A rainy day fund, also known as an emergency fund, is exactly what it sounds like: money that’s set aside to weather any financial storms you might encounter in your life.
You might think that if you’re young and healthy, you don’t need this kind of savings account, but the truth is that everyone needs one.
Solos Advisor knows that even the most financially savvy people can have bad luck that causes them to need some extra cash – and they’re not always the ones who deserve it.
Why Build an Emergency Fund?
At its most basic level, an emergency fund is used to cover unplanned expenses.
But if your job or business is unstable or risky, you need an emergency fund that’s big enough to cover at least six months of expenses. And probably even more.
A big, fat rainy day fund takes care of your financial security and peace of mind
When it comes to safeguarding yourself and your family, you can never have too much money set aside for unexpected events.
How To Build An Emergency Fund
In an ideal world, you’ll have enough money in your bank account to cover all of your expenses for at least three months. But in reality, many of us don’t.
That’s why it’s important to build up an emergency fund—or rainy day fund. Especially to use during times when life throws unexpected curveballs.
A budget is essential for making sure you don’t end up with nothing saved and debt piling up over time.
Emergency Funds Are Different For Everyone
Your emergency fund is for more than just emergencies. To have a solid emergency fund, you should consider what constitutes an emergency in your life. Plus, how much cash you’ll need.
Even if $1,000 doesn’t sound like much to you, having it is better than not having it. If you don’t plan on ever taking a vacation, that might be a good place to start building your rainy day fund.
How Much Should Your Emergency Fund Have?
The common rule of thumb is to have enough cash to support yourself for 3–6 months.
For example, if you need $2,000 per month in living expenses and have six months’ worth of cash set aside, you can survive on it without working should you suddenly become unemployed or ill.
But how much is that? If you’re saving up for an emergency fund, try to aim for about 10 percent of your monthly take-home pay.
Stocks vs Mutual Funds vs ETFs
When it comes to retirement savings, you have several options for where you choose to put your money. While some may argue that stocks are riskier and mutual funds are safer, all three investments have their benefits and drawbacks. But which one is right for you? Here’s what you need to know about each option.
The Dangers of Stocks Investing in individual stocks can be risky; there’s no guarantee they’ll increase in value or even stay stable over time.
Remember 2008? If not, here’s a quick refresher: The stock market took an enormous tumble. All while investors panicked over rising unemployment rates and falling home prices.
It was one of the worst economic downturns in recent history. And while it doesn’t happen often, it serves as a good reminder that stocks can be risky.
Mutual funds are collections of stocks or bonds managed by professional money managers. They offer some of what individual stocks do—namely, access to broad investment opportunities—but they also come with certain benefits.
These include lower minimum investments than many stock investments and tax advantages. This is thanks to their holdings in both taxable and tax-deferred accounts.
ETFs, or exchange-traded funds, are baskets of stocks that investors can buy and sell like any other stock. These funds also tend to have lower minimum investments than individual stocks—making them more accessible to many investors.
Liquidity Is Key When Building an Emergency Fund
Building an emergency fund is essential to avoiding unnecessary financial strain and making sure you can handle any unexpected expenses that pop up in your life.
A rainy day fund allows you to meet these costs without incurring credit card debt or having to rely on friends and family for a loan.
Without enough cash on hand, you could end up spending your hard-earned savings on less important expenses, like paying for things that are broken or need repair.
Keep Track Of Every Dollar That Goes In and Out Of The Account
Whether you use a spreadsheet, an app, or just an old-fashioned pen and paper, it’s important to keep track of every dollar that goes in and out of your rainy day fund.
A good rule of thumb is to review your account each month so you can see what you’re spending money on and adjust accordingly.
Saving for unexpected expenses will go much more smoothly if you plan ahead and stay organized.
How Will You Access The Money?
Before you even begin saving for your rainy-day fund, you’ll need to determine how and when you’ll access it. Many people use credit cards as their primary form of emergency cash—don’t do that!
It not only comes with high-interest rates, but if a crisis does strike, it will cost you an additional fee just to access your own money.
Make It Automatic
One of my favorite tips for saving money is to set up an automatic savings plan, so that you’re never tempted to spend what you’ve put aside.
With your rainy-day fund, make sure you are forgetting about it—otherwise, you might be tempted to dip into those funds when they seem more convenient than opening another credit card.
As with any investment, it’s a good idea to make sure you understand what your rainy day fund is investing in and why.
Even though you’re not expecting to need it immediately, you don’t want to get caught off guard by abrupt changes in your life.
But even more than that, we should all consider our rainy day fund a lifestyle investment. It represents how responsible we are with our finances and how prepared we are for big life changes.