Start Your Rainy Day Fund . . . You Are Going to Need it
Everyone talks about it, but not everyone does it. We all experience a rainy day somewhere along the line and it's best to be prepared with an emergency fund. It’s critical to have that rainy day money stored away for just those days we don’t like to face.
There are a few guidelines to remember about an emergency fund.
First, this is not a “put and take” account. You really need to limit your your spending to what you can afford. An emergency fund is for those moments in life we don’t want to think about: “my engine just blew up”; or “I just got fired”. Everyone should be working toward saving at least 10% of their income. Create a separate savings account for any "non-emergency" spending. This might include saving up for need repairs on your car or home, rather than taking from your emergency fund.
Second, you should be able to access the fund easily, for example: it shouldn’t take over a week to access. Last, you should use the fund only for a true emergency.
An emergency fund is the cornerstone for building financial security.
So how much do you need in your emergency fund?
A lot of experts often recommend a minimum savings of three to six months worth of basic living expenses. On the other hand, that much money may be hard to accumulate, so I suggest starting with a smaller goal in mind of $1,000 to $3,000. Keep this money in a savings account or money market fund, so it is easy to access.
Once you have that initial $3,000 saved, move it to short-term investments like a six-month CD or a short-term bond fund with a mutual fund company like Vanguard. Then continue to fund your emergency fund. If you have to use the first 1,000 to 3,000 dollars, you can always cash in the CD or short-term bond fund to replenish the emergency fund.
In the end, how much you really need depends on how you set up your personal budget. You may already have a family, or you are still single, so your spending and savings needs will be different, depending on where you are in life’s journey. Some factors to consider include:
The more people you need to support (besides yourself), the more unexpected expenses may occur — thus, the larger your emergency fund should be.
How easy is it for you to find a new job if you suddenly lose your old one?
As it is with finding a new job, you should also consider your current job security. How stable is your industry? Is your company on the verge of bankruptcy?
Steps to Building an Emergency Fund
1. Set an amount that you’re comfortable with. If you know for sure you can’t accumulate three to six month worth of basic living expenses (that is, food, lodging, transportation, etc.), try the smaller ranges of $1,000 to $3,000.
2. Start saving right away. Start with something, 25 dollars a week, or 200 a month. Any amount will do. Set this up as an automatic deduction from your checking account to savings to make it easier. Check out mobile phone applications like Acorns or Stash. These applications make it easy to invest on a regular basis. Acorns has a feature to collect what they call "Round-ups".
Each time you use a debt or credit card, the transaction is rounded up to the next dollar and the difference deposited in you Acorns account. The typical user saves $75 to $100 a month this way. Funds are deposited in index funds picked for your preferences, income and age.
3. If find it difficult to start an emergency fund, cut down on your expenses temporarily. Skip a few trips to Starbucks for the latie. Cutting back on dinner out, or an evening at the bar with friends can quickly allow you to start that emergency fund.
4. When you have paid off an auto loan or credit card statement, then keep paying the same amount — only now pay yourself and creating some financial security in the process.
5. Did you get a tax return? Then use that to start an emergency fund, rather than buying a big screen TV.
6. Once you’ve met your emergency fund goal, move on to other financial goals. Now you can start building your savings for a nice vacation; that home you want to buy; for retirement, and saving for your children’s’ education.
7. Reexamine your emergency fund’s size periodically — especially during life-changing events. Finally got married? New child on the way? Landed a new job? Reexamine your fund’s size to see how well it correlates to your current situation in life. Perhaps it may be time to put a little bit more in.
Remember that an emergency fund is only for an emergency, and not to be taken lightly. These chunks of cash are a necessary part of any sound budget. Go without one, and you’ll risk falling into unmanageable debt all the more readily. The bottom line is, don’t let yourself pay those sudden bills or loans on plastic alone! You should always have a bit stashed away to back yourself up.