Budgeting… you read a lot about the process and benefits, but very few of us are actually able to create a realistic budget and stick to it. Whether it’s a direct result of our impulsive shopping or due to one of life’s unexpected emergencies, staying within your financial means can often be rather challenging – particularly in today’s economy. With the cost of living continuing to rise and income either decreasing or staying the same, many households have found themselves living from one paycheck to the next. In fact, according to CNN Money, approximately 76% of the US is reported living from paycheck to paycheck.
The mere idea of not having even a few dollars leftover in the bank for even the tiniest emergency or unexpected expense is enough to stress anyone out. Should you need to pay for a cab, a flat tire, or even buy yourself lunch one day of the week, you’re stuck making a difficult decision – either you stick to your budget and pay all of your bills or you pull a bit of money from one bill to cover the costs of an unexpected expense. This in turn creates a snowball effect as it pertains to your debt.
So what can you do? Many financial experts suggest that you have an emergency savings or rainy day fund stored away for unexpected expenses outside of your monthly expenses.
What is a Rainy Day Fund?
A rainy day fund, also known as an emergency savings account is simply saved income that you’ve put away for those months where something comes up unexpectedly. The amount you save will greatly depend upon your personal preferences and needs. The income can be stored in your home, or in an interest baring savings account that will allow the funds to increase over time.
How Much Should You Save?
This is a common question for many new savers. How do you know how much you’ll need to have in an emergency? Unfortunately, you never know exactly how much an emergency will cost you. It could range from a few dollars to several thousand dollars. Bankrate suggests saving anywhere from six months to a year worth of income. However, realistically… if you’re living paycheck to paycheck, chances are it would take you a while to save up that amount of money. As such, it is highly recommended that you at least have $1,000 in savings as this can cover an array of emergencies.
What Might Constitute as an Emergency?
Everyone has their ideas of what an emergency is, and therefore what you consider an emergency might differ from what others believe to be an emergency. However, I’m sure we can all agree that an emergency does not constitute needing to get tickets to a concert before they sell out, or needing to purchase designer handbags because they look great with your work attire. An emergency is simply something that your household needs to sustain a decent quality of life. Some examples might include:
- Car repair (or replacement if its inoperable)
- Plumbing, electrical, or water emergency/repair
- Unexpected medical expense
- Payment of a bill that is about to get shut off (i.e. lights, heat, sewage, water)
- Anything that is necessary but is not covered under your normal monthly budget
But I Live Paycheck to Paycheck – How Do I Save for a Rainy Day?
It goes without saying that saving for a rainy day can be easier said than done. Trying to find extra income (that you don’t need) that can be put to the side might be a bit more challenging. Below are a few suggestions on how you can begin saving for a rainy day:
- Put Away the Change – The old fashioned change jar concept still holds true today. With any luck, you can save hundreds of dollars in just a few months. All you have to do is put away all change that you receive on the daily basis. When paying for expenses in cash, whatever change you receive should be placed in the rainy day jar. If you really want to boost your savings, you can also include dollar bills as well. Any time you receive one dollar bills, you can place them in your jar as well.
- Cut Out a Luxury – Alright so this may not have been your idea on how to save, but sometimes desperate times call for desperate measures. By cutting out a luxury such as: removing cable services, not eating out, or skipping the trip to the nail salon, you can add that money into your rainy day account and get to your goal in no time at all.
- Earn Money on the Side – Lastly, but certainly not least is the option to earn a little money on the side. Find something you’re good at and learn how to make a living at it. Cut the grass, walk a few dogs, offer your babysitting services, etc. The income you receive from these services should be directly deposited into your rainy day account.
When All Else Fails
What if you’ve saved $1,000 but the emergency costs you $1,500? Or What if you’re in the process of building your rainy day account and an emergency happens that is more than you’ve saved up? Don’t worry; it certainly happens to the best of us. In these instances, there are other options that you could consider, including the possibility of taking out a loan. Short term loans are options for individuals with less than perfect credit. I strongly warn anyone looking to take out a short term loan to review their contract entirely, only take out what they can afford to repay, and repay the loan in a timely fashion to avoid high interest and fees.
Well, hopefully this has gotten you motivated to begin saving for a rainy day. Set up a plan to begin saving in your household right away. This way you can be prepared in the midst of an emergency. Ideally, the more you save and the more diligent you are at saving, the smaller the need will be to take out a short term loan.