How often do you get surprised by live and are not prepared?
How often do you use your credit card to pay for these little emergencies?
In this blog post, I will show you how to be prepared financially next time.
How next time the car breaks down it will be no financial catastrophe at all.
The 2 types of financial rainy days
Let me first start with a little theory.
There are two types of rainy days: Those that you expect and those you don't.
Expected rainy days
Sometimes you even know when a rainy day happens: You have to pay your expensive vacation in October.
For other rainy days, you do not know when they occur - but you can still anticipate them. For example, your old car might need repair once in a while.
More examples of expected rainy days:
- You need to pay an insurance every year
- Christmas presents
- 90 birthday of grandpa and you will need a flight
- Your really old dishwasher might break
- Your house needs repair
Rainy days in this sense are not necessarily bad, but if you are not prepared, they can be really stressful.
I love cruise vacations for example. Sometimes they were (to) expensive for me. I didn't have all the money when I had to pay the bill. I was anxious and even sold some of my retirement nest-egg to pay the bill.
Or you might use your credit card to pay for Christmas presents or the car repair. The next years you have to pay extra for this. Year after year. The tragic thing is: You should be able to finance these rainy days on your own, feel a lot better and save a ton of money in comparison.
Hard to gain financial independence like this.
Unexpected rainy days
The second type of rainy days is those bad moments in life. Moments that you did not anticipate - at all.
These moments range from surprising to really hurtful, and some of them have the potential to ruin your families finances.
- You get laid off without notice
- A car hits you and you can't work
- One of your parents dies and the funeral needs to be paid
- A relative is in real trouble and needs support
- You die (without any warning sign)
In my young foolishness, I thought a long time that these rainy days are relatively unlikely to happen. Boy was I wrong.
My father recently died way, way too young. He prepared for this rainy day, very well in fact. He spared us to worry about money in this very, very bad situation.
Also getting laid off is always a possibility. There are no save jobs. Just look around.
Or you can certainly get too ill to work really, really fast.
How to self-insure against most rainy days
Let me show you how to prepare for rainy days.
Step 1: Make a list of expected rainy days
First I want to make you a list of all expected rainy days. Add the name of the rainy day and how much money per month you think you need to be prepared.
Don't overthink this.
Remember: you did not save for rainy days yet. The most important thing now is to just get started.
Your estimations will get better and better over time.
Example 1: Christmas is in 6 months from now. Last year you needed around $300 to cover all expenses. So $50 for Christmas it is.
Example 2: Your car is quite old and might need repair. You have no idea when, you have no idea what it will cost. So you guess $30 per month.
Add up the amounts. The number is what you have to save for expected rainy days.
Does it seem big? Unfortunately, you will still have to pay it if you save for it or not.
Step 2: Think about unexpected rainy days
Now I want you to think about unexpected rainy days.
This might be uncomfortable.
What happens if you get so ill that you can not work anymore?
What if you get laid off tomorrow?
Can you stay in the flat/house? Would there be enough money to keep the car?
Against some of this risks, you need to insure.
For example, if you have a new house, a non-working wife, and 2 small children - what will they do if you die tomorrow?
I will not cover insurances here.
But please do yourself a big favor: Before you shop around for term life insurance educate yourself. Buy a good book on insurances. There is a lot of money to be saved. The book will page huge dividends!
Step 3: Start saving
Time to automate your savings for your rainy day and emergency fund.
You need to save, monthly, the amount that you calculated for your expected rainy days plus something extra. As much extra as you can in fact. For now.
How big should your emergency fund (for unexpected rainy days) be? I recommend 6 months worth of your monthly expenses.
You don't have to do finish in one month or even a year. In fact, it is really unlikely that you can do it in this short of a timeframe.
But even $1000 in your emergency fund make a very big difference.
Put the money where you can access it fast. But don't keep it on your checkings account. Rescue it from yourself, please 🙂
Without a budget: Start a savings plan and save automatically, directly after your paycheck arrives. The key is automatically. This is no decision you should think about every month.
With a budget: Keep track of all the categories separately and save manually every month. This has the advantage of you knowing that you used too much money for car repairs and need to increase your savings a bit.
Step 4: Never forget what this money is for
This is the hardest part. I definitely failed to do this, before I started to budget.
Do touch the expected rainy day money, when expected rainy day arrives.
Many rainy days will not be rainy at all if you planned for them.
Your emergency funds though are for emergencies only.
It makes sense to define what is an emergency and what is not an emergency in advance. Maybe write it down to remember.
It's worth it!
Having an emergency fund feels great. It took me quite a while to fund mine, but I am not troubled about money anymore.
Many things that would otherwise be catastrophic won't be.
If I die my loved ones have enough money to bury me.
If I get laid off, I have half a year to search for the perfect new job and am not forced to take the first offer.
The even bigger effect has the saving for the known rainy days.
As I mentioned many of them are not rainy at all any more.
It's time to pay the vacation? No problem. Not at all I saved for months to be prepared.
The other thing you will learn is to save.
If you really manage to save 6 month in expenses only the sky is the limit really. You obviously can save for retirement or whatever you love.
I wish you less and less rainy days from now on dear reader and if you stand in the rain, that you at least have an umbrella with you.