As fall sets in Seattle we know what’s coming, rain! Saving for a rainy day is an idiom whose origins are really unknown, but all of us know what it means. It could be as simple as setting aside an amount in an emergency fund or foregoing some sort of small gratification in order to buy or achieve something bigger. One of my proudest parenting moments came when my son was about 5 years old and had money he wanted to spend at Target. We cruised the toy aisle back and forth and there really wasn’t anything that he wanted that fit his price range. Then and there he learned about saving his money so he could buy the bigger toy later. 8 years later, he still does a good job of it.
Saving for a rainy day can be challenging, I get it. With the cost of living skyrocketing over the past 4 years especially, families are strapped. We still have to figure out how to do it though. Cars need repair. Appliances die. Without some savings you are forced into debt.
There are actually two different short term savings you want to consider according to Nerdwallet.com—a rainy day fund and an emergency fund. They classify a rainy day fund as something to cover routine expenses that aren’t necessarily part of your budget like small home maintenance. An emergency fund is for more major items like an unforeseen car replacement or job loss. According to Nerdwallet you should have between $500 and $5000 in your rainy day fund and 3-6 months’ worth of expenses set aside in your emergency fund. These amounts should be risk free and earn a little interest, like a high yield savings or money market account. To me, rainy day or emergency funds are the same, and I’ve always advocated to have 6 months savings in your emergency fund, maybe more.
Both my wife and I are in sales. If we truly go into a recession that lasts longer than a couple months (COVID) our income will take a significant hit. My income is directly impacted by market performance and hers by building and construction projects. For us we keep 2 years’ worth of expenses set aside in our emergency fund. That’s our sleep-well-at-night money. We have a little more on top of that in case a generational buying opportunity strikes in the real estate or financial markets. A moment neither of us will ever forget is visiting Palm Springs in the depth of the financial crisis in 08. Businesses and homes were selling for a song. If we only had money back then! It was a vivid moment in history for us and we vowed to be ready when the next time comes.
I also remember losing my job in 2000. I had no savings at all back then. In fact, I had just paid off my credit card bill in total to be debt free. I did have a car lease and rent that was due each month. I had to work odd jobs to get by and I count my blessings that I was able to get through without accruing debt. At least I was single and had no mortgage or private school costs. That recession now would cripple me without some sort of safety net.
My advice comes from the school of hard knocks. Even if you are flush with a good income and ample stock portfolio, aim for at least 6 months of expenses in your Rainy Day/Emergency funds. If you have that, look at where it’s parked. Is it in a savings account at a mega-bank where you are getting 0.02% interest? If so, look at 3rd party resources like Bankrate.com who show rates for CD and money markets around the country. I’m not endorsing any products in particular, but American Express, Goldman Sachs and Capital One all have really good products you can use. Coincidentally those are the top 3 when you go to Bankrate.com. Credit unions typically offer good savings rates as well. The reason you don’t want it is something more aggressive like stocks is that you would have to sell them at a lower price than you may want.
Find ways to automate your savings into an emergency fund even if it’s $50 a month. I regularly harp on knowing your cash flow. So many people have no idea how much they spend or even want to spend. Figure out how to generate that savings. If it comes down to whether to save toward your emergency fund or retirement, get that emergency fund established first. That’s not just me saying it but others as well, including financial services firm, Thrivent.
Here’s why: The S&P 500 over the past 100 years has averaged roughly 10% return per year. There’s good years and bad years that create that average meaning that there is no certainty of that 10% return. To get certainty you need to look at government bonds which are hovering around 4% as of this writing. Money markets offer certainty that you won’t lose money but the interest they pay will fluctuate with Federal Reserve monetary policy. If you have a major unforeseen expense for say $5000 that you can’t cover from an emergency fund you’ll have to get a loan. HELOCs charge roughly 8.5% right now and credit cards will charge around 22%. Those rates are CERTAIN and certainly higher than the 4% you can get guaranteed. In the case of the credit card, it would take you roughly 10 years to pay it off if you paid the minimum payment due. That’s $12,480 that you paid on the original $5000 purchase. That’s certainty of a 150% loss on your money!
We know Murphy’s Law. Emergencies happen; life happens; shit happens! Be prepared so you're not kicked while you’re down. Enjoy the rain here in Seattle and grab a warm, cozy latte with some of your hard-earned savings. If it’s a bad day maybe you switch to bourbon. Maybe you’re ambivalent about your day and choose not to buy any beverage now with the plan of buying a coffee machine or bottle of18 year old single malt once you hit a goal. No matter what, save some money so you have something to drink!
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