Rainy-day fund: how big should it be?

No doubt you’ve heard this before: “Save money for a rainy day”. It might be easier said than done (especially with the household budget and other expenses to meet), but it’s good advice.

The truth is, it might well ‘rain’ at some point in the future. Creating a healthy emergency fund is like building a solid (financial) shelter from the storms of life. But how much should you set aside? And why, exactly? Here are some key points to get you started.

Why it’s so important?

Recent BNZ Financial Future Research revealed that an increasing number of Kiwis are living pay-day to pay-day, with one in five respondents having no money at all set aside for emergencies, and nearly half having less than $1,000 saved.

There’s a lot of financial and emotional reasons why having a rainy day fund makes sense, including a couple of our top picks: (1) it helps you to stay afloat during tough times, and (2) it can play an important role in reducing the need to take on extra debt.

Whatever happens – unexpected loss of income or expenses – a rainy day fund means you will have an emergency stash of cash to draw on. Sounds like a plan?

Getting started

A good first step is to identify what kind of emergency might occur. A loss of earnings due to health issues, a business problem, redundancy, even an unexpected dentist bill… These are all good reasons to have a rainy day fund.

How much do you need?

Now that you have built a list of possible reasons for your rainy-day fund, you can start calculating how much you may need to save.

A good rule of thumb is to have enough to cover three to six months’ worth of living expenses. This is the typical recommendation, but of course, your rainy day fund may vary depending on your circumstances.

Having three months’ worth of expenses in your emergency fund is a good starting point. But if you have people depending on you financially, you may want to put away more – six months’ worth of expenses, for example.

Should you save more than this?

Once again, the answer depends on your situation. As you get better at saving, you can even work towards accumulating a year’s worth of living expenses in a savings account.

In any case, if at some point you feel that you have more set aside for emergencies than you actually need, you may wish to consider investing the surplus or putting it into a higher-interest account.

As always, don’t forget that we’re here to help you make well-informed decisions about your finance – including savings and investments. This is what we do and love: helping you build a solid financial plan and enjoy the life you’re looking forward to.

 

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