The Value of a Rainy Day Fund
Written by R. A. Stewart
Having a rainy day fund will enable you to pay for unexpected expenses when they arise. This could be for medical expenses, dental expenses, car breakdown, or anything else which may crop up from time to time.
A rainy day fund is not something you use to pay for discretionary spending items. Gym membership fees, a weekend away, or a day at the races are not things you would dip into your rainy day fund for.
When setting up this account you need to set guidelines as to what can come out of this account and what is a no no.
If you are in debt then should you have a rainy day account?
The answer to this is yes, but you MUST pay off your debt first before start depositing money into your rainy day account because the savings on interest will put you into a better financial position.
It is not sensible to have money in an account which pays next to no interest when you are paying high interest on loans.
If there is one bad habit which can be a hindrance to financial freedom it is the habit of borrowing money for stuff which should only be bought with discretionary spending money.
I hasten to point out that if you have debt of any kind then you do not have any discretionary spending money until that debt is paid off.
Getting into the habit of living more modestly means readjusting your lifestyle to fit in with your monetary goals. There are things which people spend their money on which are really choices. They have the choice to spend it on this and that or do without it.
A bad money manager fritters away all of their discretionary spending money so that by the time the next payday comes around they are broke.
Having a raining day account will provide a cushion again unexpected events which can cause finance stress.
Where to keep it: Keep this money in a separate, easily accessible bank account — ideally a high-yield savings account. It shouldn’t be hard to reach when you need it, but keeping it isolated from your day-to-day checking account prevents you from accidentally spending it on regular expenses.
The benefits of a raining day account are:
- It protects you from high interest debt. If you have a $1,000 bill suddenly crops up then your only option may be to borrow that money at high interest rates.
- It gives you peace of mind. Knowing that you have money readily available to pay for some unexpected expense gives you some breathing space.
- It prevents you from selling investments at the wrong time. If you have investments in growth or balanced funds then you may be forced to sell them just when the markets are down. Having a rainy day account will insure that this does not happen.
- It buys you time and choices. If you suddenly suffer a job loss, a rainy day account will buy you time to decide on your next move instead of just making a random choice out of desperation.
About this article
This article is of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. This is not financial advice but the opinion of the writer.
Read my other articles on www.robertastewart.com
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