A rainy day fund is
money that’s set aside for an unexpected expense,
such as a car breaking down, a trip to the ER,
or a loss of income. A rainy day fund is
important to help weather the financial impact
of unforeseen expenses. When setting up
your rainy day fund, there are three
aspects to determine: how much to save, how to
reach your savings goal, and where to keep the fund. Building up a rainy
day fund should be considered as one of your
first savings and investing goals. While the main goal
of investing is to earn money to be
used at a later date, the goal of a rainy day
fund is to protect yourself in the present. Ideally, a rainy day fund
should have enough money to cover at least six months
of your household expenses, or longer if you decide. Your goal should be to maintain
your standard of living without dipping into your
investments or 401(k), which could potentially lead
to heavy penalties. To start, you can make a list
of all of your monthly expenses, including rent or mortgage,
car payments, grocery bills, and insurance. And don’t forget to list smaller
expenses such as cell phones and utilities. When you’ve created
your list of expenses, simply total the amount
and multiply it by six, or however many months
you want it to last. This number is the savings
goal of your rainy day fund. While it may take time
to reach this goal, don’t be put off by
the effort required. There is no better time
to start saving than now. You may ask yourself,
how do I start saving for my rainy day fund? The first step is to
reduce your spending. When you create your
monthly household expenses, ask yourself if everything
on the list is necessary. You may notice that you’re
spending an extra $20 a month on premium cable channels
that you hardly watch. While $20 by itself might
not be a large contribution to your rainy day
fund, every bit helps and adds up over time. After identifying unnecessary
expenses to eliminate, the next step is to set
aside a fixed percentage of your earnings each month. This amount will be
different for every investor, but you should try to make each
monthly contribution count. You may want to consider
creating a separate account solely for your rainy day fund. Most banks and
credit unions will help you create an
additional account and many can even
automatically deposit a set portion of your paycheck
directly into the account. Because emergencies can
happen in the blink of an eye, money in a rainy day
fund needs to be liquid so that it can be
accessed quickly. This means keeping it
in an account where money can be withdrawn
without incurring penalties. Such accounts can include
checking and savings offered by your local
credit union or bank. These both allow you to
access your money at any time. You may also consider
keeping your rainy day fund in a money market account. A money market account is very
similar to a savings account, but with a few differences. Money market accounts
typically have minimum balances that must be
maintained and there are transaction
limitations per month. In return for
these restrictions, you’ll have the potential
to earn a higher interest rate on your money. A money market account can
be a good long term option once you’ve reached your
rainy day fund goal. Though it won’t
have the potential to appreciate as much as
your stock investments, it’s not as susceptible
to market volatility. If you haven’t yet
established a rainy day fund, consider doing so today. No one wants to get caught in
a storm without an umbrella. [MUSIC PLAYING]