While not ideal, it’s quite common for unforeseen circumstances and emergencies to pop up and cause a strain on your finances. Instead of racking up credit card debt or wreaking havoc on savings to pay for an unexpected expense, a “rainy day” or emergency fund provides a safety net of money to pull from in an emergency. A rainy day fund can help you avoid living paycheck-to-paycheck, as it provides a pool of money to pull from for unexpected purchases or needs without worrying about an interest rate like you would with a credit card. Here are a few ways to stockpile savings:
1. Make it automatic. Establish a plan that outlines the monthly amount you can contribute to a separate emergency savings account. A good way to build up consistent savings is by setting up an automatic transfer from your checking account into your savings account that’s earmarked as emergency savings. In addition, some employers allow employees to set up a payroll deduction to an outside checking or savings account, which works similarly to a 401(k). Making savings automatic helps keep your rainy day fund growing without extra action on your part.
2. Take advantage of tax time. If you receive a tax refund this year, another way to start an emergency savings fund is to put that cash directly into a savings account. This is a good way to establish a lump sum immediately. While it may not be as fun as booking a trip or buying a new wardrobe, it’s an efficient way to jump-start your savings.
3. Look into credit or debit card features. An additional way to increase your savings is to use a “round up” feature offered by many banks, apps and debit cards. For example, spending $4.50 would round up to $5 and the $0.50 would automatically be added into your savings account. This is a great, roundabout way to build up your savings in a small yet consistent manner.
A general rule of thumb is to accumulate three to six months of living expenses in a rainy day fund. However, if you have a family and are living off a single income, are a business owner or have a specialized job, you should have at least six to nine months of living expenses. If you lose the income as the primary earner, you will need more money to support your family. In addition, it may take longer to replace the same income and find the same position if you have a specialized job.
A rainy day fund is essential for access to a pool of money that isn’t subject to market fluctuations or credit card penalties. Be sure to have your rainy day fund savings in check before moving on to your other financial goals.
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BKD Wealth Advisors, LLC is an SEC registered investment adviser offering wealth management services for affluent families and investment consulting services for institutional clients and is a wholly owned subsidiary of BKD, LLP. The views are as of the date of this publication and are subject to change. Different types of investments involve varying risks, and it should not be assumed that future performance of any investment or investment strategy or any noninvestment-related content will equal historical performance level(s), be suitable for your individual situation or prove successful. A copy of BKD Wealth Advisors' current written disclosure statement is available upon request