You’ve all heard the saying “Save it for a rainy day,” and are probably wondering what it actually means and whether it’s as important as we’re led to believe. Rainy days happen to all of us. They are the times when things seem a little more difficult than normal. Saving for a rainy day means putting aside something you don’t need at the moment and keeping it until a real need arises. Setting aside money for emergencies is a perfect example. However, it’s important to have a rainy-day fund not just for emergencies, but for major expenses as well.
How Much do you Need?
The amount recommended by many financial advisors is to set aside enough money to cover a minimum of three months of expenses. Ideally, you should try and set aside as much as you possibly can each year. For many of you, this will mean saving a little at a time, until you get into the habit of setting money aside. Even if it’s just a few dollars every week, this will be better than nothing. The idea will be to slowly increase the amount as your budget allows.
Create a Budget
Following on from this point is the need to create a budget. That way you can see what you’re spending your money on and decide whether you can make any cuts. Everything you spend your money on should be written on a list. It may surprise you what your hard-earned cash is being spent on. It will also highlight any unnecessary payments you’re making.
Savings vs Investment
If you find yourself in a position whereby you have gathered a large sum of money you may be wondering whether it’s time to invest. There are many different options when it comes to making investments. You can research all your options online and sign up to different services if you want to learn more. The Energy Advantage newsletter is one example. You should bear in mind, however, that investing your money will bring a certain amount of risk. Whereas a savings account will be less risky but will generally earn a lower return.
The Benefits of a Rainy Day Fund
There is no way you can predict what is around the corner. Life tends to throw in a curveball every now and then. Any good financial plan should feature a rainy day fund to cover occasional or one-off expenses. It could be your car breaking down. You might need to pay for a tree to be removed because it was blown over in the last thunderstorm. Perhaps your grandkids need help with college expenses. Whatever the reason, your rainy day fund will cover these. There are also a number of other benefits:
- Peace of mind – having savings reduces financial stress. You’ll be able to sleep better because you won’t be worrying about all those “what ifs.”
- Provides flexibility to be patient – a certain amount of power comes with such a fund because it allows you to make decisions without being forced into a financial corner.
- Financial discipline – this is something your savings plan will encourage. Managing money effectively is not a skill you wake up with one morning. It takes practice and getting into the habit of saving is a great way to start.
What’s the Difference Between a Rainy Day and an Emergency Fund?
Many people consider a rainy day fund to be much the same as an emergency fund, whereas in fact, they are very different. A rainy day fund is meant to cover smaller emergencies, such as the need for a car repair. Emergency funds, on the other hand, are for covering more serious events that potentially turn your finances upside down. These are much harder to predict. Losing your job, getting divorced or unexpected medical expenses fall into this category. An emergency fund should provide you with a cushion, allowing you to pay your living expenses for up to six months.
Strategies for Saving
Whether you want to start saving for a rainy day or build up an emergency fund, there are some strategies that will help you handle any future expenses. Opening a separate bank account will be a good place to start, but make sure access is quick and easy. Make a list of any expenses you’ve got coming up, so you can plan better. Remember to include maintenance on the car and house repairs. Veterinary bills and kids’ dental expenses should also be factored in. Making such a list will mean you’re less likely to be caught out by any unexpected expenses.
Don’t be tempted to pull money from your savings account whenever your checking account is running low on funds. If you keep dipping into it every now and again it really serves no purpose. When a real emergency strikes you’ll find that you’ve emptied your savings account to pay for something that wasn’t really important. These are often the times when people turn to expensive ways of borrowing funds and ending up paying far more than they needed to. If you’ve got separate emergency and rainy day funds you’ll be far less likely to tap into either of them, unless you really need to. Don’t worry if you’re one of these people, in fact you should feel really proud of yourself. It’s a recognized phenomenon that’s called mental accounting. Pigeonholing funds for specific purposes means you’ll think twice about using your emergency medical funds when your TV needs replacing.
Life can be unpredictable at the best of times, and you need to be as prepared as possible for when the unexpected happens. Many of life’s emergencies can be predicted to a certain extent, but it’s not quite as easy to predict exactly when things will happen. Car repairs are a good example. You know parts will need to be replaced eventually, but unless you’re a trained mechanic, it’s likely you’ll miss the signs. Having a rainy day fund and emergency savings will means you’re always ready for such expenses.
