Could your car need repairs? Might your water heater go out? Is it possible you might lose your job during a corporate reorganization? Sure they can. Wouldn’t you like to reduce your stress and avoid going into debt by being ready for the unexpected? Fortunately, there are two financial planning tools to help you deal with life’s surprises.
The first is a rainy day fund. It’s used for those lower-cost items that are likely to occur, but whose timing is uncertain. Car repairs and appliance replacements are examples of this. Medical co-pays, roof repairs and other such expense fall into this category too. The amount you should have in such a fund depends on your lifestyle, expense history and other personal characteristics. Experts often say you should have at least $1,000-$2,000 in this fund.
The second is an emergency fund. It’s used for those higher-cost items that may or may not occur. Job loss is the classic example of this. An unexpected surgery would be another example. Experts often recommend having 3-6 months of monthly expenses put aside. (If you don’t track your expenses, a good approximation is 3-6 months of your take-home pay.)
Recognizing the importance of these two funds is one thing, but saving for them can be a different matter. Funding these objectives is like saving for anything else. The main thing is to get started. Then think about how long you want to wait to reach your savings objectives and how much you can free up from your current cash flow. These funds are important enough that they should not be funded if there’s anything left over at the end of the month. Rather, they should be treated as a normal monthly expense. If you have an actual budget, add a line item for each fund so they’re in your plan.
You should invest these funds into something that’s very liquid since you’ll probably need the money quickly once the unexpected occurs. Higher-interest savings accounts (such as online savings) are good choices here. CDs are not a good choice due to the early-withdrawal penalties. You should have separate accounts for each of these two funds and not co-mingle them with each other or with other savings. It’s best to have a monthly contribution for each account taken from your paycheck automatically. In addition to your regular deposits, unplanned sources of money should be directed towards these goals. A raise, an inheritance and a tax refund are examples of such windfall income.
If you’d like some help figuring out how much to put in each fund and how to do it, or have other financial questions, we’d be pleased to discuss your particular situation in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.