Many of us have heard about the emergency fund or saving for the
rainy day. Experts suggest keeping at least 3 to 6 months of living expenses
in case of an unexpected financial emergency, such as job loss or sudden
illness. This account should be relatively liquid. That way, you can access it
quickly if you need to.
Rainy day
funds may sound more similar, but they are really intended to pay for the
occasional smaller expense. For example, let us say your refrigerator suddenly
stops working and you need to replace it, or you or a family member needs an
unexpected surgery.
Emergency
Fund
An
emergency fund is intended to be your safety net in the event of a financial
emergency. These emergencies include, but are not limited to, job loss, or a
major illness or injury.
You should
aim for an emergency fund of at least 3 to 6 months of living expenses,
including all bills, debt payments, and everyday expenses, such as grocery
bills, childcare costs, and transportation costs. But if you are a
single-income family, have a serious medical condition, own a home, are
self-employed, or are trying to stay out of debt, an emergency fund becomes an
even more pivotal piece of your financial plan.
Rainy
Day Fund for Smaller Expenses
A rainy day
fund is intended to pay for a one-time, smaller expenditure. For example,
paying for summer camp or braces for your child, or replacing a broken window
in your home – any other short-term, unexpected cost.
A rainy day
fund helps you avoid going into debt by covering all those small inconveniences that
always seem to pop up. While a RM 1,000 repair to your car may not seem like
much, it can throw your entire budget out of whack or even put you into debt if
you are not prepared.
Setting
Up Your Emergency Fund
To set up
your emergency fund, you first need to decide how much you would like to have
in your fund. For some, three months’ living expenses is the most they can
swing. Others may be able to set aside 6 months. Remember, the most important
thing is that you have at least something in your emergency fund. Then, you can
work toward your goal over time.
The same
principle applies to your rainy day fund. Figure out how much money you would
like to have in your fund, then work backward from there. Divide the amount you
will need to adequately fund your account by how much you can afford to put
aside each month. Then, you will be left with the number of months it will take
you to reach your goal.
For
example, let us say your monthly expenses are about RM 3,000, and you want to
set up a 3-month emergency fund. That means you’ll need to save around RM
9,000. If you set aside RM 500 a month, you will fully fund your emergency fund
in about 18 months. While this may sound like a long time, do not forget about
unexpected windfalls like tax refunds, cash gifts, or even monetary
inheritances. You can use some of this to pad your emergency fund and help cut
down the time it takes to fully fund it.
Setting
Up a Rainy Day Fund
Next, you
will need to decide how much you need for your rainy day fund. In this case,
thinking long term about some of your expected expenditures will help you
decide how much you need. Do you have an aging pet? Do you kids need braces? Do
you live in an area where hurricanes or tornadoes are common? Is your air
conditioner on the fritz? Factor all these into your decision.
Then, like
your emergency fund, divide the full amount by how much you can spare each
month. So, if you want a RM 2,000 rainy day fund and can afford to set aside RM
75 per month, it will take you just shy of 27 months to reach your goal. You
could also make other small cuts to your expenditure budget or even collect
spare change to help fund your rainy day savings.
Budgeting
for Your Funds
Finally,
you will need to factor both these expenses into your budget. And add a
line item for funds to allocate to each account, and set up automatic debits
each month so you do not fall behind on your goals.
You should
keep your emergency and rainy day funds relatively liquid. This means you can
access it easily and without paying a penalty. A high-yield bank account or a money market account are two good
options. You could also keep your emergency fund in a traditional savings
account.
While
saving for an unknown emergency or “rainy day” may not seem like the most
exciting way to allocate your hard-earned cash, in the face of a true financial
emergency or an unexpected bill, you will be happy you did.
START FREELANCING
Whether you have a knack for designing
websites, writing blog posts or taking photos, you can use your talents to earn
extra income by freelancing. Do not forget to tap into your network and ask
whether anyone is looking for freelancers. If that does not get you anywhere,
you can spend your day off searching the web for various other opportunities to
make money.
RESEARCH INVESTMENT OPPORTUNITIES
Your rainy funds should be relatively liquid. To place your
money in a time deposit or savings accounts earns you very little interest
income. You should consider investing a substantial portion of your rainy day
funds in the stock market.
If your busy schedule has kept you away from investing, you
can spend a day looking for a financial advisor or doing some research to find
out what is happening in the stock market.
By investing, you are essentially putting your money to work.
If your investments perform well, you could potentially build serious wealth
and increase your net worth. Just keep in mind that you will be taking on some
degree of risk and that returns are not always guaranteed.
MANAGE YOUR DEBT
Paying off credit cards and other kinds of debt can take
months or even years. If you are struggling to dump your debt, it might be a
good idea to come up with some strategies that might speed up the debt
repayment process - strategies like debt consolidation.
By settling or reducing your debt burden, you will free some
cash which could be set aside for your rainy day.
As usual, we remind you to take your Memo Plus
Gold daily. It will help to keep you alert and mentally sharp. For more information or to order for Memo Plus Gold, please visit : https://oze.my.
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