Saving for the future is an important part of your financial health. You never know when an unexpected expense will pop up, as they do at some point in everyone’s life. You want to be sure you can afford to cover these costs to reduce your stress levels when they occur. The best way to do that is to create a rainy day fund. This type of account helps you save up for future financial bumps in the road. Here’s what you need to know about this kind of account, and why it is so important to have.
What your rainy day fund should cover
The terms “rainy day fund” and “emergency fund” sometimes have different definitions, but for simplicity, we will use them interchangeably. This savings fund is meant to protect you financially in the case of an unexpected expense or loss of income. Since everybody’s situation is unique, nobody will have identical costs in their life. Plus, it’s hard to plan for unexpected expenses, since you obviously cannot see them coming. However, there are some basic costs you should consider saving for ahead of time.
One of the biggest expenses to prepare for include emergency medical costs. While many medical services in Ontario are free for residents with a health card, there are exceptions that can be pricey. For example, certain medications, ambulance rides, or even urgent dental work are all expensive, especially if you don’t have extra insurance coverage. Next, you should consider the cost of vet bills if you have a pet. Our animals are part of our family, but their care can be expensive! Saving for potential treatments can reduce stress next time your pet has a health issue. Finally, we can never know when our appliances or cars will quit on us. It’s always handy to have backup funds ready for these types of repairs or replacements.
Why you should have this dedicated fund
Why is it so essential to have an account specifically for a rainy day? Wouldn’t it be easier to just take money from your regular account when you need it, instead of having to maintain an extra one? This is a common belief, but in most cases, it’s not true. Having a separate rainy day fund keeps that money safe and locked away, so you can’t spend it on non-emergencies. If your emergency funds are mixed in with your regular savings, it’s much harder to keep track of what you can spend and what you should hang onto. Plus, holding your savings in a separate account means you always know how much money is available for you to use in an emergency. This will help hold you accountable and keep you committed to maintaining your savings.
How much should you contribute?
In general, we recommend having enough money saved up to help you through a couple of months of expenses if you experience a loss of income or encounter some unexpected costs. Of course, this amount will be different for everybody. In order to calculate how much you should be actively contributing to your rainy day fund, you will need to first think about how much you can realistically afford to set aside. This means taking into account your income and expenses, and determining how much you have left over every month, for example. You can add these contributions into your monthly budget to make them a permanent part of your financial plans. You should only add in as much as you feel comfortable doing. While it’s important to save for the future, you shouldn’t sacrifice your ability to maintain your current financial health. Whether you can afford to add in $20 or $200 per month, your savings will add up over time.
How to successfully save up
Finally, one of the trickiest parts of saving for future expenses is being committed to building up your emergency account. Many of us struggle to prioritize hypothetical costs that may not occur until much later in life, if ever. However, your future self will thank you for it. You can consider automating your bank account so every month, a certain amount of money is transferred into your savings account. This way, you don’t have to actively think about it or forget to contribute to it. It might also help to think of specific scenarios where you may need these savings later in life. This gives you something to save for, which can help increase your motivation. Most importantly, be sure to check in with yourself! Once a month, for example, you should look at your account to make sure your savings are building up the way you planned. This forces you to make any adjustments, as needed, to your saving habits.
Building up your rainy day fund takes time and dedication. You need to sit down and plan out the expenses you want to prepare for, and how much money you may need. If you’re not sure where to start, or if you want to find the best way to start saving for a home, feel free to reach out! We can discuss your options and get you on the right path towards homeownership and financial freedom.
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