Saving money for a rainy day is one of the smartest financial moves you can make. The principle of saving is always in vogue even in hard economic times. In fact, if you can save money now, once the economy turns around you’ll be sitting pretty.
What Is a Rainy Day?
A rainy day is an unexpected turn of events or an emergency that would tap into your daily funds. It is an unexpected bill, a bookkeeping error, or a simple mistake you make with your finances. It could be a weather occurrence, a relationship problem, or a job layoff.
Why the Need for Rainy Day Funds?
The idea of saving money for a rainy day weds today’s availability with tomorrow’s provision. If you have a little extra cash now, why not set it aside for the future? You never know what tomorrow will bring. Setting aside a little cash today produces freedom, flexibility, and fortune.
You’ll have freedom in your finances, freedom to spend wisely without going into debt, because the buffer of rainy day funds protects you from financial bondage.
You’ll have flexibility in your budget, flexibility to plan wisely without stressing over a few dollars or worrying over unexpected bills around the corner.
You’ll have fortune in your net worth, fortune in providing for your needs and the needs of your family.
How Much Should I Set Aside?
Determining the amount of your rainy day funds depends on multiple factors including your income, your level of expenses, your standard of living, any debt you have, and your financial goals for the short term and the long term. It’s not a formula for everyone to follow. Rather, it is a comfort level based on your own context. Consider these questions.
How much money do you make? Obviously the more you make, the more you can set aside.
What kind of expenses do you have? The higher your level of expenses, the more you need to set aside to meet those expenses in the future.
What is your standard of living? The greater your tastes and desire for nice things, the more you’ll need to set aside for that potential emergency.
How much debt do you have? This is a tough one. The higher your debt level, the more you should be paying it down, but the less you’ll have available to set aside for a rainy day. Regardless of the loans you have, it is still important to try and keep a little reserve account on the side.
What are your financial goals? It’s important that you have simple goals like saving for a birthday present and harder to reach goals that might take longer such as ensuring you have enough funds for your later years. The clearer your goals are in your mind, the easier it will be to set aside funds for that unexpected event.
So how much should you set aside for emergencies? Depending on your answers to the previous questions, you should have at least $300 set aside. That will allow you to get food, pay utilities, or get some gas. If you had $1000 in the bank, you could probably cover your mortgage or rent payment. If you had $3000, you could get by for a month. If you had $10,000 you might be able to survive a major financial meltdown for several months.
Where Should I Put It?
Even though interest rates are low, you need to keep your rainy day funds in the bank. You need the flexibility of a savings account to tap into the funds whenever you need them.