Emergencies happen.
And your budget may suffer a hard hit if you don’t have a rainy day fund in place.
A rainy day fund is money you have set aside to use in the event of an emergency, such as when unexpected expenses come up, you lose your job, hospital bills, etc. Here’s how you can start your own.
Plan Ahead
The key to starting a rainy day fund is to be able to look ahead and see what “true expenses” you have in the future. Here’s how to calculate them:
Your True Expenses = What You Have/Want to Pay Now + What You Have/What You Want to Pay in the Future
Remember, there are no normal months, meaning that your expenses will fluctuate throughout the year and having a rainy day fund will prepare you for unexpected, high-expense months. For larger, less frequent expenses, such as car insurance, life insurance or vacation expenses, break down the total amount into smaller monthly amounts. Let’s say you know your car insurance is due in six months and it’s going to be $600. If you set aside $100 a month to go toward your car insurance, then by the time your car insurance is due, you already have that $600 saved up. No surprises and most importantly, your budget is intact.
Save First, Spend Later
Once you get your paycheck, immediately put 5% of it into your rainy day fund. Your fund should be kept in an easily-accessible account, so you can take out money without being penalized. It’s best to place your money in a savings account, but if you have more self-control, then a jar will do. Just make sure to stow it somewhere you won’t be tempted to reach into when pizza arrives.
Most financial advisers recommend saving up to 3-6 months’ worth of your post-tax income. If you’re just starting out, set aside whatever you can and start increasing the amount gradually. As a general rule of thumb, the less stable your source of income is, the greater the amount you’ll want in your fund. Once it’s there, forget about it and don’t touch it.
Cash In on Chump Change
Keep all your loose change and put it in your rainy day jar. Every day, empty your pockets, dig through your purse, shake out your couch cushions and any spare change you find should go straight into the jar. This can also be applied to the money you save with a rewards card. Take the amount written at the bottom of the receipt where it says how much money you saved and put it into your fund.
Bonus Tips
- Have your employer directly deposit a set amount from your paycheck into your rainy day fund.
- Add birthday money, bonuses and tax returns right away.
- Skip a few coffee runs to save money.
- When you leave a tip, put the same amount into your fund.
- Check out “The Dollar Bills Saving Plan” and more ways to grow your rainy day fund here.
Feature Photo via We Heart It