If you have tried to get out of debt before and may be experiencing some progress, but suddenly something unexpected happens. Maybe your car broke down or you have some form of unexpected expense. This can lead you back into debt and leave you feeling like you can never be free from this debt trap. This is why a small rainy day fund is an essential step in your journey to freedom. One of the basics of good personal finance is to have some sort of backup plan, just in case you run into unexpected financial problems.
Experts suggest a starter fund. This will enable you to tackle any minor, unexpected expenses that could occur. After you get on a written budget and before you start paying off any debt, you need to have a specific amount of money saved. This should take only about a month if you get really serious about it and no more than 2 months. Then when you have your rainy day fund in place and unexpected expense comes up, you simply pay it out of your fund and then set about rebuilding your fund again.
It is important to know the difference between when it is raining and when you just think it might be. A birthday present that you want to buy is not an emergency, so you do not use your fund. Christmas is not an emergency, it is in December every year, and again you do not use your fund for this. Your rainy day fund should only be used for something that is totally unexpected, could not possibly be planned for and is absolutely necessary. Only when you have satisfied these 3 conditions, should you use your rainy day fund.
Your rainy day fund should be kept separate from your main bank account where you cannot spend it by accident or too easily. It should also be easy enough to access when you need it and without any penalties. For this reason experts advise against keeping it in any form of long-term savings account. Don’t buy shares in the stock market for your rainy day fund. Remember, this is not an investment; you are not trying to make a return on this.
I know what you are thinking. “What if i have an emergency that is more than my fixed emergency fund?”. Let’s face it the amount will not get you that much. It is the fear that this causes, that will drive you on to pay your debts off faster. It is supposed to feel a little uncomfortable. Now when you are debt free, except for your mortgage, then you need a proper rainy day fund. This should consist of 3 to 6 months of expenses and again should be kept somewhere that you can get at it when you need it but not somewhere that you can spend it too easily. When you have this in place, you are prepared for most of life’s unforeseen circumstances and you can sleep and snore.
