The first time you create, a budget life feels so good. You can see all of your income and expenses laid out right in front of you. Hypothetical savings are encouraging and projected debt payments seem to lift a weight off of your shoulders.
Then, life happens. Your budget doesn’t exactly line up all of the time and random expenses begin to creep into the picture. Here’s a quick breakdown of why, as a young adult, you should always have a rainy day fund ready to help you address unexpected financial challenges when they arise.
The Importance of a Rainy Day Fund
Housing, food, clothing, school, there are plenty of predictable expenses in life. When foreseeable, even the bigger costs can be planned for in advance, either through savings, taking out a loan that can be easily paid off, or a combination of the two.
Nevertheless, for every rent payment or trip to the grocery store, there’s going to be some unforeseen reason to pull out your wallet, as well. These “unexpected expenses” can cost anywhere from a few bucks to thousands of dollars.
Regardless of the size of the expense, it’s always good to be prepared to pay for the unknown costs of life. Otherwise, you’ll need to borrow funds, which means you’ll end up paying more money in the form of interest before all is said and done.
That’s where a rainy day fund comes into play. Also called an emergency fund or short-term savings, a rainy day fund typically consists of a savings account that is specifically reserved for unexpected events and is ideally big enough to cover at least three months of your expenses — although many financial experts recommend six or even nine months.
This may sound impossible if you don’t even have a fund yet, but the truth is, you don’t create an emergency fund overnight. It’s something that takes time, with the goal of eventually reaching three, six, or nine months of savings.
Unexpected Expenses to Prepare For
The question that remains, though, is what you’re actually creating your emergency fund for in the first place. What kind of unknown expenses can possibly demand hundreds or even thousands of dollars of your hard-earned income? The answer is a lot of different things, including but certainly not limited to the following:
The debate rages over whether a car is technically an asset or a liability. For most, it depends on factors like the size of their auto loan, how often their car breaks down, and the cost of fuel.
While auto loan or lease payments and expenses such as fuel can easily be added to a budget, the potential for repairs is a difficult thing to predict. A vehicle could run for years without a repair or it could need several repairs in the span of a few months. A rainy day fund can help to manage the costs of these unexpected auto-related incidents.
Animals are cute, but unless you’re talking about a goldfish, they’re also expensive. Everything from vaccines and vet visits to food, grooming, and even treats and toys will cost you money.
When it comes to the unexpected, animals can also have serious health issues such as cancer that can lead to substantial amounts of unforeseen expenses. An accident or a genetic defect can lead to thousands of dollars in medical bills; however, pet insurance or an emergency fund may be able to help you make up the difference (or cover the whole bill, if you’re lucky).
Medical expenses are practically impossible to predict. Everything from well-visits to major surgery can seriously impact your finances.
Often health insurance will at least cover part of the cost. However, between deductibles and medical procedures that aren’t covered by a particular policy — along with the average hospital visit running north of $15,000 — it’s wise to have some savings ready to take the edge off of any expensive, unpredictable medical emergencies.
A home is an asset, but it can still be filled with unanticipated expenses. If you’re buying a house, things like closing and moving costs can quickly add up.
Once you’ve settled down, the expenses can just keep on going. Leaks, broken appliances, infestations, and many other factors can quickly add up. Fortunately with a home, if you use your emergency fund to make smart, sustainable improvements and repairs that consider the environment or reduce utilities and energy consumption, you can eventually make some of your money back when you sell the home in the future.
Temporary Lack of Income
Finally, there’s the simple expense of, well, covering your expenses without an income.
The average employee holds a job for 4.2 years, and unless you make a seamless transition with every professional move, you may find yourself temporarily without an income from time to time. When that happens, an emergency fund can help float you through the tight times.
Managing the Unexpected
Needless to say, there are a lot of different expenses that can creep into the picture over time. While you can’t necessarily be financially prepared for all of them at once, a rainy day fund can be the perfect tool to help you keep your finances afloat, even in a pinch.
In many cases having some short-term savings can help you cover small costs that you didn’t foresee, such as new headphones or wipers for your car. Even if you’re faced with a larger purchase, such as replacing your fridge or paying for an unexpected trip to the ER, a well-stocked emergency fund can help you take the edge off of the bills and give you breathing room to make a game plan going forward.
So revisit your budget as soon as possible and crunch those numbers. As you do so, look for any areas where you can trim off a little cash to siphon into a rainy day fund, so that you’re ready for any reasonable surprises that life might bring your way.