Step 3 of 7 - Rainy Days
To truly become Financially free requires more then "making ends meet", or "getting by". It means getting ahead, so much so that you can eventually become what is often called "self insured". Basically, you will have enough savings to pay for higher deductibles on your insurance, to live off of in-case you loose your job, or to pay for other emergencies when they come up.
You can plan for the unexpected. Things happen all the time, and you need to be prepared for them.
How much you save for a "Rainy Day" is mostly a matter of your personal comfort, but here are some guidelines that will help you get started:
While you still have un-secured Debt:
- $1,000 is usually a good starting point.
- Keep the amount low, and focus on getting out of debt before saving up a large sum.
- Consider any insurance deductibles you might have, and make sure you have enough saved to pay for the one with the highest delectable.
For example, if your car insurance has a $500 deductible, have at last that much save in-case you get into an accident.
After you have everything paid off, except your first mortgage on your house:
- $15K - $30K, depending on your income is a good rule of thumb.
- Consider all of your insurance deductibles, and other obligations that could unexpectedly need to be paid.
- Figure out what it would cost for you to survive on basic necessities for 3 months to a year.
The actual time frame depends on what you need to feel secure.
- Don't make this so high that you miss out on other opportunities to invest and give.
If an emergency does happen, and you are forced to use money out of this fund, so you don't have to barrow, then put your focus back on building this fun up again before continuing on with other steps.
Put this money somewhere so that it's not too easily acceptable (i.e. don't just leave it in your checking account), but still capable of being withdrawn from in case something comes up (i.e. a high yield savings or money market account). Don't put it into something that will cause tax penalties or other fees if you withdraw it early (i.e. and IRA, or 401K - these are NOT emergency funds).
It's also important to keep track of what you are saving for, so that you do not take more money from your savings for a vacation or other large expenditure and end up putting yourself in a bind. A Breakdown of Savings worksheet can be helpful with this. Sinking Accounts are also a great way to go.
Another great way to protect yourself from the unexpected, is to have some Food storage. The simplest way to do this, is to look at the food items you buy on a regular basis, and note their expiration dates. If they will last more then 3 months, start building up a 3 months supply. If they will last more then a year, start building up a 1 year supply.
Once you have about 3 months worth of items you use on a daily basis, you'll want to start looking into things that have longer self lives when properly stored in bulk. These items are not things you'll use on a daily basis, but will become extremely valuable when economies become unstable and things start to fail. This catastrophic problems have and do happen, and even though they may be relatively rare, when it does occur, you'll be free from rationing and panic knowing you have substance to live off of. This scene of peace can even help you to thrive in hard times.
Consider this: If you have a year supply of food on hand, and are debt free, then you really don't need very much money saved up to survive on basic necessities for a year.
When economies fail, people usually resort to a system of bartering for goods and services. Having something to barter with is a good idea in these situations. Try to make a hobby of it, or if you have a hobby think how you can use it as a fall back if you were to loose your job in an economic depression.
Collecting coins is a good example, but only if you collect coins that are actually worth more then just their face value. In hard times people are not going to want anything that even resembles the money that has failed them, but if it's made from precious metals (gold, silver, platinum, etc), or has some other intrinsic value or industrial application (copper, brass, etc.) it may be value to trade with.
Do not let these items replace your normal retirement savings. They are a protection or a hedge, but likely will not have good growth performance over long periods of time.