The weather’s been gloomy, but your finances don’t have to look so dismal. Here are five tips on how to save up for a rainy day, courtesy of the Financial Planning Association of Massachusetts.
Watch the small things
Many people have trouble putting together an emergency fund. After all, there is always something else to spend money on! These are often small items, small fees and small purchases that go unnoticed. However, they add up. What if you could limit your purchasing of these small items, and put your extra cash into a rainy day fund instead?
Here are some ideas:
1. Consider giving up your daily Dunkin’ Donuts or Starbucks habit. At $3.05, a cappuccino may not seem like a lot, but one every 251 working days in the year adds to $765. What small expenses do you incur every day that adds up?
2. AT&T and Verizon will charge you $199.99 for the new iPhone5 or the newer Samsung Galaxy 4 with a two year contract. The truth is most of us want the new hot phones and their fancy features. How long will these phones stay “hot’’?
3. Pack your lunch: a sandwich or a salad at Panera will set you back $9 a day, or $2,259 a year.
4. Carpooling is great. Biking to work is better: It will not just save you gas, it will make you healthy too. Have you tried Boston Bikes yet?
Chris Chen, CFP, CDFA
Insight Financial Strategists LLC
Have a cushion
I advise every client to both maintain an adequate cash reserve and have in place appropriate lending facilities. On the cash reserve, the standard calls for three to six months of living expenses in checking and savings or other safe and accessible accounts. However, many people should have more than this— often one to two years, depending on their employment and personal situations. In addition to a cash reserve, it may be prudent to have in place ways to borrow additional monies without swiping the plastic. A home equity line of credit could provide a valuable short-term cushion, and is currently available at very low rates but might not be something that you can acquire once you’re there, i.e., if you are suddenly unemployed. So one may want to set this up now, and not wait until that rainy day –as the proverb says, “Dig your well long before you are thirsty.’’
Christopher K. Griffith
UBS – Griffith Wheelwright Group
Stick to the plan
Clients are preparing for a rainy day just by being clients. Clearly, attention to savings and spending are the main keys to being ready for a rainy day. I always discuss the fact that financial plans change over time as our life changes and certain events occur. Financial planning is a process, not an event. You get ready for a rainy day by recognizing this and sticking to your financial savings and spending targets. Very quickly this creates financial security which in turn provides financial flexibility which allows you to deal with life’s imminent surprises. This really is what getting ready, and being ready, for a rainy day is all about.
Peter Jaworski, CFP©
Sadly, rainy days do come, and they are easier to weather if you’ve planned in advance for them. We review clients’ insurance coverage to make sure they are properly covered, often recommending an umbrella policy as a great catch all. Disability insurance is also very important because there is a greater chance you will need it at some point in your life. Also, we encourage them to make sure they have their estate planning in order, especially important for people with young families and for those who are older and don’t have a spouse or children.
WH Cornerstone Investments
The recent recession has a lot of people rethinking the importance of a rainy day fund. It is important to have a reserve in case there is a disruption in the cash flow or an unexpected expense.
The first thing to do is sit down and calculate how much you can save; list your income sources and your expenses. The difference is what you have available to save. If that total is $0 or less, go back over your expenses to see where you can trim the fat.
Once you have determined how much you can save, create an automatic savings plan. It is easier than making manual transfers and it doesn’t “hurt’’ as much. Set up an online savings account at an online bank or a brokerage firm and have a monthly amount transferred from your checking account to the online savings account.
Use any windfalls as a way to fund the rainy day account. Bonuses, gifts, and/or tax returns can add a big boost toward your savings goal.
It may not be an exciting goal to dream about, but you will be happy to have that umbrella/protection on a rainy day.
Linda N. Homsey, CFP, RLP
Freya Financial Services
Expect the unexpected
One of the biggest mistakes most Americans make is not building (and keeping) a rainy day fund, otherwise known as an emergency fund. Picture this: You just finish paying off your last credit card and you go out for dinner to celebrate this outstanding accomplishment. After dinner you return to your car only to find a huge dent in the side. Someone has backed into your door and taken off, leaving you to pay for the damages. Sure, insurance will cover it, but not until you pay a $500 or $1,000 deductible. Where does that money come from? Your emergency fund of course, but most people don’t have one. I guess you’ll have to put it back on the plastic. Darn! Just when you thought you were done with those credit card payments, you have another balance to pay off.
This is just one example of why it’s important to sock away money for a raining day. Don’t worry, it shouldn’t take too long. Depending on whether you are single or married, with one job or two, the general consensus is that you should save enough dough to cover 3-6 months of expenses. So get saving!
Eric Roberge CFP®
Breakwater Asset Management