Do I Need An Emergency Fund And A Rainy Day Fund?

Q: Do I need to have a separate rainy day fund and emergency fund?jar with money labeled emergency fund

A: In an effort to simplify their money, people sometimes consolidate accounts. This is OK in many instances, but it’s important to remember that rainy day funds and emergency funds serve different purposes. Additionally, it’s important to have not just one, but both funds available to tap into as needed.

Read on for all your questions on rainy day and emergency funds, answered.

Why have a rainy day fund?

Say your washing machine decides to suddenly quit on you and needs replacing. You’re now looking at an extra expense that can run anywhere from $350-$850 (or more). Where are you going to get that kind of money in a pinch?

According to a Federal Reserve Board report, if you’re like 44% of Americans, you’ll need to sell something you own or borrow money to fund such an unexpected expense. Or, you might choose to charge the purchase of a new washing machine to a credit card, which means you’ll pay extra in interest and the cost of the new machine will be haunting you for months-or even years-to come. Either way, a surprise expense of a few hundred dollars can be enough to send you into a tailspin of debt.

Is there a solution?

Here’s where your rainy day fund comes in. It’s a small savings account created just for these types of small, unfixed expenses that you know will crop up on occasion. You’ll tap into your rainy day fund to pay for minor household and car repairs, to cover the cost of summer camp for your child, or to replace your broken kitchen table. When you have a way to fund these small financial hiccups, they won’t have as much of a chance to disrupt your financial health.

Why have an emergency fund?

In contrast to your rainy day fund, an emergency fund is for much larger expenses. It should have enough padding to keep you afloat even if you experience a major disruption in your life, like a divorce, job loss or illness. Without an emergency fund, any of these, or a similar event, can leave you scrambling to pay your bills and quickly send you into a debt trap that can last years.

How much money should be in each fund?

Your rainy day fund, created for minor expenses, only needs to hold $500-$1,000. That should be enough to tide you over in the event of a small, unfixed expense.

Sometimes, you may be able to anticipate these expenses and save up for them accordingly. For example, if you know your child will need braces next year or that your HVAC system will need replacing in a year or two, you can build up your rainy day fund over the next several months until it has enough to fund these anticipated expenses.

Your emergency fund, however, should be positioned to pull you through major financial crises. That’s why you will need to have a lot more money in the account. Ideally, it should hold 3-6 months’ worth of your living expenses. This value will vary according to circumstance and can be anywhere from $3,000-$10,000 or more. Find your own magic number by tracking all your fixed and discretionary expenses for a month and multiplying that amount by 3 or 6.

Where should I keep these funds?

By definition, the cash in both of these funds needs to be easily accessible. Don’t lock the money up in a Savings Certificate or another long-term savings account that will make it difficult and/or expensive to withdraw when the need arises.

Your Destinations Credit Union Savings Account is a perfect home for both your rainy day fund and your emergency fund. You can even set up multiple accounts for each one. Your money is always safe here, and our rates are generally some of the best in the market. Best of all, you’re free to withdraw your funds without penalty whenever you need to do so.

How can I build my funds?

You’re convinced: You need an emergency fund and a rainy day fund. But how are you going to get the money for both? If you’ve never saved up for unexpected expenses before, the prospect of doing so can be daunting.

No worries, though. With a bit of discipline and hard work it can be done! Use these three tips to build your funds:

  1. Start a side hustle. Freelance for hire, take online surveys for spare cash or accept a seasonal position. Keep all or most of the extra money you pull in for your funds, making equal contributions to each fund.
  2. Trim your budget. Take a long hard look at where your money goes each month and choose your biggest money-gobbler to be pruned. Use the money you save for your funds.
  3. Make it automatic. Set up an automatic transfer from your Checking Account to your Savings Accounts so your funds grow on autopilot and are less tempting to use for fun.

It may be some time before your funds are fully padded, but that’s OK. It takes time to save up that kind of money, and hopefully you won’t need to tap into your savings until you’ve successfully built your funds.

Also, you won’t need to stick to your tightened budget or keep your extra job forever; you can drop both as soon as your funds are built, taking them up again only when the money in one of the funds is depleted.

Start setting up your rainy day and emergency funds today! You’ll sleep better at night knowing you’re prepared for any financial eventuality.

Your Turn: Do you have a rainy day fund and an emergency fund, or do you use the same source to fund any extra expense? Share your take with us in the comments below.

SOURCES:
https://www.thebalance.com/do-you-need-a-rainy-day-fund-and-an-emergency-fund-4178821

https://www.aarp.org/money/credit-loans-debt/info-08-2011/rainyday-fund-emergency-fund.html
https://www.nerdwallet.com/blog/banking/why-you-should-save-a-rainy-day-fund-and-an-emergency-fund/

How To Fund An Emergency

Q: Help! I’ve been hit with a financial emergency and I don’t know how to pay for it! Woman standing in flooded houseWhat are my options?

A: Ideally, you’ll want to have an emergency fund in place for this very reason. If you don’t, or the money you have set aside isn’t enough, you have several options to consider.

We’ve listed some ideas below. Be sure to review the pros and cons of each before determining which option(s) will work best for you.

1.) Credit cards

For many people, when faced with staggering and unexpected bills, the default option is to pull out their plastic. Unfortunately, following this trend can put you on the fast track toward a lifetime of debt and playing catch-up because of this one-time emergency.

Credit cards offer incredible convenience. With your card in hand, you don’t have to wait for approval, take on another source of debt, or even think about how you’ll pay for it all until later.

When you borrow with a credit card, though, you’ll get more than you bargained for. With interest rates that can soar (in some cases, to an astronomical 30%), you’ll end up paying a lot more money than what you initially borrowed.

To make it worse, credit cards are designed to keep you in debt. They make it easy to push off paying what you owe by only requiring a minimum monthly payment. With accrued interest, paying only the minimum each month means you’ll hardly be making headway on that debt at all and will end up carrying it for a lot longer than planned.  (Please note: Destinations Credit Union has a fixed-rate credit card so you will know in advance if rates ever change.)

2.) 401(k) loans

You may not have an adequate emergency fund on hand, but what you may have is funds sitting in your retirement fund. But, should you crack open a 401(k) to pay for a financial emergency?

Borrowing money from a retirement fund should only be used as a last resort. It’s really advisable only for those whose credit has been shot and won’t qualify for another loan. 401(k) loans have a low interest rate, but will affect your future financial stability in ways other loans will not. For this reason, experts only recommend borrowing from a 401(k) if you are completely secure in your job and the money will be used for a sound investment. Using this money to fund a medical emergency or household repair is not such an investment.

Also, payments for the loan will be taken out of your future paychecks, so be sure you can afford less regular income before borrowing from a 401(k).

3.) Friends and family

For many, friends and family are the obvious answer when you need someone to bail you out during a rough time.

But is this solution really so obvious?

For some, it may very well be the case. Borrowing from friends and family means borrowing without interest and being granted generous loan terms. However, it can also get sticky, fast.

Only borrow from people you know and love with these guidelines in place:

  • Have a clear repayment plan in place and be sure you can stick to the set timeline. Don’t accept any offers of “pay me back in 10 years,” or that debt will be haunting you for a very long time.
  • Write down the loan terms and create a shared contract detailing all of the terms and the repayment plan.
  • Consider having a third party witness the loan and sign the contract.
  • Keep your financial and personal relationship separate. As long as you’re making your payments on time, there’s no reason to discuss the loan every time you speak.

Borrowing from those you hold most dear means putting a cherished relationship in jeopardy. Do not go this route unless you are confident your relationship can stand up to the test and you are absolutely sure you can repay on time.

4.) Personal loans

Personal loans exist for reasons like these. Since they have no explicit purpose, you won’t need to give any lengthy explanations for why you need the money and you should have the funds in hand rather quickly.

Unfortunately, though, personal loans are unsecured and most of them come with high interest rates and fees. You’ll also need to have decent credit to qualify. As a member of [credit union], though, you have access to personal loans with affordable rates. They may just be your way out of a financial bind!

If you think a personal loan might be right for you, call, click or stop by Destinations Credit Union today to learn all about our rates and payment options. We’re always here to help you out!

Setting up an emergency fund

It might be too late right now, but it’s never too early to start thinking about the future. Start setting up your emergency fund today so you’re never stuck in a tight spot again.

Here’s how to make it happen in five simple steps:

  • Create a goal for your fund. Ideally, an emergency fund should have enough cash to cover your living expenses for 3-6 months.
  • Review your monthly budget to find places to cut back. Alternately, look for ways to boost your income.
  • Determine how long it will take you to reach your goal by allocating the saved or earned money to your emergency fund.
  • Open a savings account specifically for this purpose.
  • Set up automatic monthly transfers from your checking account to your emergency fund.

Now you can sit back and watch your emergency fund build itself into something substantial that will help you sleep better at night. From here on, unexpected expenses or setbacks won’t throw you for a loop. You’ll be prepared for anything!

Your Turn: Do you have a secure plan in place for emergencies?

SOURCES:
https://www.google.com/amp/s/www.forbes.com/sites/peterlazaroff/2017/09/23-how-to-set-up-your-emergency-fund/amp/  

https://www.google.com/amp/s/www.bankrate.com/retirement/4-reasons-to-take-out-a-401k-loan/amp/  
http://www.businessinsider.com/how-to-borrow-money-from-friends-family-2013-1  
https://www.nerdwallet.com/blog/loans/personal-loan-why-should-i-get/  
https://www.thebalance.com/why-using-your-credit-card-for-emergencies-is-risky-960992 

Combatting The Financial Mistakes Of Our 20s And 30s

People starting out in their careers often focus on the here and now while ignoring the

couple looking at computer

A couple, man and woman seated sharing a digital tablet.

future when it comes to finances. As you climb the ladder of success, you tend to think that the raises and promotions will endlessly continue. It can seem like you have forever to plan for the future.

As millions of Baby Boomers will tell you, the future comes faster than you can imagine.

While there are lots of financial mistakes we can make, here are six that are common and avoidable. If you’re starting out, know the pitfalls, and maximize your chances of avoiding them.

Mistake #1: Not Planning for Retirement

Retirement seems like a lifetime away, but the only way to make sure that you have what you need to retire is to start planning early. This is probably the most common mistake we make in our 20s and 30s. It is also the easiest one to avoid. If you start saving for retirement when you get your first job, even if it’s a very small amount, you will establish the habit as well as start to build savings.

Short-term goals, like a new car, can overshadow what seems like the very long-term goal of retirement. However, it’s wise to get your priorities straight early on so you’ll reap huge benefits. As Suba Iyer, a financial writer, said, “When I started my first job. I thought retirement was too far away and I should be saving for some immediate needs like getting a car. The end result-I didn’t save for retirement or a car or anything else. I just spent my entire salary.”

Mistake #2: Spending Too Much on a Car

Speaking of cars … that’s something that trips us up when we’re young. While it may make financial sense to buy a new car, be careful not to buy more car than you need. A flashy and expensive car may be tempting, but keep your long-term goals in mind and choose a car that serves your current needs without sabotaging your savings.

Mistake #3: Not Using a Budget

Unless you are fortunate enough to have parents who explained what a budget is and how to use one, you may have no idea where to start.

You may look at a budget as something you don’t need because you are not making enough money, Or you may see it as something that will restrict your spending or is just too much trouble. However, a budget can help you at any level of income and can even give you financial freedom because you can see where you are spending. And they’re less trouble than you think. It can be as simple as tracking money in and money out. As you make more money and your expenses get more complex, you can customize your budget from there.

Mistake #4: Overusing Credit

While most people know that credit cards can get us into trouble, it is very easy to fall into the debt trap. You start carrying a little balance on your credit cards and it builds up. You may then have to dip into savings to pay your credit card bills.

Avoid this situation by using credit sparingly and only for identified and planned purchases. Implement a plan to save for major purchases and pay for most, if not all, of them in advance. “Start shifting your mindset so that debt no longer seems normal and stop creating new debts,” says Andrew Josuweit in a recent Forbes article.

Mistake #5: Having No Emergency Fund

For the same reasons we tend to skip proper retirement planning, we also skip saving for emergency situations. In our 20s and 30s, we tend to think we’re invincible, but illness or job loss can happen at any time. An emergency fund should cover your expenses for at least three months.

Mistake #6: Not Having Adequate Health Insurance

While health insurance is expensive, it is short-sighted to skip this vital component of your financial portfolio. Just one hospitalization can get you off course and cause real financial hardship. Health insurance is not optional, and young people are the first to ignore this rule. The cost may seem prohibitive, but it comes back to priorities and future planning.

Your turn: In your 20s and 30s, did you make mistakes you regret? Or, are you in this age bracket now and have questions about setting your priorities? Share your questions or words of wisdom here!

SOURCES:
https://lifehacker.com/the-biggest-money-mistakes-to-avoid-in-your-20s-1536804874 

https://www.forbes.com/sites/andrewjosuweit/2017/03/23/8-money-mistakes-you-want-to-avoid-in-your-30s/#78979a693906
https://www.fool.com/retirement/2017/12/04/5-money-mistakes-to-avoid-in-2018.aspx