The unexpected happens. That’s a part of life we all need to be aware of and prepare for, and a big part of preparing for it is having the financial aspects covered. Recently we had an article detailing recent retirees’ biggest regrets when planning for retirement and one of them was not saving for those “rainy days”. You can map out your retirement savings plan perfectly, but if you didn’t plan for one unexpected incident, that could be trouble. Don’t get caught off guard. Here are some steps to starting your rainy day fund.
Understand its purpose.
Saying you’re creating a rainy day fund does not automatically make you good at saving money. There absolutely is a discipline to effectively saving money, and for some it comes easier than with others. Before you begin your savings, ask yourself what its purpose is. Why do you need a rainy day fund? What does it do for you? What could happen if you don’t have one? Taking a serious approach to this kind of savings means you need to have an understanding of it beyond it would be nice to have some money. Once you establish that sincerely and have respect for it, it will help prevent you from neglecting the fund or dipping into it at inappropriate times.
Decide on the best vehicle.
The next step in this process is deciding how and where you are going to save. There are many options for you and your decision will be based on a mix of personal preferences and financial advice. Many people have an idea of the type of savings they want and certainly the kind they would rather avoid. In the end, the decision is yours and it’s your money so you should feel comfortable. That being said, advice from an expert is always a very good idea. Don’t take friendly advice blindly (including this), but rather speak to a professional – better yet, speak to a few. Understand the options so you can make informed decisions on your savings.
Make a deposit plan.
Next comes the actual saving of money and this will require some planning. You need to understand how much you make, how much you need to live and how much you can afford to save. Again, some professional help in coming these conclusions is never a bad idea. Once you figure this out, you need to establish a schedule for when you will deposit into the fund and how much you will deposit. Without such a schedule, it can become to easy for these regular deposits to fall off and therefore your savings never really grow. Come up with a reasonable schedule (most people use their pay cheque as a marker) and be sure to stick to the deposits.
What is realistic?
Understanding how much of your income goes into your savings can be very difficult to figure out. If you don’t put enough into your regular deposits then your rainy day fund remains stagnant and will likely be useless when needed. If you are putting too much in your savings then you may be struggling in your other financial areas. Be realistic about your savings deposits. Know what you can afford and what will actually make a difference over time.
Control you spending as well.
Your savings can only grow if your finances are in good order and that means you have to be conscious of your spending habits. Review your spending and see where your money is going. Are there areas where you could be spending less? Are there indulgences that you could lose? This might require having a frank conversation with the whole family about spending habits but it’s important that your money is being used in the best way possible to ensure your savings grow while you also continue to live comfortably.