SAVE FOR THE RAINY DAY

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.

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