This past summer, my wife and I were happily driving back after an awesome weekend in the Great Smokey Mountains and my Jeep suddenly started smoking. A long story short, a faulty belt caused us to end up on the side of a mountain road with no cell service having to flag down a park ranger in the middle of the road. A few days and almost $1,300 later, my Jeep would be fine.
Now $1,300 might be a lot of money to you or it might not, but that doesn’t really matter. The question that it raises is the same. Have you ever wondered if you could sustain a major, unforeseen expense and still be financially okay? Could you handle major car trouble on the side of a mountain? Could you handle emergency surgery that your insurance company does not want to cover? Could you handle losing your job for a few months? You can help ensure your short-term financial stability by simply creating a rainy day fund, but you probably already knew that. What you might not know is how much you need…
In order to determine the amount of safety net you need, I would suggest keeping up with your expenses for one month. Keep in mind that extra and unusual expenses like eyeglasses, Falcons tickets, or your mother’s birthday gift do not need to be counted. To make things simple, I would just consider:
• Rent/House payment
• Car/Furniture payments
After you sum those expenses, I would suggest beginning to save up between 3-6 times that much for your rainy day fund. This way you can have the peace of mind knowing that you could sustain the loss of your income or a significant, unplanned expense without changing your current lifestyle for at least 3-6 months. What you should save up to be comfortable is different for everyone and is totally up to you, but personally, I would work towards the 6 month savings amount if possible.
The main thing to remember is that you need to build up and protect your rainy day fund in some sort of high interest checking or savings account or money market account so that it is easily accessible and is growing while in reserve. This rainy day fund is not for remodeling the kitchen or for that Caribbean cruise; it is your own lifestyle insurance policy only to be used when your financial survival is threatened.
Some might say this is a waste of money, but I can’t tell you the comfort a rainy day fund gives you when you’re stuck on the side of the road. If you don’t yet have a rainy day fund, you need to start working towards one so that you are always prepared before that check engine light rears its ugly head in some aspect of your life.