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 can happen with our finances. One moment you may be trawling the web deciding which new shoes you want to splurge on, and the next, you are 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. In a more serious situation it could include being out of work for a period of time, without income protection, or having to cover medical bills.
To get you started, it is important to have a basic set of rainy day savings guidelines. These can be covered using three important questions:
Where will you keep the money?
As the name suggests, emergencies are urgent, therefore it does not make sense to put your rainy day fund in a bank account, where you will incur penalties, should you need to access the cash fast.
How much do you need to save?
It could be as little as a few hundred dollars or as much as a year’s worth of living expenses. Take the time to add up your outgoings in the last six months, to determine how much you will need as a minimum.
How will you reach your goal?
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 curve balls.
This is when it is important to have a rainy day fund, which is effectively an emergency savings fund. It acts as a safety net to protect you if an unexpected event has a knock-on effect to 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, or more serious, get you into a downward spiral of debt.
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.
If you are the type of person who likes to make hay whilst the sun shines and worry about the crop failure later, the good news is saving even just a little every month will make a difference. There are many ways to set aside a small lump sum regularly, just by cutting back a bit and setting yourself an expense budget. Of course, this also needs to be agreed if you have a partner, so you feel that both parties are weathering the storm together. 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.
Here are some handy tips to help you set aside money for a rainy day fund:
Out of sight
Set up a direct debit as soon as you are paid, which diverts a small amount every period, for example $25 per week. Keep this in a savings account in a completely different bank, for which you do not have a bank card. 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.
Savvy shopping trips
Try to pay with cash, as it always seems like you are spending a lot more. Also 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. Try to buy supplies out of season, such as school materials, which will be discounted after schools start. Also make sure you shop around online before visiting stores, as there are numerous websites nowadays, which give preferential deals, as well as vouchers and cash back.
Look after the pennies
Have a small change jar, where you place coins at night. It is pleasantly surprising to see how quickly these coins add up. You can then deposit these coins in a rainy day bank account, which earns interest.
Eyes on the prize
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. 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!
Rainy day cuisine
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 be a healthier option too. If you are a social butterfly, have friends over for dinner instead, where everyone brings a dish or drinks. You can even incentivise your mates by turning this into a competition, such as “tastiest dish for under $10”.
Spend energy, save cash
Public transport and petrol is also very expensive nowadays so carpooling is a great way to save money and strengthen a bond with a friend or colleague. If your commuting distance allows it, try cycling to work, or even walking home several times a week. The fresh air will make you feel better – don’t forget an umbrella if the weather forecast says showers!
Summing it all up
Rainy days in general are not much 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 can help us stay afloat when the storm clouds of debt are gathering.
Bad luck can strike at any time so if you need professional advice and expert solutions, we’re here to 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.