What does it mean to “save for a rainy day”? We’ve all heard the expression, but perhaps haven’t considered how we can apply the advice to our personal finances.
Think of “rainy days” as financial obstacles and temporary crises. We know we’re bound to encounter them at some point – like car trouble, laptop issues, or illness – but it can be hard to plan for things we don’t see coming. While no one wants to spend their time thinking about disaster, even fewer people want to scramble to gather money in the face of an actual emergency.
During the notoriously drizzly month of April, try working with students to show them the importance of creating a “rainy day” emergency fund:
What’s an emergency?
As you start to build an emergency fund, it’s a good idea to define what constitutes an “emergency” in the first place. Although it may seem tempting at the time, the arrival of a new game or gadget is not an urgent matter.
Your emergency fund should be reserved for unexpected events that have an immediate and negative impact your daily life – like if your laptop breaks down and makes it difficult for you to write a paper, or your car breaks down when you rely on it for rides to and from work. Medical issues that require immediate attention also fall under the emergency category.
How to save?
It’s important that your emergency fund is easily accessible and kept separate from your regular savings.
To contribute to this fund as painlessly as possible, reevaluate your current expenses to see if there are any places where you can cut costs. Shop around for sales and resist impulse purchases until you feel that your emergency fund is in good shape.
It’s also smart to invest in routine maintenance – doctor checkups, software upgrades, and car tune ups – to avoid more expensive problems down the line.
How much is enough?
Determining how much to keep in your emergency fund is a personal matter, depending largely on how much you are able to contribute. A good rule of thumb is to calculate your expenses and ensure that you have enough to cover three months in the event of a crisis – although six months would be even better.
The point of saving early is to buy yourself enough time to deal with an issue and get back on your feet without putting yourself in debt.