Let’s face it, life is busy. Each week you’re juggling between your work, family, and friends while also trying to find time to pursue your dreams. In the process of trying to keep it all together, life somehow has a way of throwing you unexpected curveballs. The thing about them is that you don’t know when they’re going to happen or how much they’re going to cost!
From time to time, you’re going to experience events that leave you in need of money. Unfortunately, it’s not a matter of if, but of when either. To get through these financial storms, you need to have rainy day savings and emergency funds!
Like an umbrella, your rainy day savings keeps you safe and protected when life starts pouring down on you. While the weather can be somewhat predictable, you have no idea when a sudden event will occur and you’ll need to have extra money on hand to pay for it!
Your rainy day savings (aka rainy day fund) is cash that’s put aside and gets used to pay for one-time non-recurring costs. Having this money tucked safely away allows you to get yourself out of an unexpected financial jam unharmed.
A healthy rainy day savings account should have at least $1,000 in it. Most likely, this will be enough money to cover small one-time expenses and will hold you over until your next payday.
Without these funds available, you’ll have shortfalls in your budget which can leave you scrambling. You might have to find fast cash, take on debt, and waste money on interest each time a proverbial rain cloud forms over your head!
By stashing money into a rainy day savings fund, you’ll be better protected. Not only will your savings and spending plan be safeguarded, but you’ll have an improved sense of financial wellbeing, too!
For most people, it’s during prosperous times when they experience the greatest lifestyle creep. They feel rich and wealthy which gives them the tendency to focus on spending and consuming, rather than being frugal and getting ahead. Truth be told, the good times are when you should be preparing for the day that life takes an unexpected wrong turn!
Your rainy day savings are for small unexpected expenses. But, for the more costly ones, you’re going to need a larger amount of money!
While some sudden costs you face will be little, others can be expensive. When you find yourself needing to buy a big ticket item or to cover your monthly expenses, then you’ll need emergency savings!
Your emergency savings (aka emergency fund) are funds you have accumulated for mishaps that are out of your control. This money also acts as your safety net, so that when you fall it’s there to catch and prop you back up financially!
Once you have filled your rainy day savings account, then move on to your emergency savings. Your goal should be to have at least 3 months’ worth of your living expenses inside it. It’s best to keep these funds in an account that’s safe, easily accessible, and liquid, too. Otherwise, you may run the risk of an emergency turning into a full-blown personal financial crisis!
For instance, imagine a financial hardship hits and you don’t have an emergency fund to rely on. To pay your bills, you’d likely have to sell investments or borrow money from your retirement accounts. Not only would you pay needless fees and taxes, but you’d also be reducing the power of compounding in the process. As a result, your most important financial goals may get delayed for years to come!
It’s important to realize that having emergency savings puts you in a position of power, too. It gives you breathing room so that you aren’t forced to make rash decisions. Instead, you can be patient and selective, allowing you time to make the best decision!
On your path to financial freedom, one of the first steps is to establish a rainy day fund. Not only does this create a small protective barrier, but it also builds financial discipline by getting you in the habit of living below your means and saving!
To start building your safety nets, create a budget that allows you to save. Next, monitor your spending to ensure it remains with the parameters you’ve set. As your savings accumulate, transfer it to a separate account, like a HYSA, and let it sit. After that, continue to repeat this process until both your rainy day savings and emergency savings accounts are fully funded!
It’s important to monitor the amount of money you have in each of these accounts, too. As you experience emergencies and the funds get used, you’ll need to top them back off so that you remain protected!
Most financial professionals advise that you shouldn’t invest your rainy day savings or emergency fund. In doing so, these funds would be at risk which contradicts their purpose in the first place!
Also, if you invest, you don’t know what the state of the market or economy will be when you need to sell. If the market is down, then selling could turn an already bad situation, worse!
Still, I know some people can’t stand the thought of letting their money sit in an account idle while inflation erodes its value. So, if that’s you and you’re adamant about investing your emergency savings, then you should err on the side of caution. For safety, consider overfunding each account by 10 to 30% or reducing the risks you take. By doing both, your money and future will be better protected if the markets were to take a nosedive!
Regardless of your income or net worth, it’s in your best interest to have rainy day savings and emergency sayings. In due time, you’ll experience some sort of unexpected event that accompanies an unforeseen bill and you’ll need a way to pay it.
Both, rainy day savings and emergency savings are important to your financial stability. While the amounts in them differ, their purpose remains the same. They give you peace of mind and confidence in knowing that when you encounter a sudden expense, you’ll be able to pay for it in cash!
Does your financial strategy include both rainy day savings and an emergency fund? Comment below.
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