By Tiffany Welka
A rainy day fund is a reserved amount of money to be used in times when regular income is disrupted or decreased in order for typical operations to continue. It is also used to help deal with budget shortfalls in times when revenues don’t match expenditures.
Your car conks out, you lose your job, your furnace stops working, your home had a leak, you need a root canal, etc. Any of these calamities and many more, can bust even the best planned budget. As an Accredited Wealth Management Advisor, I am constantly reminding my clients to make sure that they have enough in liquid assets “just in case”.
How much you need for your rainy day fund depends on many factors, such as your goals, other assets, age, career, health, income and expenses. General rule of thumb is to have at least six months to a year’s worth of expenses saved and readily accessible in the event of an emergency.
Here are some different strategies that you can use to create your own rainy day fund.
- Something is better than nothing. Start small! Every bit will help to get your rainy day fund built! Acknowledge progress, not perfection.
- Try to save one month’s worth of expenses. After one month, try to save another month of expenses and so on and so forth until you have an amount that you feel comfortable with or until you have attained your predetermined goal.
- Have an expense mindset. The best way to start a rainy day fund is to act as if it is a weekly or monthly bill that has to be paid.
- Stand alone. Keep it in an account that is not commingled with your other accounts. This makes it easier because you will be less likely to dip into this fund for non-emergencies.
- Make it automatic. There is an SMS based savings program, or app, called Digit that uses an algorithm to study your habits and automatically save an amount that you can safely afford to put away. You can also add automatic drafts from your checking account into a different account. You could use a different checking account, savings account or money market account.
- Add unexpected cash. On top of your automatic contributions to your rainy day fund, you can add any money that you were not expecting to have, such as from birthday gifts, tax refunds, or bonuses from work.
- Replenish it. Once an emergency arises and you have used funds from your rainy day fund, remember to get your account back up to where you need and want it to be!
The unexpected can always be expected. After making sure that you have your liquid funds or rainy day funds built up to where they need to be or where you feel comfortable, you should consult a financial professional to discuss other savings options for you to continue your savings plan and grow your estate!
Tiffany Welka is vice president of VFG Associates, LLC in Livonia, MI