Life can be very unpredictable. Just ask Liam Seacrest, a 40-year-old resident of Vancouver. After a tree fell on his house early last month, Liam found himself struggling with a torn roof and water dripping through his ceiling.
Liam had two choices; wait for his insurance company to process his claim, while the leaking roof caused secondary damage, or fix the roof from his pocket and get reimbursement later from his insurance company. Of course and as you would expect, he settled for the latter but only because he had a rainy day fund!
Rainy day funds – relief in troubled times
When a tree lands on your house you don’t pause, take a breather and say I’ll sleep over it and hopefully make a decision in a week – you need a solution, fast. Most times, ‘solutions’ will cost you money. That’s where a rainy day fund comes into the picture.
A rainy day fund (not to be mistaken with an emergency fund) is a lump sum of money set aside for ‘rainy days.’ That’s money set aside for times of unpredicted trouble, need or difficulty. Rainy day funds give a sort of peace of mind, propositioning you to act fast to resolve an issue when unforeseen circumstances arise. In line with this, monies designated as for ‘rainy days’ are typically stored in a savings account where they’re easily accessible and free from any risk of depletion, another way to say that your rainy day fund shouldn’t be deposited in a mutual fund or any investment vehicle of the sorts.
Keeping you in the financial green zone
Aside from setting you up to respond to emergencies fast, a rainy day fund also helps you stay away from debt, a not so pleasant economic situation plaguing millions of Canadians. Currently, over 70% of Canadian households live in debt, with a debt profile amounting to an eye-watering $2 trillion. That’s almost the same amount as the country’s gross economic output!
As interest rates continue to rise and expert predictions point to an even higher upsurge in household lending, it’s easy to see why staying off debt could be a potentially viable economic strategy. Rainy day funds help you do just that. When you save and have enough cash to get you out of life’s many tight spots, you distance yourself ever farther from the unforgiving clutches of debt.
Training yourself to be a better saver
If you’ve tried saving before, you would know that it doesn’t always pan out to be an easy endeavor. These days there are so many bills to pay and an even greater number of wants to satisfy, slicing off a chunk of your paycheck to keep just for keeps sakes will most times seem like too much of an economic stress to bear.
Setting up a rainy day fund can serve as an effective way to master the art of saving. Because you have a motive – staying clear of debt and guaranteeing instant relief in times of need – overcoming the temptation to spend indiscriminately becomes even more natural, and rerouting these monies to your savings account turns into a thing of joy.
Over time and with consistent practice, this process metamorphoses into a habit, and before you know it you’re saving more money than you’re spending. That, my friends, is one of the keys to financial freedom.
So, start saving today to inject a bit of sunshine into your rainy days and perhaps more importantly, lay the groundwork for a life free of financial worries and limitations.