Let’s just assume for a second that you are managing your income, budget, and mapping out all your spendings and expenses every month.
You’ve got your ‘planned’ expenses such as insurances, memberships, subscriptions, meals etc. covered. If, however, your car suddenly breaks down or your laptop doesn’t switch back on – would you have enough funds to cover that cost?
When things go south, having a financial safety net is key. It’s what we call the rainy-day fund and it’s quite straightforward. It’s having a fund for those unexpected events that are bound to occur at some point.
Your car breaks down. Let’s have four scenarios:
1. You have no ‘extra’ money with which to cover the costs and you have already maxed out your credit card. You have no option but to leave your car at your house until you have the money to repair it.
2. You do have money in the bank, but these are committed. You decide to max your credit card so that you get your car fixed. You have now an additional financial burden and a monthly commitment to pay off your card.
3. You have money in the bank but it’s your savings account. You dip in your savings to pay off the repair costs. You now have reduced savings.
4. Every month, and independent of other savings, you put aside another sum just in case something unexpected crops up. You pay off the repairs through your rainy-day fund and in doing so avoid all the above.
Building a rainy-day fund offers you some peace of mind. When a crisis hit, be it large or small, you’re always covered. It’s also the best way to stay on target with all your budgeting and saving goals because you don’t dip into your savings or add (more) debt.
This heavily depends on your income, but we suggest starting small with €25 to €50 a month. An option is to set up a standing order with your bank, so that as soon as your work cheque comes in, the money immediate goes into your fund. If the opportunity arises, try to increase that amount.
Set a target.
It’s important to have enough money in your fund to cover you for a few months should you end up in a sticky situation. As a minimum, a rainy-day fund should give you a solid financial cushion of three to six months. The fund should cover your living expenses – mortgage or rent, utilities and other things considered as ‘needs’.
Consider the below as reference to how much money you should tuck away in your rainy-day fund:
Car Repair | €1000
Reading glasses | €180
Technology breakdown | €300
Smartphone breakdown | €200
This table is based on a 2016 UK study carried out by Money Advise and adjusted for Malta.
Coverage of emergency differs from one person to another. It can be something minor like phone repair, but it can also be something major affecting your financial stability like losing your job. It is important, therefore, to understand what your essential expenses – or needs – are.
We’re talking about essential debts like car and home loans or grocery shopping if you’re living independently – and not your daily lattes which you can do without and will be the first to go during any emergency.
Let’s assume your monthly expenses are €500 and you have set a rainy-day fund for six (6) months. Your emergency coverage is €3,000 – so that would be your target. To this you can add a cushion of another €1,000 to cover for unexpected costs. In this case, your rainy-day fund will have €4,000.