Dollars & Sense

Are You Prepared? Emergency Cash

The breakdown.  

Experienced trucking owner-operator know it's going to happen sometime, the question is when?

Another question right on the heels of the first is will you have enough funds to cover the cost of the repair or replacement, living expenses and other bills that don't stop when the revenue does?

Building and maintaining a healthy emergency fund can be tough, but successful expedited owner-operators find it essential to the health of their business and peace of mind.  And over time, it beats the alternative.  As one expediter puts it, "Once you start having a little bit of short-term money problems, they turn into long-term money problems pretty quickly."

Even a relatively stable owner-operator business can benefit from an emergency fund to cover the unexpected - an accident, a major repair or a significant business slowdown.

In an Overdrive magazine article from a few years ago, the following emergency fund facts about single-unit owner-operators were given:
 
*Fifty-seven percent have established emergency funds, averaging $11,500.
 
*Among those who have established such a fund, about six in 10 consider the size of their fund to be right: $13,600. Owner-operators say the emergency fund should equal about a third of a year's operating income (revenues minus expenses).
 
*Among the 36 percent who feel their emergency fund is too small, the average size is $5,000.

Ray and Joyce Phillips are straight truck owner-operators with Landstar Express America.  Joyce says, "You know, when you're an expediter, your money fluctuates a lot.  We've been in this business a long time and have experienced the lean times, and you just have to have money put back."

"We don't have a savings account necessarily dedicated for breakdowns, but we keep money set aside in case something happens.  I try to put a percentage of the income in the accounts, one of which I think of as being untouchable - we use it for repairs."

The Phillips' echo other expedited owner-operators who say that while they may not term the account "emergency funds", trying to operate a business with the next paycheck is an invitation to disaster.

John Skinner is a two-truck owner-operator who tells us,” What people recommend to me is 2 months of expenses - truck payment, insurance, maintenance, etc.  My goal is to put away three months and I'm working hard to accomplish that.  When I started my business, I started with no money, so it's taken me this long to get to this point."

To be sure, saving for the unexpected requires a lot of discipline. But its always better to pay for emergencies with cash that's been earning interest for you rather than with cash for which you'll pay someone else interest.

Let's examine what for many is the first (and last) source for emergency funds:  credit cards. 

They're convenient and easy to get, unless your credit stinks, but the down side is sky-high interest.

"We learned the hard way that if you rely on credit cards, that's one of most devastating and expensive things you can do to yourself and your credit," says Joyce Phillips.  "Good credit is a precious commodity that you don't want to lose."

Straight truck owner-operators Carroll and Dora Bean say, "We'll use our credit cards for motels, rental cars and things like that because we don't carry large amounts of cash in the truck.  We pay off the balance every month, so we don't pay any interest but we always have them available in emergencies."

Carroll adds, "What we've always done is put our revenue in a checking account to pay our bills.  When the account gets to a certain level, we withdraw those funds and put them into a money market account which pays interest. Our money market is set up so we can access it by writing up to three checks a month free of charge."

"I've been in trucking since I was sixteen years old, so I know what the prices are for tires, a motor rebuild or transmission replacement.  And you've got to keep in mind all the incidentals that come up if someone crosses the line and hits you; you'll be out of work for awhile."

Some accountants recommend not a dollar target but a per-mile saving plan.  For a newer Class 8-based expediter try 6 cents to 8 cents a mile. 

An emergency fund that's building at a strong per-mile rate tied to the age of the truck should cover not only major emergency repairs, but also tires, replacement and the like. Just don't stretch it any further.
 
Setting up an automatic draft from your checking account to grow these funds works well.  It's the easiest way to build up money without thinking about it If you have to do it on your own, typically it doesn't happen.
 
Options
So, until the emergency funds account is fluid, and if credit cards are the last choice, what other emergency credit options are available?

Bank line of credit
If it appears a business line of credit is right for your operation, set it up now. When an emergency hits, you don't want to wade through weeks of red tape to get approval. Also, your loan terms will be better when your business is healthy.

Home equity loan
Homeowners have the option of getting a home equity line. It has the advantage of tax-deductible interest payments, but, (and this cannot be minimized) the drawback of putting your home at risk. A home equity line's interest rate will be lower than a credit card's. It will be also beat a bank line of credit rate because, unlike the bank line, it is secured.

If you do choose this option, make sure your accountant deducts the interest as a business expense, which is worth more than an itemized personal deduction.

Something the accountants strongly recommend is to run your business with dedicated accounts - credit and checking.  They say it makes for clean accounting, which is better for you and the IRS.

Joyce Phillips says,”I can't say that I've got a set amount that I keep in a fund, but I get nervous when the account gets down below a certain level.  We keep enough in the bank so that if something were to happen, we'd be OK for a couple of months.  Or, if we had a major repair to pay for, we have a line of credit we can rely on."