The trick to saving for a rainy day is that you have to do it before the rains come... That means putting short-term gratification aside (skip the extra latte, push of the vacation, put in more hours at work) in favor of the long term. Investors understand this process as well as anyone. Putting money away long-term into a 401(k) or IRA means removing it from daily circulation. This seems much tougher to do in strenuous economic times, like today. So, this tweet from Mint.com caught my eye yesterday: So, I clicked through to find this interesting infographic. It got me thinking about the right investing and personal finance tools to use to set up a rainy-day fund and how investors should approach this. First of all, why set up an emergency fund?
- Sh*t happens: That's just life. You need to have some extra funds on hand if you need to tap them for any of the things life throws your way (job loss, sickness, etc.).
- Avoid debt: Having some money set aside helps you avoid debt. That's important in terms of the performance of your entire financial life.
- How much to put in an emergency fund: In The Wealthy Barber, David Chilton recommends keeping $2k- $3k in an emergency fund (it's a more realistic goal for most people who have a hard time saving), though many others recommend more, like $5-$10k or enough to cover a couple of months of expenses. You want your rainy day fund to be new savings, not to liquidate longer term investment money (unless, of course, you don't have a choice).