Much advice in the personal finance world says you should use every extra dollar to pay off debt. While that is excellent advice, I have a slightly different view on the subject. Start a small rainy fund while you’re still in debt.
If your debt is from credit card spending, you first need to break the habit of using plastic. How do you do that if you are in the cycle of relying on plastic for any emergencies? Since you’ve used all your cash to pay the credit card bill, nothing is left over, and this makes it necessary to go back to the credit card when you have an out of the norm expense like a car repair or other financial emergency. It feels terrible to work on chipping away at your debt them BAM! an emergency happens, and you’re forced to charge it. Rats! All your hard work wiped out in one shot.
At this point, the assumption is you have stopped digging the credit card hole and want to break the plastic habit for good.
What is a Rainy Day Fund?
A rainy day or emergency fund is money you save to prepare for times when your income is decreased or interrupted ,and you are faced with unexpected expenses. A rainy day or emergency fund are different terms for the same thing.
Start A Small Emergency Fund Today
First, open a saving or checking account to be used solely for your emergency fund.
How much do you need in your rainy day fund?
The amount in your emergency fund depends on your situation. If you have an older model car that is now starting to need repairs, think about what the next repair may be and how much it might cost. If you own your home or condo, do you anticipate any small plumbing or appliance repairs? I understand an emergency is usually unexpected but you should have an idea if your plumbing is in good repair or your car is coming due for a brake job.
If you think everything is just fine, then maybe start with a small emergency fund with $500 or less.
Finding money to start your rainy day fund?
Don’t try and fund it all at once. First look for the low hanging fruit. I have separate bank account that I use for my personal expenses, clothes, gifts, etc. If I have anything left over at the end of the month , most of it goes into my rainy day fund and the remaining amount goes into my holiday fund.
- The loose coin you have been saving up in a jar.
- Look for small easy to sell items to list on eBay
- Sell unused gift cards at sites like giftcardgranny.com
- Clothing that you can sell a consignment shop
- Clean out the garage and have a yard sale (check local license requirements)
What qualifies as an emergency?
This is what I consider a real financial emergency:
- Job Loss – Probably need more than $500 to get through this one, but at least it might keep food on the table for a month or two.
- Car Repairs – you need a running vehicle to get to work.
- Home Repairs – the heating unit goes down in the middle of winter or your roof springs a leak in a rainy season = emergency. The washer or dryer stops working = not an emergency, just go to the laundromat until finances improve.
Starting a rainy day fund with just $10, get’s you $10 closer to your goal. Last January I started a holiday club account with $20, and six months later I had over $300 saved just by depositing small amounts of money on a somewhat inconsistent basis.
Maybe it’s a cliche but…. slow and steady will win the race to eliminate debt.