There is just too much personal finance advice out there. Of course, you shouldn’t spend all your money at bars and coffee shops; you should be saving where you can and treat yourself occasionally.
It can be easy to overlook some of the finer points of responsible financial prudence and working towards various financial goals, such as the difference between an emergency fund and a rainy-day fund.
It is evident that emergency funds remain the central topic in personal finance. An emergency fund is a cash reserve that can be drawn upon in times of critical need, like accidents, unemployment, or going through a dry spell in business. Even unforeseen global events can leave you strapped for income, like the coronavirus outbreak affected businesses.
Establishing an emergency fund usually means setting aside 3 to 6 months of living expenses, whereas the rainy-day fund can be considered as a financial cover up for any unexpected emergency situation.
Emergency funds are meant to pay for your everyday expenses; rainy-day funds are meant to cover the unexpected costs, such as when a kitchen pipe bursts, your pet getting sick, or the car breaking down.
When you have an emergency fund, you will be able to endure financial hardship. With a rainy-day fund, you can manage emergencies short-term only and one-off incidents without resorting to loans.
Therefore, creating these funds should be a priority for everyone when they start earning. You should always have a small amount of money tucked away, no matter how little, to create your very own emergency fund.
However, we live in a time when loans can be easily taken at low interest rates. Even better, now you can take out Fast and easy loans online in case of any emergency. Getting and qualifying for these loans is a straightforward process. All you need is a clean financial statement and a good credit record, and you’ll get the loan in no time.
Although online loans are a good option in case of an emergency, financial experts still recommend that one should set aside a rainy-day fund.
Now, let’s take a look at some of the reasons why it’s always wise to have a rainy-day fund.
Relieves you mentally
Each one of us has a limited mental bandwidth, and it gets overstretched when money is tight. Making better choices is easier when funds have already been set aside to take care of emergencies. Without much financial space, you will be constantly engulfed in a tense battle, trying to make ends meet, while finding it hard to sleep at night.
Having a rainy-day fund reduces your financial stress. You can sleep better knowing that an emergency will be covered if one arises and your family won’t be left to suffer. Also, ensure you have emergency cash handy or your funds can be easily liquidated, so that you can use it right away.
Liquidity in an emergency
A rainy-day fund’s primary purpose is to provide a steady income stream in times of financial distress. You can use the money to pay the bills without having to put yourself in debt if you lose your job, get hit by unexpected medical bills, or experience annoying car troubles.
Generally, many financial advisers suggest setting aside six months’ worth of expenses. However, the experts caveat that rule by conceding that the amount can vary from person to person or emergency to emergency. Your plans should be tailored to your needs.
The amount should be determined based on several factors, including geographic location, age, fixed and variable expenses, dependents, demand for your skills/services/product, and your area of expertise.
We need to prepare for the unexpected since fortunes can turn on a dime in today’s world. A rainy-day fund ensures our financial resilience in the event of a rough patch. Basically, they’re like self-insurance, in which instead of paying a company, we assume the risk ourselves.
Prevents us from borrowing in times of crisis
Payday lenders charge no rates. During a crunch, they may appear to be the only option, but crunching the numbers proves we’re the ones that suffer. Therefore, it’s always wise to put aside some funds for such situations instead of falling prey to payday lenders.
Having a rainy-day fund also gives you the freedom to decide what you want to do with your life without having to live by the banks or some lenders’ conditionalities.
An emergency fund provides more benefits than just financial security. For instance, in the event you lose your job, you don’t have to take the first opportunity that comes along and can delay choosing in favor of the right career position.
This independence in spite of the troubling situation helps you focus on finding a position that is at least close to where you see yourself in the long-term, which could mean a higher wage and greater job security.
It shows us our potential
When we realize that we’re in charge and we’re able to direct our money the way we want – rather than what the lenders wish us to do – we’re empowered. Even seeing the progress of our regular savings increases our confidence in what we can accomplish.
Establishing financial control
People don’t suddenly become experts in financial planning overnight. Putting money aside for rainy days inculcates the saving habit.
Starting small helps you initiate the process if you have not yet created a rainy-day fund. Don’t get focused on the dollar amount or your ability to contribute.
Most people have to wait a while for their accounts to be funded to the level they want to see them at. It’s a waiting game. To help you along the way, you can set up an automatic deposit, so a portion of every paycheck is automatically transferred into a separate account at the start of every pay cycle.
You should also consider alternative funding sources if you’re having difficulty coming up with the extra funds to get started. Having a garage sale or consigning clothing can help you get a jumpstart.
No one can accurately predict unexpected events to happen. It’s understandable that saving money may seem hard without financial discipline, especially for those living in countries with higher interest rates, but it is important to make it a priority given unexpected events like the Covid outbreak can upend our smoothly-run lives in matter of a few days. In spite of what may seem counterintuitive, reducing your debt payments enough so that you can stash one month’s worth of expenses can actually make staying out of debt easier. After all, planning smartly today will help you a lot in the future. So, if you haven’t started a rainy-day fund yet, now is the time to do so.