You’ve likely heard people use the saying “rainy day fund,” or emergency savings, but you may not be aware of exactly what that is or why it’s so important. This article will break down why and how to do it.
Despite your best budgeting efforts, you can’t always predict every circumstance you may encounter. You may think you don’t need a rainy day fund because you manage your money well and spend frugally. Still, there are a number of situations that you can’t plan for – but with a rainy day fund, you can prepare for them.
Typically, your rainy day fund will not be your entire emergency savings account. You should have $1,000- 2,000 for smaller unplanned events, like an unexpected medication or car repair. Your larger emergency savings account will help with large or long-lasting expenses.
Even if your car is reliable and you have insurance, you may still have to pay for repairs from time to time. As cars age, their components do as well, and from time to time, you may find yourself being forced to scrounge up the cash for replacement parts. Having a rainy day fund can help you to prepare for a situation like that. In a more serious situation, your car may break down entirely. In that situation, your emergency savings fund would need to be big enough to buy a new car that can safely get you where you need to go. Ideally, your rainy day fund will be large enough to fix your car, or if necessary, put a down payment on a new one.
Tip: Keep in mind that the better your credit score is, the more easily you will be able to get a car loan if needed.
Unexpected Medical Expense
Even with medical insurance, you could still potentially find yourself with unexpected medical bills. Perhaps you were traveling and had to visit an emergency room outside of your insurance plan’s coverage. Or maybe your medical insurance does not cover specific medications or procedures. In any case, a large medical expense is something that you hope will not happen to you. If it does, though, the last thing that you will want to worry about while you recover is the cost of the care that you need. By having a rainy day fund saved ahead of time, you allow yourself to heal with some extra peace of mind. Stress is not good for your health, so a stressful financial situation could hinder your recovery. Take care of yourself by planning ahead.
Unplanned Life Event
While car problems and medical expenses are some of the most common ‘rainy day’ could cause you to need that emergency stash of money. That unplanned event could be a pregnancy, a move, an ill relative, or something else. While there are financial resources available to people in some of those situations, it may not always be readily available, or it may not be enough to get the things you want and need. Change can be a great thing, but it can also be expensive. The rainy day fund will help you make a plan to get through the unplanned event.
How to Save It
You’ve established that you need a rainy day fund. How can you save one? Here are some suggestions.
If you have not yet created a budget for your earnings, that is the first step to creating a rainy day fund. First, list all of your monthly expenditures (rent, utilities, vehicle payments, phone payments, etc.). Then, write down any and all monthly income. This will help you easily decide where to allocate how much of your money each month, as well as how much you can save. To start, try to save between 10-15% of your monthly income.
Keep it Safe and Separate.
Keep your money safe by putting it into a bank account. Depending on what bank you choose, this can actually help your money to earn you more money with interest. And by keeping the bank account separate than your checking account and your larger emergency savings will allow you to clearly see where your money is and where you need to save more.
Having both short-term and long-term savings goals will allow you adjust your savings plan when you’re able to. Set goals by asking yourself questions. How much do you want to have saved by the end of the year? How much do you want to have saved in three years? These questions will help you decide when and by how much to increase your monthly savings. Having goals set will also help you to consistently save to reach that point where you think you’ll be more comfortable and prepared. Remember, as your financial situation improves you may want to increase your monthly savings. This will help you reach your goals more quickly. Stop putting it off and start saving today, and you will be thankful for the cushion the next time you face an unexpected financial situation.