Life often hands us unexpected changes. To manage these unexpected changes, you need to have some amount of expenses set aside.
These unexpected changes could be any unforeseen event which may burn a hole in your pocket. It can be anything like a broken car, sudden illness, or even a job loss. A rainy day fund is something which is saved for the doomsday, which is not touched until it is a real emergency Remember, something on a sale is not an emergency. Emergency is something without which it would be difficult to continue your livelihood, like sudden medical expense, or unexpected job loss.
How much should this rainy day fund be?
That depends on your fixed expenses. Experts suggest at least three months of your basic expenses. To be safe, six to twelve months is sufficient. To calculate how much this amounts, you need to first budget your expenses. If you haven’t, start tracking your expenses on a daily basis right from today itself. There are many apps which can help you do so.
Suppose you lose your job due to some unforeseen situation, you can fall back to these funds, and replenish it immediately, when funds become available. This amount should be kept in an account where it is easily accessible. How much returns you get do not matter. Liquidity matters. You should be able to withdraw it whenever you want.
The main purpose of having a rainy day fund is to be prepared for the unexpected, and this helps us to not panic in such situations. A rainy day fund fund won’t give you any meaningful returns, that’s not it’s purpose anyway. It will definitely keep your ‘peace of mind’.