Although it’s impossible to predict when an emergency may strike, you can prepare your finances by building a rainy day fund. Having extra money set aside provides peace of mind because you’ll know your finances are strong enough to weather the storm.
Different than a regular savings account, a rainy day fund can help offset unexpected expenses and allow you to pay with cash instead of having to rely on costly credit cards or loans.
A rule of thumb is to have 6 months take-home income set aside. But don’t let that amount scare you away – you can always start small and build your savings over time. Here are a few tips to bulk up your emergency fund:
- Open a new account – Avoid having your rainy day fund in your regular checking or savings accounts. You might also consider keeping your rainy day fund at a separate bank so it’s less accessible for quick transfers.
- Set up an automatic deposit – With every paycheck, have a designated amount automatically transferred to your rainy day fund. This can be done on a weekly, bi-weekly or monthly basis.
- Deposit tax returns, cash gifts and pay increases – Add any extra money you receive to your fund to help it grow faster.
- Eliminate or reduce small expenses – Another way to help your savings grow is to cut a small expense and add the money you save to your rainy day fund. For example, instead of getting your hair cut every 4 weeks, try extending it out to every 8 weeks, and put the money you save into your rainy day fund.
Although you need to be diligent about building your rainy day fund, it’s also important to give yourself a break. You may not be able to reach your goals in the time frame you initially sketched out, but keep at it and it’ll happen. In time, you’ll have enough socked away to cover even the darkest, stormiest days.