Why You Need to Have a Rainy Day Fund

If you have tried to get out of debt before and tried to control your spending, then like me you know that as soon as you start to see some progress, something bad happens. Your heating stops working, or your transmission goes in your car or you have some form of unexpected expense. This can lead you back into debt and leave you feeling like you can never be free from this debt trap. This is why a small rainy day fund is an essential step in your journey to freedom

In his book "The total Money Makeover", Dave Ramsey suggests a starter fund of $1,000 and I do not disagree. This will enable you to cash flow any minor, unexpected expenses that occur. After you get on a written budget and before you start paying off any debt, you need to save up $1,000. This should take only about a month if you get really serious about it and no more than 2 months. Then when you have your rainy day fund in place if an unexpected expense comes up, you simply pay it out of your fund and then set about rebuilding your fund up to $1,000 again.

It is important to know the difference between when it is raining and when you just think it might be. A birthday present that you want to buy is not an emergency so you do not use your fund. Christmas is not an emergency, it is in December every year, and again you do not use your fund for this. Your rainy day fund should only be used for something that is totally unexpected, could not conceivably be planned for and is absolutely necessary. Only when you have satisfied these 3 conditions, should you use your rainy day fund.

Your rainy day fund should be kept separate from your main bank account where you cannot spend it by accident or too easily. It should also be easy enough to access when you need it and without any penalties. For this reason I would advise against keeping it in any form of long-term savings account. A local credit union account should be fine for your rainy day fund. Remember, this is not an investment, you are not trying to make a return on this.

I know what you are thinking. "What if I have an emergency that is more than $1,000?". Let's face it $1,000 will not get you that much. It is the fear that this causes, that will drive you on to pay your debts off faster. It is supposed to feel a little uncomfortable. Now when you are debt free, except for your mortgage, then you need a proper rainy day fund. This should consist of 3 to 6 months of expenses and again should be kept somewhere that you can get at it when you need it but not somewhere that you can spend it too easily. When you have this in place, you are prepared for most of life's emergencies and you can sleep a little easier.

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