Five simple steps in creating your "Rainy day Fund"
How Much Savings Will “Rainy Days” Really Need?
As the old saying goes, "When it rains, it pours," and for many people, their budgets cannot withstand an unexpected expense of more than PHP 20,000. There's no way to know when unexpected expenses may occur and if you're not prepared, you may be left breaking your budget or getting into debt.
For many years, the Philippines has had one of the lowest gross domestic saving rates in Southeast Asia, reported at 14.26% in 2019. This falls behind neighboring countries such as Indonesia (33.32%) and Vietnam (25.38%). This is worrying, as it means that in the event of sickness or emergencies, the majority of Filipinos have no means to fund their needs. This also implies that they could end up in debt or worse, not be able to cover their emergency expenses.
Having a rainy day fund in your pocket will keep you from having to take out a loan or fall into debt. Here are five steps to saving for a rainy day:
- Assess your personal needs
- Make a budget
- Set up a separate account
- Save raises or bonuses
- Replenish what you lose
What is a Rainy Day Fund?
Sometimes known as emergency fund, a rainy day fund is a source of money that you can use when unplanned financial expenses occur. It prepares you for life's unexpected events that can be costly and inconvenient.
These difficult and trying events are typically grouped into three:
Personal crises: Situations that prevent you from earning an income due to job loss, hospitalization, illness, accident-related injuries, permanent disabilities, or death. They can also be caused by the loss of a part-time job or the slowdown or closure of your small business venture.
Family crises: These refer to huge expenses that can result in lower income for the household. Unemployment of your spouse, house and vehicle repairs, or health issues such as a family member's serious sickness.
Natural disasters: Uncontrollable events such as fire, flood, seasonal typhoons, earthquakes, and the spread of infectious diseases.
All of the situations above can put a huge strain on your finances but saving for a rainy day allows you to plan ahead and be prepared should they occur. A rainy day fund serves as a financial cushion, protecting you from debt and helping you stay on track with your financial goals.
How Much Money Should I Have in My Rainy Day Fund?
If you’re still living on your own, a good rule of thumb is to have at least three months' worth of your expenses. For single-income families, you should have enough for at least six months’ worth of expenses and for dual-income families, at least three months’ worth of expenses. These are best practices that most people adhere to so they can have financial safety nets. For instance, if you suddenly resign from your company, you would still be able to live well within your means for the next 90 days as you hunt for a new job.
Of course, the more money that you can save, the better. Once you reach the minimum amount needed for your emergency fund, you can then pour a portion of your income in high-yield savings accounts or money market accounts that let you earn interest on your deposits. We’ll discuss more about this in the next section.
Five Steps to Saving for a Rainy Day
Saving at least three months' worth of your expenses for your rainy day budget can seem like a daunting task, especially when it feels like all of your available income is already accounted for each month. But it's not impossible – it just needs effort and discipline on your part.
Following these five steps will help you get started on budgeting for a rainy day and achieve greater financial security.
1.Assess your personal needs
In the previous section, we discussed how much money you should put in your rainy day fund. When working towards that goal, it's good to assess your personal needs and financial situation first. For instance, if you work as a freelancer and own a car, you might consider setting aside more in your emergency fund than someone who has a regular nine-to-five and commutes to work.
Take into consideration your total cash flow, debt, financial goals, and the people you are currently supporting financially. Once you have a better picture of your financial standing, you can start budgeting for a rainy day.
2.Make a budget
Many people get carried away with superfluous purchases and forget to create a proper budget. In order to save for a rainy day, you'll need to create a budget. Right now, you might think that you don't have enough money to put some towards your rainy day fund, but you might be surprised when you sit down and analyze your cash flow.
Many financial experts recommend the 50-30-20 rule when it comes to budgeting for a rainy day, or just budgeting finances in general. The 50-30-20 rule breakdown is as follows:
- 50% of your income: This covers costs such as housing, food, utilities, clothes, and other things that you won't be able to live without.
- 30% of your income: This is your discretionary spending, which will involve you distinguishing between needs and wants. These include monthly subscriptions, meals out, entertainment, and travel.
- 20% of your income: This is the portion that should go to your savings. How you use this part of your budget depends on you. You can either put all of the money towards your rainy day fund until you reach the minimum amount before moving on to bigger savings goals, or you can divide the 20% into several portions. What matters is that you're putting away money each month for your future.
By creating and sticking to a budget, you can help limit unnecessary purchases and reach your goal much sooner.
3.Set up a separate savings account
Keep your funds accessible but away from temptation. This means setting up a separate savings account that you won't be tempted to tap for everyday expenses. You can even schedule automatic transfers from your main account to your savings account each month so that there's already a set amount that you won't be able to touch from your income.
If you think you have more than enough money in your rainy day fund for emergencies (such as five months' worth of income), you can then move on to other savings goals and benefits – such as earning modest returns while still having the ability to get your money in times of crisis. Time deposits and money market funds are ideal for this purpose as you can earn a bit of extra cash while you let your money sit in the bank.
4.Save raises or bonuses
When you get some extra money from a tax return, your 13th month bonus, or your cash convertibles from work, it can be tempting to go out and spend it all. While it's okay to dedicate a portion of it to a treat-yourself day, saving raises or bonuses is the fastest way to save up for an emergency fund.
So when you do come across more money, factor a significant portion of it into your rainy day budget. The faster you achieve your rainy day fund goal, the faster you can move on to saving for retirement or even for something fun, like a well-deserved vacation.
5.Continuously and consistently save
A rainy day fund should always be replenished. Just because you made it through a costly situation doesn't mean another one won't pop up in the future. Ensure that you always have something put away until you reach the minimum requirement in your rainy day fund. Doing so will give you the peace of mind you need for your other financial obligations.
Start Saving as Soon as Now
Saving money is never easy but a rainy day fund gives you a sense of security for any unexpected events that could occur. With cash set aside, you'll be at ease knowing that an untimely accident or home repairs won't end you up in loans or debt.
It's vital to start saving for a rainy day fund as soon as today. You can follow the 20% rule or start smaller and then build it over time. Once you have enough to cover for emergencies, then you can begin letting your money work for you through investments.
Learn more about the different types of savings accounts at Metrobank. Tell us how you want to start saving and we’ll keep your funds safe and secure. With an interest-bearing account, the longer you keep your money, the more you let it earn. Experience meaningful banking that helps you save each pay period with Metrobank Online’s scheduled automatic transfers.
