| No one wants to think about a rainy day. If given a choice, I certainly would pick sunshine and blue skies over a rainy day, any day. But the reality of life is, rainy days do come. And when they do, it’s important that we are prepared for them, and that we have our umbrellas ready! What do rainy days look like in our financial lives, and how should we prepare for them? An unexpected car repair, house expense, medical expense, or maybe the loss of a job, are just a few emergencies that could happen in your life. Here are a few strategies and tips to prepare you for these types of emergencies: 1. To start, have at least three to four months of expenses in a rainy day account: Add money each month to an account that is deliberately and specifically for emergencies only. This money should be kept in a checking or savings account that’s separate from the account you pay your monthly bills from. There are many recommendations out there on how many months of expenses you should have in a rainy day account. I’ve seen as high as 8 to 12 months of expenses. There’s a downside to thinking you need that much in savings. When you multiply your monthly expenses by 12, that number can seem daunting and perhaps a bit overwhelming. That’s why I recommend a starting point of three to four months in savings. The key to reaching your emergency savings goal is to take small steps in building your rainy day account. I also recommend including saving for emergencies as an actual expense in your monthly budget. Don’t make it an after-thought at the end of the month. This way, it’s more intentional and likely you’ll meet your goal, plus it takes away from the limited thinking that you’ll put some money to savings only if there’s anything left at the end of the month, which usually means, there actually won’t be. 2. Pad your emergency budget categories: As you’re building up your rainy day account, you’ll want to pad your monthly budget expense totals for each of your emergency categories until your account has at least a total of three to four months of expenses. So, for house repairs, you would determine a monthly amount by taking a look at what you expect the yearly cost to be and dividing that number by 12. Sit down at the beginning of the year and take a look at what’s aging in your home and what needs your attention. For more major repairs like a new roof, you can opt to include the total expense into your monthly budget over a longer period of time, say two years. Doing it this way will lessen the stress and worry that comes with such a sudden expense. There will always be car maintenance and repairs, so each year you can review what you paid for vehicle repairs the prior year, and then determine the monthly expense amount from that data and how much of an increase, if any, is necessary as your car ages. 3. Rainy day savings account tip: Something important to remember! Continue to replenish your rainy day account as you deplete it for those sudden unexpected expenses. So the rainy day account deposit/withdrawal sequence should be: deplete, replenish, deplete, replenish, deplete, replenish… You’ll notice that there may be times when the savings you need to add to your emergency account becomes somewhat of a fixed expense, depending on how often you have to take a dip into the account to pay for emergencies. Being unprepared for emergencies can wreak havoc on your finances, not to mention the emotional stress it causes and the effect of that stress on your financial health and wellbeing. With these emergency savings strategies and tips, it can help you feel more prepared and ready for any rainy day that comes along. Cheers to your financial wellness! |
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