This is the second in a series of posts that focus on your finances, specifically, money to support yourself and your business down the road.
I interviewed Shelley, who comes from a background of acting and arts administration, but who now works as a Consultant for Investor’s Group, a series of questions about managing our future finances as artists, and she gave me so much information, I had to stretch it over a series of blog posts! This post focuses on ‘bounce.’
TAoTB: Okay, first things first: what the heck is ‘bounce’?
S: Really simply, ‘bounce’ is an emergency fund. The fact is that, as self-employed people, we tend to have a variable income. One month you could make $5,000, the next $500. What happens if that latest contract you signed doesn’t pay on time and your rent/mortgage/utilities payments are due? Everyone needs an emergency fund – whether we lose a job and need to wait 8 weeks for EI to come through (IF we’re eligible), or simply have a slow-down in work.
TAoTB: Right. That makes sense. How much of a bounce do you recommend we need, and what should I do with those funds?
S: Three months of expenses would be my minimum recommendation, with my preference being somewhere between 4 and 6 months.
That money would be used so that:
- Our goals don’t suffer. For example, what if you can’t make our RSP contribution for 6 months because you need to eat instead – this can have an enormous impact on long-term goals.
- You always have a positive cash-flow situation. If that contract doesn’t pay on time, you’re not needing to borrow from friends to pay rent (‘cause we’ve ALL been there).
- We can plan for the “what ifs”. For example: “what if” I can’t work because I’ve injured myself and WCB/my Disability Insurance has a 120 day waiting period?
TAoTB: Where’s a good place to keep your bounce?
S: You have a few options. Obviously, a savings account–I like one that is not connected directly to my bank account so that it’s not really easy to access. ING Direct or many Credit Unions have good free- or low-fee options. There are also non-registered accounts available – you can put your monies into these accounts and have access to it within 2-3 days. Money Market and No-Load funds would be the most sensible. The goal is to have your money in a place where you can gain some interest on it, and have it be accessible, but not too accessible.
Another option will be available starting in January. The Government of Canada has announced an amazing new vehicle for non-registered savings called the Tax Free Savings Account (TFSA). Persons over the age of 18 can contribute up to $5,000 per year into this account and withdraw it at any time, without tax penalties.
What’s cool about this account is that it doesn’t have to be in a traditional Savings account. You can invest in Stocks, Bonds, Mutual Funds, GICs – nearly ANY vehicle that would be eligible for RRSPs. This makes the potential for you making money off of your emergency fund while you are not using it much, much higher.
Let me give you an example. Let’s say you invest $5,000 on January 2nd , and, with some crafty investing, and in a best-case scenario, these monies grow by an unbelievable amount – let’s say $25,000 by May 1. On May 1, you can withdraw $25,000 without any penalty, maintain your contribution room and NOT incur any taxes.
Next in the series: insurance!