A Personal Finance Blog for Malaysian: Why Do We Need A Rainy Day Fund?

Thursday, September 16, 2010

Why Do We Need A Rainy Day Fund?

What is a “Rainy Day Fund”?
A “rainy day fund” is typically a fund that you’ve created to pay for unexpected expenses. For example:
· Your car needs a new sets of wheels
· Your home is infested with termites & requires treatment
· Your child has appendicitis and needs to undergo surgery
· You need to remove your wisdom tooth
· Your company suddenly winds-up
The list can go on and on and you may not necessarily experience only one of the above but all together! That’s when it pours!
Why Do I Need a “Rainy Day Fund”?
As Forrest Gump said in the self-titled movie, “Life is like a box of chocolates… you’ll never know what you’ll get!” Everyone’s life has ups and downs, sunny days and rainy days. When you save money for a rainy day, you protect yourself and your family. You get ready for those unplanned times when you need that extra boost of “Vitamin M”.
It is easy to go into debt (especially credit card and “Ah Long” debts) if you don’t have some money stashed aside. You want to pay your bills and keep your credit debt low, even when something unexpected happens to you.
Since no one knows what the future holds, everyone needs a rainy day fund.
How can I save when I don’t have much?
You are probably thinking that there’s really nothing much left to save after paying all the bills. Many people, no matter how much money they have, say they can’t save. That is because expenses usually grow until they use up all your extra money.
However, you, and only you, can change this pattern. Here’s how:
· Pay yourself first
· Create a “forced-savings account” that allows you to withdraw in times of emergencies
· Lower your expenses by living smartly
· Set rules for when you’re allowed to use the money, some REALLY hard rules!
· Try till you succeed but never give up!!
What does it mean to “Pay Yourself First”?
Most of the time, when our salary comes in, we start to pay for this and for that and to everyone else first and only then, do we save whatever that’s left. This is backwards. It’s your money and you deserve to keep some of it for yourself and your family.
Don’t feel discouraged if you can only set aside a small amount. Saving a Ringgit a day or RM10 a week may not sound a lot but at the end of a year, you’ll have RM365 or RM520. As the Malay proverb goes, “Sedikit-sedikit, lama-lama jadi bukit!” It’s better to save a little each week than to try to save a lot and fail.
The key is to make a habit of saving some money each pay day. When you save first, you tend to make your expenses fit the money that’s left. If you never see the money, you don’t have the chance to spend it. As they say, “Out of sight, out of mind!
How much should I save?
The rule of thumb is to save at least 10% of your income. However, this may not be always possible. It’s best to start with a comfortable amount and gradually work towards that target. Of course, if you can save more, that’s much better.
Your goal is to create a rainy day fund to cover between three to six months of your monthly expenses. You can do this by trying to save up one week’s expenses, then two weeks’ and gradually build it up to one month’s and so on.
Remember: Getting into the savings habit is more important than how much you save!
Where should I put my “Rainy Day Fund”?
Your rainy day fund should be kept in an account which is easy enough for you to withdraw in times of emergencies. However, it should not be too easy for you to dig into it as and when you wish. You may choose to open a Savings Account with a bank but opt not to have the ATM card. Alternatively, you may also invest part of it into one of our government’s Amanah Saham funds. Choose a fund that ensures safety to your capital whilst giving you a reasonable rate of return.
When your pay comes in, remember to pay yourself first. An easy and effective way to do this is to enroll into a payroll deduction scheme. You may instruct your employer or your bank to put part of your salary into this savings account/ amanah saham of yours every month. Remember that this account is strictly meant for emergencies and as far as possible; thou shall not use it for other purpose!
How do I decide when to use my “Rainy Day Fund”?
This decision depends on your situation. You need to think about this ahead of time. Remember earlier we talked about setting rules? Make some rules about when it’s okay to use your money so you don’t spend it foolishly. Then follow your own rules!
The following questions may help you decide in setting some ground rules:
· Is this expense a Need or Want?
· Do I really need to incur it today?
· What would happen if I don’t spend it now?
· Can I find a cheaper substitute?
· Is there some other way I can pay for this expense without going into debt?
· If I use this money today, how will I feel about my decision next month?
Always remember that this is your “Rainy Day Fund” and if it isn’t raining, you aren’t touching it! No others excuses apply here!

There is another Malay proverb that says that we should prepare an umbrella before it rains. This “Rainy Day Fund” is our umbrella and do ensure that it’s big enough to shield you when it rains (but make sure that there’re no holes!)
So start building this fund now and it might just be your life-saver someday.

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