The rate at which people in the UK are saving is falling. According to data from the Office for National Statistics, more than half of 22 to 29 year olds (53%) have no savings at all. Even among those who are saving, 40% have no more than £1,000 saved.
It’s an alarming figure as it means that a large portion of young adults do not have emergency funds to cover unexpected expenses. Some examples might include sudden car repairs, having to replace a faulty boiler system, or an unexpected job loss. Either scenario can happen. If you’re not prepared with a rainy day fund, you could be left with no other choice but to borrow at a high interest rate.
Here we’ll look at how to build a rainy day fund so you’ll have the means to cover any unexpected surprises that come your way.
Start With a Small Amount
It’s impossible to predict with complete certainty about what will happen in the future. Experts like Dave Ramsey recommend setting aside three to six months of living expenses in an emergency fund. A funded rainy day account lets you prepare for any unexpected events. If you lose your job, you’ll have enough to cover living expenses while you look for another job.
Start building your rainy day fund with small amounts then slowly ramp up your effort. Saving just $5 a day averages to about $150 a month. Don’t discount smaller amounts either as even a few dollars a day can really add up after a few months.
Create a Savings Plan
Saving a few months of living expenses is much easier with a budget. Budgeting lets you create a spending plan for your money so you have enough to cover all expenses. In addition to including major expenses like food and housing, build in a monthly commitment to add funds to your rainy day account. You can even automate this by setting up direct deposits into a savings account with your bank.
Be sure to look for ways to reduce your spending. For example, preparing your own meals at home can easily help you save a few hundred dollars a month. Other ways to save include cancelling any monthly subscriptions you no longer use or looking for better deals when shopping.
Using Your Rainy Day Fund
Life happens – Your car might break down or you may come down with a potentially serious infection like measles or hepatitis that requires you to briefly stop working. These scenarios are impossible to predict. But with an accessible emergency fund, you’ll be able to weather the storm instead of borrowing or using a credit card.
It’s important to have a highly liquid rainy day fund. When you need access, you can simply withdraw the needed funds and pay for the emergency expense. Such scenarios are bound to happen again so you’ll want to replenish your emergency fund again. Hopefully, you’ll never have to use a rainy day fund but with how unpredictable life can be, having one will provide extra peace of mind.
Kym Wallis, the founding director of Higher Ranking has over 15 years of advertising sales, digital strategy, and business development experience. He is currently working as Digital Adviser for Travel Vax.