It’s important that you have a good savings account together at any age. However, it’s critical that you have enough saved up as you approach retirement. If you’re living paycheck to paycheck, it can seem hard to do this. However, today we’ve got a few tips for how you can create a rainy day fund, and how you should use it to cover unexpected expenses.
Budget and Save
Rainy Day Fund
A rainy-day fund is a backup account that holds between $1,000 and $2,000. About 60% of people would struggle to address an unexpected expense of $500. If you’re in that percent, it’s important that you put some money aside from each paycheck to help address expenses like car repairs, weather damage and appliance breakdowns.
Keep in mind that a rainy-day fund should be separate from your savings account and retirement savings. These accounts have specialized purposes and shouldn’t be the sorts of things you dig into for minor expenses like a flat tire or a fallen tree in your yard. By making a separate fund to cover these medium-sized expenditures, you help your savings continue to accrue interest for bigger expenditures later.
How to Save
Start small when it comes to this kind of account. Open a second checking account and send $20 or so of your paycheck to it. Don’t use it until it has at least $1,000 in it, and then use it only to cover unexpected expenses. A blown AC unit, a busted water heater, that sort of thing. If you need to, you can adjust your withholding with the IRS to get more on your paycheck each month.
Similarly, you could opt to put your tax refund straight into your rainy-day fund. This helps you to feel comfortable that you could tackle an unexpected expense without digging into your savings. It’s hard to put a price on peace of mind.