No matter how much you make plans or how careful you are, there are no guarantees that life will unfold according to plan. At any time you could face an unexpected life change for example an illness, job loss or having to replace a faulty spare part in your vehicle. Right after discovering the growing stain on your dining room ceiling.
The unexpected can happen at any time, which is why a rainy day fund is an important part of your budgeting process.
A rainy day or an emergency savings fund is a safety net that protects you when an unexpected event such as job loss or unexpected repairs to your home affects your cash flow. Without access to cash, you might be forced to draw on your longer-term investments or use bank loans, possibly jeopardizing your overall goals.
How much to save:
Many financial experts recommend that you set aside the equivalent of 3 to 6 months’ salary for an unexpected emergency. What’s right for you will depend on your circumstances. If you have a large mortgage, loan payments, and ongoing education expenses for your children, you will need a larger safety net. If your house is completely paid for and you’re debt-free, you’ll probably need less.
Where to save
The money in your emergency fund needs to be secure and easily accessible. At the same time, you’ll want to be earning as much interest as you can. You’ll want to open a Savings Account that is tax free where earnings and withdrawals are tax-free. An advisor can help you determine an appropriate rainy day fund amount. How to plan your budget and make your income, spending and savings add up
Start small. And don’t stop.
Depending on what you decide as an ideal amount, commit to put something away either every time you get your paycheck or in a lump sum at a particular time every month. It’s okay to start small – the key is to begin. Treat it as a non-negotiable monthly “expense” and before long you’ll have more than just emergency money saved; you’ll have retirement money, vacation money and more.
Automate the savings
A very easy way to manage your savings plan is to make it automatic. Set up a pre-authorized, automatic transfer into your savings account and then you won’t even have to think about it. And when you need it, it will be there.
Plan your budget
This can help you decide how to slice your income pie. You should start by splitting it into three spending categories. The first is Essential expenses which are necessities such as taxes, housing, utilities, transportation, loan or debt payments, insurance and an adequate food allowance. Second is Savings which can be a short-term emergency savings account that is sizable enough to support you for three to six months OR long-term/retirement-savings account. Third are optional purchases which may include such things as entertainment, gifts and personal indulgences. It’s easy to go over budget in this category, especially if you’re buying on credit and not keeping an ongoing tally of your purchases. Know your limits and, if necessary, switch from credit cards to cash and/or debit cards to help you keep better track of this non-essential spending. Banking online will help you stay on top of your monthly transactions rather than wait for your statement.
You may prefer a yearly spending plan better than a monthly version. You can also try a hybrid where you plan out your spending for the year to get the big picture of your finances, and also do month-by-month planning. This approach gives you more opportunities to find ways to boost the savings that will help finance your dreams.
By Wanjiru Muhoro | Writer