Do you have a rainy day fund? Should you?
No matter how well you plan life is full of unexpected financial problems that arise in your path. The water heater leaks. The car breaks down. Your dentist tells you that you need a crown. If you have no liquid savings, no rainy day fund, you are forced to borrow money, usually with a credit card at high interest, to afford these unexpected expenses.
This is why we all need a rainy day fund, or what I call a reserve fund. Ideally it should be enough money to live on for at least six months in case you lose your job.
To determine how much you should have in your reserve fund you take a hard look at your expenses and determine how much it would take at bare minimum to survive for six months with no income. Rent or mortgage payments, utilities, food, transportation. No frills. No eating out. Just the necessities. Take that number and multiply by 6 and you have the target for your reserve fund. For most people this will be at least $18,000-$30,000.
When unexpected expenses arise you can draw from this reserve and avoid debt. Then you pay yourself back, building the reserve up to at least your minimum amount needed.
The two primary benefits of a reserve fund is to avoid debt and the interest you pay on it and peace of mind. If you have $18,000 in the bank you sleep a lot sounder than if your balance is $18.
How to Build a Reserve Fund
Donna Freedman’s recent post to the GetRichSlowly blog talks about 29 ways to add to your rainy day fund. Read entire post there to learn all 29 but here are the most useful:
For most people this is the most powerful savings tip. If you have money automatically transferred from your checking account to your savings account each month you never have to think about it. It just happens automatically. As you check your savings balance you will see it rise every month.
Save your raise or bonus–
If you get a bonus or a raise at work put it in savings. The fact is you have been living without the raise or the bonus now for some time. You will be able to live just as well without spending it.
If you get reimbursed by your employer for travel put it in savings. These are usually small amounts but they add up. I have been doing this for years and it works great.
Stop expensive hobbies and habits–
This one requires you to take a hard look at what you spend your money on. You may like to smoke, or drink fine wine, or collect something, buy expensive coffee drinks, but you do not need to do those things. You can save a significant amount here.
Make auto payments to yourself–
For most people the second most expensive thing they buy is an automobile. Never buy new. Never lease. Buy good used cars for cash and then save every month the amount you would pay in an auto payment. Within a year or two you will have enough to trade up to a newer used car. Keep paying yourself instead of auto finance companies and you will save a lot.
Use these tips and some you find on your own to save on a regular basis and you will have a fund that will pay for those unexpected expenses and you will sleep a little better.
Learn how to manage your money, eliminate debt and build wealth in my book, Your Financial Success.
Questions? Comments? I would love to hear from you. Feel free to post your comments or questions below or if you want to contact me privately you can do that here: http://danielrmurphy.com/contact-me/Wishing you well,
Daniel R. Murphy
Educating people for building wealth, adapting to a changing future and personal development.