Saving for a rainy day

Picture this – you have just lost your job, or come down sick… how long would your savings last?

Or, you have just had that dreaded midnight phone call informing you that a family member overseas, or in another part of Australia, has had a serious accident or is critically ill … where would the money come from to enable you to rush to their bedside?

These questions are worth pondering for a few moments.

You see, in life many things are not planned in a nice, neat and organised way. Life throws curve balls at the most unexpected of times.

The reality is, for most of us, we have very little in the way of savings set aside for emergencies. In fact, for many, our credit cards are also maxed out and we tend to live from one pay day to the next just keeping our financial heads above water. We spend our time on “other stuff” just so we can keep our minds off our dire financial situation. We are in denial!

But credits cards are not the topic of today’s blog. Although I am incensed by the obscenity of an 18 per cent interest rate during times of historically low rates, that, dear readers, is a topic for another day.

Today, I would like to explore the idea of saving for a rainy day. That is, having money that is not assigned for any specific purpose, but is there to cover emergencies that may unfortunately arise from time to time.

Let me be quite specific here…I am NOT talking about money to be spent when we decide that a week on a Barrier Reef island would be good for the soul, and a nice distraction from winter!

What I am talking about are savings set aside for a genuine emergency or other disaster, although some may see the need to escape Melbourne in July as a very valid emergency!

Call it “insurance” for events we can’t insure against.

Here a couple of thoughts for building an emergency fund:

1. Decide on how much you need:

This will differ from one person to another.

For example, if you have elderly family members living overseas, you may need more money for emergency travel than those with families living locally.

Wage and salary earners who have accumulated annual, sick, or long service leave may not need as much as a self-employed person with no leave entitlements.

Those aged from their mid-50’s onwards may be able to access their superannuation in the form of a “transition to retirement” pension in order to cover additional income needs, in the case of an emergency.

We all have different needs but perhaps, as a rough rule of thumb, “rainy day” savings that cover two to three months living expenses, might be a good target.

2. Start saving:

Very few of us will have the money available to allocate to our “rainy day” fund.

We will need to save this. Ideally we should arrange to have a set amount automatically transferred from our pay, each pay day.

When windfalls come our way, such as a tax refund, or a salary increase, transfer a portion to the “rainy day” fund.

If we can save 10 per cent of our pay, our rainy day fund will be established in no time at all.

3. Make the account inconvenient:

By inconvenient, I mean opening a separate account with a different bank to the one we normally bank with.

Don’t have the account electronically linked to other accounts. It becomes too easy to “borrow” from the emergency fund for that outfit we saw in the local boutique at the weekend.

Unfortunately, money we borrow from ourselves is rarely, if ever repaid.

Alternatively we could have the savings paid into a mortgage offset account, provided it can be quarantined from other savings.

By taking a few simple steps, we can get great comfort in knowing that we have money set aside for a rainy day.

And, if that emergency were ever to arise, at least having the money behind us will be one less stress we have to deal with.

Do you have any money set aside exclusively for emergencies? If so, I would love to hear your story. Share your tips for saving, and maintaining your rainy day account.

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here