Most of us like a nice walk in a light drizzle, but what if it turns into a sudden deluge, leaving you drenched and shivering? Well, often in life the same thing happens with our finances. One moment you may be trawling the web deciding which new shoes you want to splurge on. Next, you’re desperately wondering where next month’s rent is coming from.
When managing our finances, it is usually those large, less frequent expenses which are the muddy puddles. This could be sudden, unexpected outgoings such as a car mechanic’s bill, home repairs, or vets bills.
Murphy’s Law usually dictates that these sorts of things always happen at the worst possible time. On a more serious note, you could find yourself without a job suddenly or having to cover medical bills. To protect yourself, you need what’s known as a rainy-day fund. Follow these steps below to save more for a “rainy day.”
Saving for a Rainy Day: What Is a Rainy Day Fund?
What exactly is a rainy day fund? Simply put, it’s a type of emergency fund. It’s money you have, but that you hope you never need to use. If something unexpected happens that costs you a pretty penny,
A rainy day fund isn’t for fun things you purchase on a whim. It’s for necessities and unplanned expenses like:
- Unplanned repairs
- Medical costs
- Unexpected bills
- Job loss
Ideally, you should have at least $1,000 saved for your rainy day fund. More is always better, especially if you live in a high-cost area. Take the time to add up your outgoings in the last six months to determine how much you will need as a minimum. Create a budget for your fund and stick to it using these tips below.
Consider How Much You Need to Save
A rainy day fund acts as a safety net to protect you if an unexpected event has a knock-on effect on your household’s cash flow. Whilst it is very tempting to live to your means every month, without fast access to cash, you might find yourself in a situation where you need to use high-interest credit cards. This may set back all long term financial objectives. It could even send you into a debt spiral that’s hard to break from.
Financial experts agree that it makes sense to have enough savings to cover at least three months of rent and typical expenses. They also recommend that you dedicate at least 25% of your income every year to cover large purchases and retirement.
Start with Small Goals
You don’t need to save huge chunks of cash towards your rainy day fund right away. It’s okay to start small and grow over time. Nowadays, there are plenty of free tools available such as ASIC’s MoneySmart website to help you track your typical expenses and how much you will need to put aside for life’s little curveballs.
There are many ways to set aside a small lump sum regularly, just by cutting back a bit and setting yourself an expense budget. Another idea would be to seek professional advice from a good financial planner. They will show you the best ways to take into account the larger, less frequent expenses (for example life insurance, school fees, holidays) and organise them into manageable, monthly accounts, so you don’t get caught in a sudden downpour of simultaneous bills.
Keep Your Rainy Day Savings Accessible
One of the unique things about a rainy day savings fund is that it needs to be accessible. While a savings account might yield a greater return when it comes to interest payments, you’ll also need to account for any transaction fees or delays.
Talk to your bank about the best savings option for your situation. Many banks now offer same-day transfers between checkings and savings accounts, and you might not need to worry about fees or restrictions. Ask yourself if you’ll be able to quickly access the funds should you need them on a days notice.
But, Keep Your Savings Out of Sight
When you get your paycheck, it’s tempting to spend this money right away on something you might not really need. Instead, set up a direct debit as soon as you are paid, which diverts a small amount every period, for example, $25 per week. When you’re calculating your budget, you can use the 50/20/30 budget rule to work out your ideal savings amount.
Keep this in a savings account in a completely different bank. If you have a bank card for that account, keep it somewhere at home and out of sight. The harder it is to access these savings, the less tempting it will be to spend the money on something you do not really need. As the saying goes: out of sight, out of mind.
Be a Savvy Shopper
If you’re struggling to save more each month, consider changing the way you shop. Try to pay with cash, as it’s a lot easier to see money as it comes and goes. To decrease impulse buys, set yourself a 24-hour buffer for any purchase worth over $50. If you really want the item, you can return to that shop at a later time.
In addition, buy supplies out of season whenever possible, such as school materials, which will be discounted after schools start. Get in the habit of shopping around online before visiting stores, as there are numerous discount websites nowadays. You might be surprised by how much money you can save with vouchers and cashback.
Consider Long Term Savings Goals
Rainy day funds are not strictly only about the unpleasant things in life, like bills. They can also help you save for something that you really want. While you should save for an emergency first, once you reach your goal, you might wish to put funds towards any of the following:
- Retirement
- Holiday
- Family time
- New home
- Car
- Luxury good
If you have friends or relatives living overseas, pin up a picture of an aeroplane, a golden beach, or your favourite tourist attraction to help you focus on a long term plan about achieving these exciting rewards.
Make Smart Lifestyle Choices
It’s easy to splurge on the little things throughout your week. Buying coffee and lunches every day, or dining out several times a week is one of the most common ways to blow a hole in your wallet. Packed lunches, which you can cook up in bulk in advance and freeze, not only save you money but may even be a healthier option too.
If you are a social butterfly, have friends over for dinner instead. Have everyone bring a dish or drinks. You can even incentivise your mates by turning this into a competition, such as “tastiest dish for under $10”. These might sound like small changes, but they really add up.
Simplify Saving for a Rainy Day
Rainy days aren’t always a lot of fun, but we optimistic Australians also love to remind ourselves that rain is good for the plants. Having a rainy day fund may seem a bit of a drag at first, particularly compared to browsing for shoes, but it helps us stay afloat when the storm clouds of debt are gathering.
Bad luck can strike at any time. It’s best to be prepared and to know when to ask for help. Get in touch with us today on 1300 368 322 for a confidential and obligation-free consultation to discuss your financial position. We can provide you with the right advice tailored to your unique situation.