You’ve been saving money for the proverbial “rainy day.” How you spend the funds once you have them?
A rainy day fund is a key first step in developing your financial plan. It amounts to covering three to six months of expenses, usually kept in a basic savings account, for you to use in the event of a job loss or financial emergency. Some people also call it an emergency fund.
This emergency fund should be kept safe and accessible. You don’t want to lock it away in an investment product that’s difficult to tap into or that has a fluctuating value.
As tempting as that money may be, part of developing sound financial practices is being disciplined about your spending. Such discipline will help you build your emergency fund and save for other things you want.
Building your emergency fund involves setting aside extra money from your paycheck. The amount depends on how much you earn and what your expenses are. It may take a while to reach a suitable level, but it’s a foundation for financial success.
What qualifies as an emergency?
To a certain extent, an emergency varies by the individual, but one way to think of it is as a situation that your normal budget won’t cover and which requires fast action. A major car repair would qualify, especially if you commute. Other examples of rainy day fund expenses include unexpected medical costs, a flight to a funeral or replacing a non-working refrigerator. If you can’t pay these types of bills out of your current funds, you may want to look to your emergency fund.
After you draw on the emergency fund, you’ll want to rebuild it. After all, unexpected events are likely to happen again. A rainy day fund isn’t a one-time proposition.
The payoff of the money savings habit
Many people may learn, after they set up their rainy day fund, that they don’t need it much. That’s because they’ve gotten into the habit of saving.
If you start living on less than you make, even by a small amount, you build a little slack into your budget. This makes it easier to cover surprise expenses. The car repair that once may have sent you to your credit card, and then to your emergency fund, can now be covered out of your monthly budget. That’s a nice benefit to developing good savings habits.
As your life changes, you may need to increase or decrease the size of your emergency fund. Have you bought a car that requires more expensive repairs? Or is it more reliable than the car you’re replacing? Have you started a family , or has your youngest child graduated from college? You’ll need to evaluate your expenses to ensure that your emergency fund is sufficient to cover them.
Whatever your financial situation is, you want to have a cushion. Using your rainy day fund can help cover the cost of emergencies without damaging your financial position or causing you to take on debt. For more information on ensuring a strong financial footing, contact Nationwide.