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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
We rarely think about personal disasters. Reality, however, tells us we need to. That brings us to setting up a rainy day fund. The Importance of a Rainy Day Fund By Britt Erica Tunick Anyone who has ever worked with a financial advisor has likely been told they should have the equivalent of one year’s worth of their annual spending readily available in cash or an easily accessible liquid investment. Unfortunately, it is equally likely most individuals have no real idea just how much money they spend in the average year. Nonetheless, the importance of saving for a rainy day is real and something that should not be ignored. Other than young children, you would be hard pressed to find someone who didn’t understand the reality of the saying “life is what happens while you are busy making plans.” Given that few people know when they are about to be laid off, or when a major expense is looming, such as a furnace breaking in the middle of winter, the importance of having a rainy day fund cannot be overlooked. This is particularly true with so many American still unemployed and unable to find work following the 2008 credit crisis. So how do you determine how much money you need to keep in your rainy day fund? The easiest way is to total all of your spending from the previous year. That’s everything from fixed costs such as your mortgage, taxes, car and insurance payments, to spending that tends to fluctuate more on things such as groceries, gas and any other credit card purchases you make in the average year. Once that number is determined, and odds are it will be a sobering number, it should serve as the basis for how much money you should have readily available. Since few people have a year’s worth of spending on hand, and amassing that much can take time, it may be more realistic to start with a goal of saving three months worth of what you annually spend and then gradually increase your savings until you reach your desired goal. Remember, having any savings is better than being completely unable to meet your financial obligations in the event of a disaster. And if saving for a rainy day means the need to forego a few dinners out with friends, or other unnecessary expenses, just think how much more important the money you would spend on those things would be on a “rainy day.” |
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