Everyone needs a safety blanket to protect them from the unexpected sometimes. Even if you consider yourself to be a particularly frugal person, it’s easy to lose track of a bill and suddenly realize that you don’t have enough money to pay it or end up with an issue in your car that leads to an expensive mechanic visit. Your rainy-day fund is how you make sure that you’re always prepared for the little challenges that life might throw your way. Otherwise known as an emergency fund, your rainy-day cash is there in case something happens in your life that’s going to cost extra cash. It means you don’t have to break into your savings or spend money that you need for other bills. But how much of a safety blanket do you really need for peace of mind?
Calculating Your Fund RequirementsSo, how do you decide how much money is enough for your fund? There are a lot of different answers out there, but the truth is that there’s no one-size-fits-all option. For some people, three months’ worth of income is the best number. It ensures that if you ever have to take time away from work because you’re sick, then you have time to find another way to make money without having to worry about bills. Of course, your situation will make a huge difference to how significant your emergency savings should be. If you’re also running your own business, or you’re responsible for things like a car and children, then you’re going to need more money than someone who lives with their parents.
Calculating your fund requirements means sitting down and assessing your finances. Have a look at your current incoming and outgoing expenses and ask yourself how much you really need each month to live. Don’t include any of the costs for the luxuries that you don’t need in this number – just the costs of things that you can’t do without. This is your bare bones budget. Once you have that number, you’ll need to multiply it for the number of months you want to be safe if you’re suddenly left with no cash.
Building your Safety Net
Once you know how much cash you need, the next step is figuring out where you’re going to find those finances. A good place to start is to look for the quick wins in your current budget. For instance, if you currently have a series of expensive student loans that are soaking up all your left-over cash, you could consider consolidating those expenses into a single loan. A private lender may be able to give you a much better deal, so you can get rid of what you owe faster. Other ways to start building your safety net include cutting down on the little expenses in your budget that you won’t miss – like subscriptions to the gym that you never use, or coffee trips that you could do without. Although you might need to compromise in some places and cut your luxury spending from time to time, the peace of mind that comes with being protected is well worth it.