make sure you can Sleep well at night

...It's the least you deserve

Having a rainy day fund (aka an emergency fund) is super important. Not just so that you can pay off those random pesky bills that pop out of nowhere when you least expect them, but probably more importantly, for your mental wellbeing.

We talk here about why you should have one, how much you might need and where you might keep it.

What is a rainy day fund, and why you need one

When you're on the right path, you need as little distracting you as possible. It's like when you've got the beef out ready at home to cook up some lovely steak and you just so happen to be walking past your favourite restaurant/take-away and that smell just hits you, BAM! Do you give in? Or do you keep walking straight home to your original plan of beef steaks?

Ok, so it might be a slightly out there analogy, but I think you get the gist.

Having some money set aside for those one-off things that just happen is one of the best things you can do. I truly mean it. If you are on track to meeting your financial goals you do not want to be thrown off course just because of something out of the blue. Things happen! And they happen all the time! And you can't predict when they will happen. So what can you do about it? Well, you can plan for it. Not every little thing but by having just enough set aside you will know that a minor emergency is not going to change your course. You are here to stay.

A few examples of what we mean:

Car breakdown and needs a new clutch/exhaust/tyres/etc
Boiler is broken and needs replacing
You get made redundant from your job
An unexpected tax bill arrives in the post

And so on...

OK, So how much will I need?

Here's the hard part. And the answer is going to personal to you and your situation. How much money would you need for you to go to bed at night with NO money worries? You will need to consider the following and potentially more things based on your own circumstances:

Generally I use the 3-6 months of income as a rule of thumb and the personalise it. If you have a steady employed job and a very stable life, you might look to the lower end of that scale. As long as it makes you comfortable. If you are self-employed and heavily dependent on making sales for your income, have 5 dependent children and elderly parents to look after I would suggest something much higher!

Ultimately, it's all about what works for you.

What are my monthly expenses?
What is the worst thing that could happen, and what would it cost to fix? Generally this would be something not covered by insurance policies OR it would simply be your excess e.g. Boiler replacement ~£5k
If I lost my job / had no income for 3-6 months, how much would I need to survive?

Where should you keep it?

Now for the fun(ish) part. What do you with your lump sum that you are keeping aside, just in case? Well there are a few options and you should consider i) how risk-adverse you are and ii) how likely you are to need it. Either way, it needs to be READILY ACCESSIBLE! If its not, how is it going to help you in your time of need! I hope that was clear.

Some possible options:

Instant access savings account - In the UK we have cash ISA's that would do a good job, no real penalties for withdrawals and some interest (interest is never going to be great in the current environment!)

Cash account - You may be using your ISA allowance already (if so, well done you!)

Stocks and shares - For the slightly more risk-taking, I would not suggest in a single share however, potentially go for something like an index-tracker where you are not going to hurt if your one share is in a slump

Premium Bonds - You won't get a great return, so I'd probably favour a cash ISA over this

I would not suggest:

A single share - for reasons outlined above

Property - this really doesn't fall into the readily available camp

IN SUMMARY

- Know why you need a rainy day fund, it really does give you piece of mind
- Work out how much it'd take for you to sleep like a baby, every, single, night
- Figure out the best place for it. And make sure it is accessible!

TOOLS AND RESOURCES

We'll add some extra value here real soon, check back in the near future