A shortage of funds can lead to mounting debts/expenses and hence an emergency fund or a rainy day fund makes sense.
Honing your money management skills very early in life gives you the much-needed confidence in overcoming prolonged unemployment, job losses, or the current COVID-19 pandemic. Keeping a back-up of at least three to six months of living expenses in case of cash crunch or sudden illness is advisable.
Life juggles between emergencies and smaller expenses and so should your money savings to adapt to changing situations. However, the liquidity of money decides the status of the financial situation.
An emergency fund can never be defined based on a few factors instead it is a safety net that is aimed to fund your unexpected expenses for a few months of living expenses, including debt payments, bills, and daily spending. Emergency funds hold a pivotal role if you are a single-income family, suffering from a serious medical condition, working towards closing off a debt.
Rainy Day Fund
A rainy day fund is targeted towards smaller expenditures that might be a small amount yet unexpected costs like extra fuel for your vehicle, a repair or service of your smartphone, an extra buck when meeting your pal or any other short-term cost.
Rainy day fund shields you from going into debt and handling all the small inconveniences that can pop up every now and then. While a $10 or $50 might not sound much it can accumulate over a period of time and push you into more debt disrupting your entire budget as well.
Setting Up Your Funds
Setting up your funds requires dedication, self-discipline, and the most important, patience over controlling the spending. Good habits take time to become a part of your lives and savings are no different.
The various phases of your life decide how you should be setting your funds. For instance, out of college, working, married, or parenthood determines the fund type.
When do you need an emergency fund?
Emergencies can happen at any time of the day or any stage of your life so it is very difficult to predict them and that is the reason why it needs some time to build up so that it can provide a cover when you are facing an emergency situation. Setting aside three or six months is a good way to start off but before doing so remember to have at least some amount in your emergency fund so that you can work towards your goal.
The emergency fund holds great value under the current COVID-19 crisis as unemployment, increasing debts, and bill payments can take a toll on your financial status. However, daily expenses like bill payments can still be taken care of by opting for an alternative emergency fund that is readily available to access and use right away.
When do you need a rainy day fund?
Deciding on how much you will need for a rainy day fund becomes important. Some expenditures are expected like if you are residing in an area where tornadoes and hurricanes are common or you or your kids want braces, a windowpane that is lying broken, changing the tyre of your car, etc.
Making small cuts in your budget or even collecting spare change can help fund your rainy day savings. If you are finding it tough to follow it strictly then Universal Basic Credit (UBC) can come to your rescue.
Budgeting the Funds
In order to avoid falling behind your goals, it is necessary to allocate the emergency and rainy day funds into your budget. The liquidity of the funds is the key as it helps in easy access and prevents paying a penalty. Traditional savings account for an emergency fund is ideal while a rainy day fund can go to your piggy bank. Planning your inflow of funds for unexpected expenses can help buffer your commitments from debts while you focus on closing them at regular intervals.
By Karthick V