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Emergency Funds and Rainy Days: Why Every Young Person Needs a Financial Safety Net

When you are dealing with a traumatic, unexpected or very difficult time in your life, the last thing you want to be worried about is your ability to cope financially as you work through it. This is why building an emergency or rainy-day fund is so important, and the sooner you can do this, the more peace of mind you will have as you expand in your life and career, knowing you have the security of a financial safety net. 

What is the purpose of having an emergency fund or rainy-day fund?

A rainy-day fund is meant to give you a financial resource you can use for emergency situations. It is often the place I start with my clients because most people don’t think about it until they are in the middle of a crisis, and by then it’s too late to do anything to remedy their financial situation. 

When an unexpected event happens, having an emergency fund will allow you to financially deal with the circumstances, so you can put your attention back on the things that matter most. 

As a young person, you have an advantage. The earlier you can set up your rainy-day fund, the easier it is to maintain or grow it as your lifestyle changes through each stage of life. All you need to do then is add a little more to it as your income expands, your expenses increase or your family grows.

What are the benefits of an emergency fund and how much should it be?

The biggest benefits of an emergency fund are that it allows you to live for several months without needing an income or incurring debt while you aren’t working.   

The size of your emergency fund will vary based on your income, monthly expenses, number of dependents and lifestyle. Some financial experts will say to put aside one to two months of income in your rainy-day fund, and others say three to six months. This is where you need to evaluate your personal preferences and decide for yourself the amount that makes you feel comfortable for your emergency fund. For some emergencies, one month of income might be sufficient, but for other unexpected events, you might need a larger safety net. Your risk tolerance is the biggest factor here.

I typically recommend a minimum of three months of living expenses be kept in an emergence fund.  But during uncertain economic times like we are currently experiencing, I recommend increasing that fund to at least six months of living expenses to help you through any unexpected emergencies.

Before you make your decision about the amount you need for an emergency fund, be sure to research your specific market to get a better understanding of the issues you could possibly face. For example, if you were to lose your job, how long would it take to find a new one in your area of expertise where you live? That will directly inform the number of months you will need to plan for in your emergency fund. 

You might also want to get a better idea about the cost of repairs for things like a furnace, a vehicle, average medical costs, and so on. The more you know about the possible needs for your emergency fund, the more prepared you can be. 

A note of caution

Some people view their available credit lines on their credit cards as available to them as an emergency fund.  Beware, because the credit card companies can reduce your credit limits at any time, especially in an uncertain economy.

How do I build my rainy-day or emergency fund?

Building your rainy-day or emergency fund simply takes planning and consistency. Here are steps to start taking action:

  1. List all of your current expenses, including your rent or mortgage, insurance, groceries, etc.
  2. Think ahead toward possible expenses you might incur within the next year or two. 
  3. Using those expenses and the number of months you want to cover in your rainy-day fund, calculate the amount of money you will need as a safety net. For example, if your expenses are $3000/month and you want three months in your emergency fund, you will need to save $9000.
  4. Based on your current income, decide on the percentage or the specific amount of money you can commit to building your emergency fund each month. 
  5. Open your emergency fund savings account.
  6. Automate your payment into the new account, so you don’t forget to do it. 

Each month, you will see your emergency fund grow, until you reach the amount you wanted as your safety net. While we don’t like to think about unexpected events happening, they are a part of life, which is why every young person needs a financial safety net. Planning ahead will help you navigate potential financial challenges because you have an emergency fund, then you can stay focused on what matters most when a rainy day comes along.  

If you would like to learn more about building the abundant life you want, CLICK HERE to get 3 Tips to Improve Your Financial Wellness. I think Step #1 will surprise you!

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