We all experience unforeseen events. The car that suddenly breaks down and has to be replaced. A longer than anticipated gap between jobs. The boiler that decides to give up the ghost during the coldest winter for years.
We often don’t see these things coming, we have no choice but to deal with them right away and they usually cost money.
What’s rainy day fund?
At times like this, as well as dealing with the stress, you have to find the money to fix things quickly. This is where a rainy day fund can help.
The point of a rainy day fund is to cover the kind of large unexpected bills just mentioned. The sorts of expenses that you can’t predict and would otherwise knock your finances off course.
How much are we talking?
Experts suggest that we build a fund up so that it eventually adds up to 3 to 6 months’ essential expenses. By essentials they mean mortgage/rent, food, utility bills, transport, medical bills etc. If all your bills add up to €2,000 a month then, ideally, you need a rainy day fund of €6,000 to €12,000.
That sounds like a lot to me
The idea of saving up this amount might seem out of reach especially if you’re just about managing from pay check to pay check. But the trick is not to let this ideal amount stop you. It’s going to take a while to get there.
Getting started is key. Break down this amount and save what you can afford to save bit by bit.
How do you make sure you really do set aside money for saving?
One way is to automate your saving by setting up a direct debit or standing order to transfer money to your rainy day fund from your current account to a deposit account, demand deposit account or regular savings account when you get paid.
This way you don’t have to remember to save.
To save €1,000 in a year, for example, you’ll need to transfer €83 a month to your emergency fund. To save it in 2 years, you will need to transfer €42 a month to your fund.
What if you just can’t find the money?
If you simply don’t have any spare cash left at the end of the week or month then some experts suggest diverting future pay increases into your fund, selling unwanted items online, or looking at ways to earn some additional income for a while.
How to stop yourself raiding your rainy day fund
It may be tempting to dip into the fund when you’ve built it up. Just a few euros, here and there – but your hard-earned savings can easily be eaten up.
The trick is to keep your fund just out of reach but not so far that you can’t get at it, quickly, if disaster strikes.
What if I can’t stop dipping into my rainy day fund?
If you can’t help but dip into your fund, some experts suggest that you reward yourself when you reach your first €100 by allowing yourself €10 to spend on anything you like.
You get to spend another €10 when you hit €200 then €300 etc. Outside of hitting these goals, leave your fund untouched to make sure it’s there when you really need it.
It may be counter-intuitive but these small rewards may give you the incentives you need to keep saving.
Should I start my rainy day fund or pay off my debts?
Most experts suggest that you should pay off any high-interest debts first before building your rainy day fund. After all, usually, the longer you take to pay off debt, the more you pay in interest.
However, some experts suggest you build up a modest rainy day fund first because if an emergency happens then you may have to borrow money at short notice to cover the cost. And this might mean paying a higher rate of interest than you might otherwise accept.