Building Your Rainy Day Fund

By John Focht

Setting aside money each paycheck is tough on many fronts.  First, how and where do you actually find the extra dollars to squeeze out of your pay to set aside?  And second, isn’t it nicer to reward yourself with something you actually want with those extra dollars you squeezed from your pay?

Sure it would be nice to use the extra savings from your pay to treat yourself to something nice, or spend an extra round on the golf course, but it’s also important to set aside for that rainy day just in case.

Most financial experts agree after you put savings away for your 401(k) and IRA , the next important savings spot for you is building a six month cushion in cash.  Building a rainy day fund of about six months of salary provides you some emergency cash if you are ever in a situation where you are laid off or lose your job.

Building a rainy day fund also affords you the opportunity to have immediate cash on hand if you need it for a household emergency like a new roof, hot water heater, refrigerator, or washer or dryer.

Also, be sure to save in a money market or cash savings account.  You should not be saving a rainy day fund in any type of stock or high-risk mutual fund.  If the stock or mutual fund takes a hit, your cash reserve fund will also take a hit.

So, how much should you save each paycheck?  Start with whatever you can actually set aside.  A good starting point is taking stock in how you are currently spending your money. Once you have a good sense on what your spending habits are, it will be easier to start saving a little extra each paycheck.  Creating a family budget will go a long way in helping you toward building a cash reserve fund.

Once your spending and budget are in check, setting savings aside each paycheck should come with ease.  Put aside whatever you can initially with the goal of eventually setting aside 10% of your paycheck toward savings.

Continue saving until you hit that six-month salary mark.  Once you do, reward yourself with something nice.  Next, it’s to start setting aside savings for the kids college!