Don’t Get Caught Off Guard: The Importance of an Emergency & Rainy Day & Funds
An emergency fund is a readily accessible pool of money set aside specifically to cover unexpected expenses. These expenses can arise due to various situations, such as:
- Sudden job loss or income reduction.
- Major car or home repairs.
- Sudden death or disability.
- Divorce or separation.
- Medical emergencies or unexpected healthcare costs.
A rainy day fund is a designated savings account set aside to cover predictable or planned expenses that fall outside your regular expenses. Unlike an emergency fund, which is for unforeseen events, a rainy day fund helps you manage expected but occasional costs, preventing them from disrupting your financial flow.
Here are some typical examples of what a rainy day fund can be used for:
- Unexpected bills or bills higher than expected.
- Overspending or going over budget.
- Moving and/or relocation costs.
- Holiday and vacation spending.
- Gifts and special occasions.
Key Differences Between Rainy Day and Emergency Funds:
- Purpose: A rainy day fund is for predictable expenses, while an emergency fund is for unforeseen emergencies.
- Amount: A rainy day fund can be smaller, typically covering 1-3 months of expenses, while an emergency fund aims for 3-6 months.
- Accessibility: Both funds should be readily accessible, but a rainy day fund might be used more frequently.
By having a separate rainy day fund, you can avoid tapping into your emergency savings for foreseeable expenses, ensuring you have a financial safety net for true emergencies.
Benefits of Having an Emergency Fund:
- Peace of mind & reduced stress.
- Maintain financial stability.
- You can continue to save more for retirement.
- Money is not tied up in debt.
- You can invest more to build wealth.
The purpose of an emergency fund is to provide financial security during these unforeseen circumstances. It helps you avoid going into debt, dipping into long-term savings goals, or selling assets at a loss to cover unexpected costs.
Key Goals:
- Start small 1% or 2% of your paycheck or income than work your way up to 3% 0r 4% based on your tolerance.
- Don’t stretch yourself too thin when you start so you won’t feel overwhelmed. Focus more on the starting point, not the end point especially if you need more saved depending on your situation.
- Have an initial savings target amount to start (i.e. $1000-1500) then increase over time. Start small and build your way up. You will know what your comfort level is.
Access your expenses
Financial experts often recommend saving 3-6 months’ worth of living expenses in an emergency fund. To do this you will calculate your monthly expenses times the number of months you want to save. (Of course, this is after, you have already saved at minimum $1000).
Divide by the Number of Months: Divide your target emergency fund amount by the number of months you plan to save for it. This will give you the monthly savings goal you should aim for. Using the previous example, if you want to save $18,000 over 12 months, you would need to save $1,500 per month.
See mathematical calculations,
Let’s say your monthly expenses are $3,500 per month. This may include rent/mortgage, groceries/household supplies, car payments, and other necessities. Using the three-month rule, you need to set aside ($3,500 x 3 = $10,500). Do the same for six-month rule, you need to set aside ($3,500 x 6 = $21, 000). Using the three-month example, to see how much you will need to save $10,500 over 12 months, you will divide by the number of months or ($10,500/12=$875).
Wow! these are very big numbers for the average person. That’s why it is important to start not finish!