How Much Should I Save For A Rainy Day?
Q: How much is a good amount to have in savings just for a rainy day? A: This is a great question because it shows that you are actually thinking about saving money for the future, quite a rare concept in America today. In fact, just last year, the US National Savings Rate dipped below zero to negative .2% , that's a scary notion because it means that we, as a country, are officially spending more than we make! The general rule of thumb among financial planners is that you want to have three to six months worth of expenses saved in a liquid (easily accessible) account. An example of a liquid account could be a plain old savings account, or even a money market account. Both provide some interest, although not much in today's low interest rate environment. But let me make a very clear point here: Your savings account money is not for investing. Guys especially, pay attention here. This money is called your Emergency Fund, or Cash Reserve Fund, and is not considered to be a part of your true investments portfolio, it is for security. Emergency money needs to be easily accessible, and a savings/money market account will provide that accessibility. DO NOT invest your emergency fund money in the stock market. The reason we don't invest our emergency money in the stock market, or even CD's, etc. is because we want to have easy access to the money, and don't want to expose it to downside risk. If you were to put your emergency money in the stock market for example, and the market happened to be down when you needed it, you would have to take a loss when you withdrew your funds, assuming you could even sell all you wanted to, when you wanted to. If you had your emergency money in CD's, you would need to wait until the CD comes due to get your money without penalty. The best thing to do is park your emergency money in a savings/money market account at your home bank. That way, it'll be there when you need it, and amounts $100,000.00 or less are guaranteed against loss by the FDIC. Don't worry about the fact that your money is not making as much interest as it could in the market, this isn't investment money. It's security money. Now, to the question of how much to save. As I said above, most financial experts generally recommend that you have three to six months worth of expenses in your emergency fund. I think it's always best to play it more conservatively, therefore I would recommend that most folks have four to six months worth (preferably six). The reasons that you want to have this much money in your rainy day fund are many: 1.) If your income takes a downturn, or you lose your job, you will be able to live in the same manner you are accustomed for four to six months. You won't have to take the first crummy job that comes along just because you have to pay your bills and have no security blanket to catch you. The last thing you need to worry about should you be downsized or lose your income for any reason, is wondering how you are going to feed yourself, or your family. With a large cash reserve fund, you won't have to worry about it. 2.) You can raise the deductibles on things like your car insurance, health insurance and homeowners insurance because you will have "self-insured" yourself up to a point. This will save you money each month in premium dollars. 3.) Statistics say that every seven years, a major negative financial event (>$5,000.00) occurs within a family. It could be an unexpected medical issue, a car accident with major bills not covered by your insurance policy, a major unexpected household expense, etc. If you had a large emergency fund, you could take care of these issues without having to go into debt (which is what most people without a plan do). Trust me, VISA has a plan ' they want you to use their credit services as your emergency fund. Don't play their game. You always lose. 4.) The greatest benefit from having a large rainy day fund however, is this: Lower stress levels when it comes to money. Trust me, when you are sitting on a fat pile of cash, you make better long-term decisions with your money because your primary motivating factor is not, "how am I going to pay my bills this month?" Financial stress is the #1 issue that most people face ' married people as well as single people. You can avoid it by getting out of debt and saving your money. Just do it! The only thing you should do before you establish your fully funded emergency fund is to pay off your depreciating debt. That means all your credit cards, car loans, boat loans, etc. Start off by establishing a small emergency fund of $500.00 - $1,500.00, then attack your debt (everything but the house). Once that's gone, then start to build your rainy day fund. Then, one day when it "rains", you'll have a nice big shelter to sit under and not get wet! Thanks for reading. |
Posted by: Rob DeFoor - My Financial Foundation, LLC
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