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Reserve Fund

For dealing with uncertainty, a reserve fund becomes more important than for those receiving stable income. For a full-time job holder, the reserve fund is designed to cover large unexpected expenses and job layoffs. For the entrepreneur, the reserve fund must also cover the low cash flow periods because work can come and go at any time, and customer payments can be variable even when the work is steady. The reserve fund acts as a buffer to absorb periods of low cash flow and should be replenished when there are periods of high cash flow. An alternative to handing this is to use a line of credit or some other means of debt. You would draw down or expand the line of credit balance during periods of low cash flow and then repay or pay down the balance during periods of high cash flow. This can be a good solution if there is no money available for a reserve fund. However, there are 2 issues with doing this. Debt usage always has an interest charge which is an added expense that provides you with no benefit. Secondly, you are at the mercy of the lender. If interest rates rise, fees rise or lending becomes restricted, you will have issues meeting cash flows when you need money the most.

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