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27 Jul 2021 • 4 min read
Most financial experts differ in their money philosophies, but one thing that can be agreed on is having spare cash set aside for emergencies is essential when building towards financial independence.
You’ve probably heard of rainy day funds or emergency funds before, but you might be surprised to know that whilst these terms are often used interchangeably, they are in fact two separate pockets of money.
Question still remains though - why do we need it? How much do we need? Where do I even start? So we are here to give you the what, the where and the how.
Simply put, the rainy day fund is for those unexpected but regular occurring surprises - so kind of like the rain in the UK. This fund should be accessible and liquid (also kind of like rain) as you’ll need to draw on it quickly and easily. That way when you smash your phone screen or you get a parking fine you can avoid any debt to cover these.
There is varying opinion on this matter with some suggesting between £500 and £2500. So when working out what is best for you, we would suggest to always err on the side of caution & consider the costs of these surprise expenses and set a figure that works for your situation.
If 2020 taught us anything, it’s that life hands out unpleasant surprises and leaves you to handle the mess. While your rainy day fund will cover off most everyday surprises, your emergency fund is there to keep you financially afloat for a longer term period, say if you lose your job or fall ill and are unable to work.
Again, the size of this fund varies from situation to situation. However, generally speaking, a good rule of thumb is to have enough money to cover 3-6 months’ worth of living expenses, including essentials like rent and groceries.
Understandably, setting aside this much money may be out of reach in some situations. In that case, review your finances and budget on things that can have cut backs. Whatever you have left, throw into your emergency fund.
1. Make a clear plan.
You need to establish what your goal is and how much money you need personally (based on your living expenses).
2. Keep your funds separate and accessible.
Take this as an opportunity to look into your options and see what’s out there.
3. Review your spendings.
See if cheaper alternatives can be made and save the remaining bits. Starting small is better than not starting at all. Not only do small deposits lead to bigger funds in the long run, but it can also train your brain to start paying closer attention to your money and spending habits.
Don’t put hard work into saving for these two funds only to splurge on a clearance sale or night out. These funds have a purpose and you’ll thank your future self if you ever find yourself in an unpredictable situation and you’ve got these to fall back on.
When life gives you lemons (as it always does), you’ll be able to rest assured that there is a safety net in place, covering you when things get sour.
The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.
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