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3 Reasons Why You Need A Rainy Day Fund
No matter who you are, where you live, or how much money you earn, one thing will never change: you need an emergency fund.
Here are my top 3 three reasons why you should keep a rainy day fund:
1. You never know what the future holds.
Right now, you may be “living large.” You have plenty of income, your bills are at a minimum, and your monthly budget is under control. However, the future is not set in stone.
What would you do if you were suddenly laid off or fired? Do you have enough money to get by until you find another job? If you have an emergency fund, your answer is yes. If you don’t, you could find yourself in a lot of trouble.
2. Peace of mind.
There is nothing better than going to bed at night, knowing that you have enough money in an emergency fund to cover your expenses should you run into financial difficulties. Some people thrive on having peace of mind, while others believe they can deal with anything that comes their way.
Why not do the right thing and give yourself peace of mind? An emergency fund of six or more months will allow you to rest easy at night.
3. You may need money in a hurry.
Just like lunch on a Friday, your emergency fund should be liquid. In other words, you should be able to get your hands on the cash without any delay (more on this below). When your cash is liquid, if you run into an emergency – such as an unexpected medical bill – you can withdrawal the money, pay the debt, and move on. You don’t have to worry about jumping through hoops to access your funds when time is of the essence.
How much is enough?
When it comes to how much you should keep in an emergency fund there is no “right or wrong” answer. Instead, there are many opinions on this. Not to mention the fact that everybody has their own ideas of what they should be doing.
As a general rule of thumb, you should have at least six months of living expenses in your emergency fund. This may be just enough for you or you may want more, but if you start with a goal of six months you will find yourself in good position.
To calculate how much you will need, simply write down all your monthly living expenses and multiply that number by 6. Those with a “written” budget will be able to calculate this number in no time. Others may have to go through their bills, one at a time, to come up with a figure.
Example: if your expenses total $3,000/month, you should have at least $18,000 in your emergency fund. This will allow you to pay your bills for six months without any income.
Where should you keep the money?
As noted above, your emergency fund should be liquid. You want to be able to access your cash in a hurry if need be. The best place to keep your money is a savings account with a local financial institution or online bank. This allows you to withdrawal the money when you need it, while also earning interest (if only a tiny bit) with each passing day.
What about a CD or retirement account? Both of these are no-nos. With a CD, for example, you will be hit with a fee if you attempt to access the money early. The same holds true with a retirement account, such as an IRA.
What about keeping under your mattress? Although I don’t suggest it, this is something that many people do. There is no denying that this will keep your money liquid, but it won’t be safe. If somebody (God forbid) breaks in and takes the money, you’re screwed. When your funds are with an FDIC insured bank, there is no risk whatsoever.
Even if you don’t have any money saved right now, it is never too late to get going. Start by finding out how much you need, and work out a plan to contribute a little each month until you reach you goal. Soon enough, you will find your emergency fund and be prepared for the worst.
Here’s to your financial peace of mind!
Photo Credit: d3sign