Rainy Day Fund and Emergency Fund Basics
A rainy day fund is an amount of cash, separate from investments that you have put away in case of an emergency. I think of this like life insurance.
I have life insurance on everyone in our family. I do not want to use it anytime soon, but I have it just in case something happens to someone in our
family. You have no idea when you might lose your job or have a medical emergency and you need the cash now.
I have two types of funds. The first is in case I lose my job or become disabled. This is my emergency fund. I have budgeted out how much I will need to live for a single month. I then choose how many months I feel comfortable with having in my fund and set the goal to achieve it. This will only be touched if I lose my job and for no other reason. The second is for medical, auto or other emergencies. This is my rainy day fund. These do come up and I want to make sure that I can make decisions in my life without having the added pressure of an emergency helping me make my financial decisions.
So how much should you have? This is a personal preference. I have had financial planners telling me 6 months, 1 year and 2 years. The longer is obviously the better. I looked at unemployment statistics to make my decision. If you look at these released by the U.S. Bureau of Labor Statistics as of December 12, 2011 you will find some interesting data. It shows that of the 8.6% of the population that are unemployed 5.7 Million or 43% of the unemployed have been that way for 27 weeks or more. That is a half year. My opinion is that a half year is the minimum you want. I know that I could be one of the 27 weeks plus so I have a year of bills for my rainy day fund.
The biggest reason for me of a longer rainy day fund is peace of mind. I know that if something were to happen to me that I can take time and make the
right decision for my career and my family. With that fund, I can make those right decisions.
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