Key Takeaways
- Make sure you always have three to six months’ worth of expenses saved in a rainy day fund that you can easily tap.
- There are three aspects of a rainy day fund: objective, subjective and emotional.
- A rainy day fund will enable you to weather the financial and emotional impact of a sudden job loss, medical emergency or unexpected major repair.
Back in the 1950s, my mentor Ed Coyle started his first job. On Ed’s first day as an insurance salesman, he was taken to a financial institution, where he took out a $5,000 loan and then deposited the money directly in a savings account. It sounds crazy, but Ed’s boss said to him, “Ed, I want you to be the very best salesman. I don’t want you worrying about money at all.” His boss was a pretty astute guy who knew the value of a rainy day fund. What is a rainy day fund? It’s an emergency fund that you can tap if you lose your job or you have major unexpected expenses or a family crisis. Your rainy day fund is there to help you pay the bills, both emotional and physical.
There are three parts of a rainy day fund: objective, subjective and emotional.
- Objective. We typically look for three to six months’ worth of expenses. If you make $48,000 a year, that’s $4,000 a month. If you need $1,000 for taxes and savings and $3,000 for your basic expenses, then you need somewhere between $9,000 and $18,000 to cover three to six months’ worth of expenses.
- Subjective. Ask yourself this question: “If I lost my job, how much money would make me feel comfortable if I had it socked away in a rainy day fund?” $9,000? $18,000? Go with the amount that makes you feel most comfortable.
- Emotional. Ask yourself, “If my job got eliminated or outsourced or I got fired, how would I feel? How long would it take me to get back on my feet and get another job?” That might change your decision about whether to have $9,000 or $18,000. Whatever it is, pick an amount that makes sense to you, and start building that emergency savings fund as soon as possible. Now, maybe not on the first day like Ed did, but as soon as is feasible for you.
Until next time, enjoy.
Gary