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No matter how well prepared you may think you are when it comes to your life, there is always the unexpected to look forward to. No matter what, life catches up with you and sometimes that means in a financial way therefore, if you do not have a rainy day fund then you may be stuck in a bad spot.
When I was a financial adviser I used to have clients look at me like I had a third ear when I would ask if they had a rainy day fund. This was usually due to them having an abundance of savings. However, what they did not realize is that savings is just that; savings. Savings should not be tapped unless it absolutely has to be. This is where the rainy day fund comes in.
Your rainy day fund will consist of a certain dollar amount and will only be used in the case of an emergency. Say your washing machine breaks down. If you have a rainy day fund established, no problem. You simply take the money out and go get a new washing machine. Then, and this is pivotal, you replenish the rainy day fund as soon as possible.
Many experts will argue what the perfect amount of money to be placed into your rainy day fund is, but the consensus is usually between $1,000 and $5,000. The perfect amount really depends on your overall financial standing and your overall income.
A couple of important notes concerning a rainy day fund. First of all, a rainy day fund is for emergencies only. So, you can’t dip into the fund because you see a great pair of shoes that you simply have to have or because you want to take an extra $500 on your gambling trip to Las Vegas. If you act in this manner with your rainy day fund, you will find that it is quickly depleted.
Secondly, you should not invest the money in your rainy day fund into any type of risky investment vehicles. Usually, a money market or simple savings account is best. This way, your emergency money has no chance of depleting due to a bad investment. Save the risk for your ‘aggressive’ investment portfolio.
A rainy day fund can really help you through a rough patch. Sure, you and dip into savings, but then you run the risk of becoming used to doing so and your savings never really build up. If you do not already have a rainy day fund established, talk to your financial adviser today and figure out the perfect amount of money you need to have in waiting for all the potential curve balls that life is notorious for throwing.
More from this contributor:
Retirement Investment Planning in Your 30s
Three Tips to Help You Save Money for Retirement Right Now
What is Dollar Cost Averaging and is it Right for You?