It may seem bad timing to be talking about savings when the everyday cost of living is so high, but saving is essential.
Everyone bar those people that really don’t have cash to spare should be saving.
Times are tough. Money is tight and not everyone has the luxury of being able to save. But if you can, you really should.
What is a rainy day fund?
Most of us are familiar with the term, but if you’re not, a rainy day fund is a savings fund you create to cover unexpected expenses.
For example, you would use a rainy day fund if your boiler breaks down or to replace a broken window. It’s also there to help if you lose your job or if overtime stops.
It isn’t for planned expenses like a new car or a holiday but unforeseen emergencies.
If you have a rainy day fund, you don’t have to borrow, use a credit card or use a payday loan to cope with the situation.
For that reason alone, it’s well worth having.
How much should you have in a rainy day fund?
There is no rule as to how much you should have in a rainy day fund but common practice is to have 3-6 months of outgoings in savings.
That should be enough to cover all expenses if things get tough, you lose your job, get sick or something major happens.
3 months might sound a lot but you can start small. You can create a rainy day fund with as little as £10 or £20 per month and build up from there.
How can you save for a rainy day fund when times are tight?
You can save for a rainy day fund by starting small and keeping it going. As little as £10 a month ends up as £120 per year, £240 over two years and so on.
I cover saving techniques in ‘7 Simple hacks to save serious money with minimal effort’, but essentially you can spend less, go without something, reduce your outgoings and a number of other ways.
I’m not going to pretend it’s easy, because it isn’t. Not for everyone anyway.
If you’re struggling to pay the bills, you’re going to struggle to save for a rainy day. All I can say is, if it’s possible, I urge you do save something, even if just a little.
Some tips I cover in that post include:
Setting a household budget
I regard setting a household budget as the foundation of good financial management.
Without knowing what’s coming in and what’s going out, you’ll never be able to accurately predict what you’ll have at the end of each month.
A budget is simple to set up and free:
- Use Google Sheets or another spreadsheet tool to create your budget
- Set up one column as income and list all your household income
- Set up another column as outgoings and list all your monthly outgoings
- Set up a third column with debts and list all debts and their interest as a percentage
- Use the SUM function to calculate total income and outgoings at the bottom of each respective column
- Do the same for debts
That’s all there is to setting up a household budget. It’s obviously easier to describe than to do, but it shouldn’t take more than an hour.
Make it as accurate as possible and include all household outgoings. At the end, you’ll have an accurate picture of your financial situation to use in all future decisions.
If you’re fortunate, your income will be more than your outgoings and you can identify how much you could safely save in a rainy day fund.
If you’re like millions of other families, your income may be very similar, or less than your outgoings.
Your budget should then make it clear if there are savings that could be made to balance the books or how much you need to cut back to break even.
You may be able to earn extra money when times are tight. Again, I appreciate this isn’t always possible and may be out of reach for some.
Managing a rainy day fund
If you can create a rainy day fund, I recommend setting up a standing order each month after payday.
Save a set amount each month and you won’t be tempted to spend it.
Once you have 3 months outgoings, I recommend moving that fund to another savings account and starting over.
That way you have access to the fund if you need it and are also building a longer-term savings fund for other things.
Saving is a gradual process and requires willpower. You’ll see an amount of money sitting there doing nothing and may be tempted to use it.
Don’t.
A rainy day fund is like home insurance. It’s there to help when things go wrong or when you need it most. All other times, it’s just sitting there doing nothing.
You won’t necessarily appreciate it when you don’t need it but you’ll definitely appreciate it when you do!
You may have months when you cannot save and you may have months when you can save more. As long as you can leave your rainy day fund alone, it’s there for those times when you need it most.
