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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. |
What is the best way to save for a rainy day? Where to Save Your Rainy Day Funds By Britt Erica Tunick We’ve already established that rainy day funds are something everyone should have, but what is the best way of saving for an emergency? Just as the amount that each individual or family should have socked away for a rainy day varies based on how much you spend each year on average, so too does the way each person will want to go about saving their “rainy day” funds. But one thing almost everyone will agree on is that it doesn’t make sense to park a large chunk of cash in a bank account that isn’t earning any interest. Still, like it or not, it is wise to keep at least three months’ worth of expenses readily accessible in cash preferably in a savings account entirely separate from your checking account where you’ll be less likely to be tempted to occasionally pull funds from your savings with the intention of replacing them later. If you don’t have three months’ worth of spending instantly available, something many people will not, one way to build your rainy day fund is by setting up automatic withdrawals from your checking account for 10% of each paycheck. If that’s not possible, even setting aside $100 or $200 a month will gradually get your savings to where it needs to be. Other steps to consider are minimizing discretionary spending and eliminating any monthly expenses that are not truly necessary. Once you’ve secured your initial rainy day savings in cash, you may want to consider short-term investments that pay some sort of interest whether certificates of deposit, Treasuries or short-term bonds. Stocks are also an option, but given the reality that the stock market can be extremely unpredictable, the best bet is to keep the smallest portion of your rainy day savings in equities. Though the interest rates paid by savings vehicles like certificates of deposit remain on the low end, earning any kind of interest is better than keeping your savings parked entirely in cash. One way to get slightly better rates is to stair step your investments in multiple short-term CDs, with overlapping maturity dates. Doing this means that as each CD matures you can roll those funds into a new CD with the best rates at that time, yet it also makes it more likely that you will be able to access some of your money pretty quickly if an emergency does occur. Worst case, even if you have to incur a penalty for an early withdrawal, such penalties are likely to be far lower than any interest you will have earned by choosing not to just leave your savings in cash. |
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