Saving for a rainy day
23 Mar 2021
We are often told to save for a rainy day, meaning to save up for when we are really in need of something. Well, in finance, we understand the importance of saving for a rainy day and how to do it right. The term “saving” does not appeal to most – it connotes to a lack of living the full life and being unhappy because you are staying away from what gives you satisfaction. However, irrelevant of how careful we are, we cannot control accidents. There may come moment where you or your loved ones will go through a period of financial distress and an emergency fund will come handy. Hence, it truly is important to save and get an umbrella for that rainy day.
What is an emergency fund?
An emergency fund could be described as the backbone of steady personal financial plan. It is all the money that has been saved in a separate account, set aside for an emergency. This is to ensure a secure future for you and your family – and is an alternative to borrowing money from family or friends or depending on your bank account’s overdraft. It is important to have as little debt as possible when setting up an emergency fund. It is recommended to start working on the fund after you have settled your debt as it will be easier to add money to the account.
What classifies as an emergency? We are considering life’s unfortunate and unexpected events here -severe car problems, accidents, issues relating to your house and losing your job. Upgrading your television or buying the latest PlayStation does not quite classify as an emergency, but you can still be smart and save for your goals. Check out our tips about saving money to reach your targets here.
Smaller emergency funds
An emergency fund does not have to be big. The rainy-day fund serves the same purpose as emergency funds, but its money goes towards the smaller emergencies, such as buying a new phone in case of an emergency, repairing house appliances and car repairs. Therefore, the not-so-costly expenses can be covered via such funds, which also have to be carefully planned.
Larger emergency funds
Emergency funds cannot be rushed or started roughly. They need to be carefully planned beforehand. You will need to consider your income and your expenses per month, so that you will be able to determine how much you should save every month. Moreover, you must be responsible enough to save first – as soon as your income is received. Transfer the amount to your emergency fund so to ensure that you do not overspend or “cheat”. After all, this fund will serve a greater good.
How big should an emergency fund be?
There is no straight answer to this question. The bigger the fund, the safer the net is. It depends how many people have an income and how high that income is. Experts suggest that if there are two people with a good, stable income, a three-month emergency fund from each member would suffice. However, if the fund needs to be filled by one person only, a six-month emergency fund would be more suitable.
Is it manageable?
It sounds tough: most of us are always looking forward to the end of the month to receive the salary and settle our bills, buy that new game we had been waiting for or those pair of shoes that have just gone on sale. With an emergency fund, sacrifice is required. The priority has to be the fund, otherwise, the fund will lack the money and you would only realise that in the time of need. However, the best part is that it is manageable. The trick is discipline and the willingness to work. Take up extra work, look for part-time jobs. This could be the right time to do so and plan ahead, whilst the world is still recovering from the pandemic and with most people working remotely, hence making it easier for you to cope. Freelance is always a good option!