One cornerstone of a good financial plan is a rainy day fund. Saving for a “rainy day” helps ensure you have money available to meet an unexpected expense, like a car repair or a medical bill.
Last year the Federal Reserve released a report on the economic well-being of U.S. households. Their survey revealed that 47 percent of respondents either could not cover an emergency expense of $400 or would cover it by selling something or borrowing money. This means that almost half of American households do not have a rainy day fund.
I am often asked by clients, “If I had an extra amount of money left over at the end of the month, where should I put it?” If you do not have a rainy day fund, you should start building that up first. Good financial planning would not let an unexpected expense derail you and your family.
Start by putting aside $1,000 in a savings account to be your rainy day fund. This step is also the first of Seven Baby Steps recommended by financial guru Dave Ramsey of Financial Peace University. As with any type of savings goal, it is best to make it “automatic” by setting up a monthly auto deposit or direct deposit into a savings or investment account.
After your rainy day fund has been established, your next goal should be to grow that fund into a true emergency fund of three-to-six months of living expenses. This pool of savings will enable you and your family to weather a larger potentially-catastrophic event, such as a job loss or a chronic illness.
Another important thing to be mindful of when prioritizing your “extra money” is to make sure you are not going into debt to save. You do not want to max out contributions to your 401K plan at work and end up paying for other things with your credit card. Look at your goals as needs, wants and wishes. Understanding the priority of each of your goals will help you to know where savings should be allocated.
Saving for a rainy day is a great first step in a sound financial plan and will put you on track to understand how to prioritize that next dollar of savings.