Rainy Day Funds Redux
We seem to be having unexpected disasters on a routine basis, so a reminder of the value of Rainy Day Funds is once more in order.
I know… I know… this is a re-run, but we seem to be having unexpected disasters on a routine basis so a reminder of the value of Rainy Day Funds is once more in order. Where to start?
Darks Skies Tell Tales
You’ve probably read or heard comments in the news media that most individuals/families would be hard pressed to meet an unanticipated $500 expense. I found that hard to believe until three years ago this month, when a major local disaster – the August 2017 Hurricane Harvey flood – damaged more than 200,000 homes in the Greater Houston area. This devastating event left thousands of gainfully employed people – young and old – in a major financial pickle. It compelled me to write an article that was published in my daughter’s informative website, You, Me and the Tree -“Harvey, Irma and the Importance of Rainy Day Funds”.
In the case of the Harvey flood, I recall the tens of thousands of individual Texas Gulf Coast citizens who, tragically, found themselves with flooded homes, soaked furniture, ruined automobiles, moldy clothing, and in some cases, an interrupted paycheck. Seventy-five percent of these folks were located outside the 100-year floodplain, not covered by flood insurance, and without a personal emergency fund to help restore their lives to normal. Now there are millions of folks whose jobs or businesses were disrupted because of the coronavirus that continues to devastate family incomes. The Texas state legislature has a multi-billion dollar “Economic Stabilization Fund”, a type of governmental Rainy Day Fund used for disaster relief, that helps during these times. That is helpful, but I want to talk about a different type of Rainy Day Fund over which you have total control.
Rainy Days 101
You’re just out of school. You have a new job. You finally have a steady source of income. Perhaps it’s time to put some financial order in your life. When you’re flirting with financial insecurity – living from paycheck to paycheck as many young folks do – the first order of business you should tackle is to accumulate six or so months of liquidity (cash or near cash) to meet unexpected expenses. Despite steady income, most young people on the front end of their first good job with generous benefits often can’t meet medical plan or auto insurance deductibles much less the cost of unexpected emergencies. For this reason, they should start building a Rainy Day Fund… money that’s deposited in an easily retrievable but separate bank account.
According to a now bewhiskered Financial Industry Regulatory Authority (FINRA) Investor Education Foundation study, 56% of people nationally don’t have an emergency fund large enough to cover three months, much less six months of unexpected expenses – outlays such as major auto or home repairs, job loss, medical emergencies, unplanned travel expenses, etc. Sixty-four percent of Americans don't have enough cash on hand to handle a $1,000 emergency expense, let alone an uninsured flooded home (and pandemics), according to a survey by the National Foundation for Credit Counseling. Twenty-five percent of Americans don’t have a Rainy Day Fund at all. Many of these folks do, in fact, live from paycheck to paycheck, often by necessity, choosing to run the risk that no major financial disaster will uproot their lives. It’s a good bet that one week before Harvey struck, most southeast Texas citizens barely gave the tropical depression in the southern Gulf a second thought. I suspect the same held true nationally with regard to the pandemic. Its fury was slower in developing, but nastier in its endurance.
Without an Umbrella
So, what happens when individuals or families without Rainy Day Funds suffer a financial setback? In the case of the pandemic, Uncle Sam came to the near-term rescue to one extent or another, but many people have been left short of funds. Then what? They borrow from family or friends. They neglect to pay other bills. They sell or pawn other assets. They get a cash advance from a credit card company. They mostly do things that simply exacerbate their financial woes. This is why I call a Rainy Day Fund a financial firewall. In addition to helping meet those unexpected expenses, a Rainy Day Fund helps avoid disruptions in meeting the goals of a long-term financial plan.
Where to Start?
How does one begin the process of building a Rainy Day Fund? First, don’t set initial emergency fund goals so high that you soon deem them unrealistic or unattainable. A $100 or $1,000 fund is better than nothing, and when you hit that mark, strive for $200 or $2,000… then $300 or $3,000, etc.
To protect yourself against the possibility of a major emergency, develop a working relationship with your local banker and establish a meaningful line of credit. Money that could be borrowed in case of a financial emergency. And in that instance, use your smaller Rainy Day Fund to supplement the line of credit.
Where do you find the money to start your Rainy Day Fund? As potential sources, reduce or eliminate spending on non-essential goods and services while building your nest egg. Use spare change – dimes, quarters, and dollars – or an unexpected salary increase, a tax refund, or a few restaurant meals foregone (easier to do these days). You might even have that bank mentioned above automatically shift a small amount of money ($25-$100) from your checking to your emergency account each month. After a month or two of shifting, you might not notice the difference, and it adds up quickly!
Convenient, But Not
In getting started, ensure that basic day-to-day needs are met to avoid discouragement during the accumulation process. And be wise, keep your emergency funds in a separate account – one less accessible than your regular checking or savings accounts. And DO NOT carry a debit card tied to that account. Make it a bit inconvenient to access these funds. In short, make the account accessible, but not too accessible. Force yourself to consider your actions before making a withdrawal. Accept the fact that all of us lack a bit of monetary self-discipline from time to time. In short, your Rainy Day Fund is a relatively accessible stash of cash for use only in case of emergency. Don’t use it to buy an automobile or computer. Don’t buy a new piece of furniture or remodel your kitchen with it, unless, of course, your home flooded in southeast Texas back in 2017.
America is well-stocked with numerous Fortune 500 companies and a population of folks with big hearts in times of great stress. In addition to friends and neighbors, companies large and small came to the aid of Harvey victims and are doing so as well with COVID-19 victims – supplying employees with temporary housing, food supplies, interest-free loans, grants, and volunteer cleanup crews, in addition to counseling and employee time off (or the opportunity to work from home) to take care of family needs.
It Could Be You
To drive this need for a Rainy Day Fund home, in December 2018 the federal government halted the function of many of its agencies due to a budget impasse. Some 800,000 federal workers and service providers with very secure jobs missed a paycheck or two. As is typical of government shut-downs, those workers later received the missed paychecks, accrued sick and vacation time and their pensions were calculated as if they had been on the job during the shutdown. Still, according to news reports, many of those government workers quickly began to experience all kinds of financial chaos. In short, despite holding very secure positions with the federal government, many of them could not handle even this short-term financial disruption in their lives.
Simply put, major floods, government budget impasses and pandemics are not predictable events. A Rainy Day Fund is your first step toward both short- and long-term financial security. It also serves as a firewall protecting your long-term plan from short-term financial chaos.