A Personal Slush Fund for when You Need Money Now
An unexpected expense can wreak havoc on your monthly budget or leave you scrambling to find a way to cover the bill. However, according to a report appearing in USA Today, many Americans do not have the savings to cover an unexpected expense of $1,000. Approximately 75 percent of households earning less than $50,000 per year and 66 percent of those earning between $50,000 and $100,000 annually stated that they would “have difficulty” raising $1,000 for an unexpected expense. A study conducted by the Federal Reserve found that 47 percent stated that they could not cover even a $400 unexpected expense without having to borrow money or sell their possession. Although many people turn to payday lenders to cover emergency expenses, a better plan is to build your own slush fund for situations in which you need money now rather than next week, next month or next year.
Why You Should Build a Personal Slush Fund for when You Need Money Now
Not having a financial cushion can increase your stress levels. Many people report that their lack of savings is always in the back of their minds; when the car starts making a funny noise or a child develops the sniffles, the unease can quickly turn to panic. Furthermore, a study conducted by the Urban Institute found that even a modest cushion — between $250 and $749 — helped families reduce their risks of eviction, a missed utility payment or a missed housing payment. Furthermore, these families were less likely to need public assistance after suffering a health issue or job loss. The study also found that low-income households with savings accounts between $2,000 and $4,999 were more financially resilient than middle-income households that had no money saved.
The Difference Between a Rainy-Day Fund and an Emergency Fund
Although many people use the terms interchangeably, they represent two different types of savings accounts. A rainy-day fund is intended to cover you when you need cash for one-time unexpected expenses; an emergency fund is intended to cover all of your bills and expenses for an extended period. Rainy-day accounts typically contain $500 to $2,000. Most financial experts recommend that an emergency fund contain the equivalent of six months of expenses, but a handful advise that three months of expenses is adequate.
The funds are meant to be used for different purposes as well. A rainy-day fund could be used for an emergency repair bill to keep the family’s car running, defray expenses to travel to a relative’s funeral or cover the copay for a visit to the emergency room. An emergency fund would be used when you need cash to pay your rent or mortgage payment, buy groceries, cover utility bills or make payments on loans or credit cards.
It is important to remember that both types of funds contain emergency money. The funds are there for when you need money now to cover a necessary, urgent and unanticipated expense. To illustrate, your annual property taxes may be necessary and urgent, but they are not unanticipated. Birthday and holiday gifts do not meet any of the three criteria. Neither does a fantastic sale on vacation packages, camping gear or clothing.
How to Create a Rainy-Day Fund You Can Tap if You Need Money Now
Having a personal slush fund can give you peace of mind; you know that you will be able to handle the situation if you find that you need money now. Furthermore, even though financial emergencies are not pleasant, having emergency money available to cover expenses can be emotionally satisfying. Here are some tips to help you build your personal rainy-day fund for those times when you need cash quickly.
• Break your goal into smaller goals. If you want to have $500 available if you need money now, the total sum might feel intimidating. Instead, break the total into amounts that you can easily achieve. For example, start by committing to save $20; once you meet this goal, immediately commit to saving another $20 and repeat until you have saved the total amount of emergency money that you want to have in your slush fund.
• Start small. Deposit your spare change in a jar or piggy bank at the end of each day. Commit to reducing your grocery bill by $1 or $5 and deposit the savings in your rainy-day account. Take advantage of coupons offering a discount on products you would buy even without the discount, and then deposit the amount that you saved by using the coupon in your slush fund.
• Have a separate account for your slush fund. Find a bank or credit union that offers a low-dollar, no-fee savings account. You will not earn much interest, especially while you are building your slush fund, but separating your accounts can help you track your goals and resist temptation.
• Sell things that you no longer need or do not use. Depending on the items, you can sell them on eBay or host a yard sale. Clothes that you have not worn in over a year, small kitchen appliances that you only used once, collectibles that you are tired of dusting, books and movies that you do not plan to revisit, clothing that your children have outgrown and costume jewelry that you never wear are all good candidates to help you build your slush fund.
• Deposit “found money” in your rainy-day account. For example, if you receive a small raise, deposit the difference between your new take-home pay and your old. If you receive a tax refund, save it. If you pay off a credit card or other loan, deposit at least part of the amount you were used to living without into your slush fund.
• Reduce or eliminate your unhealthy habits. Two packs of cigarettes a week will add $570 or more a year to your savings. If you normally drink six cans of soda per day, eliminating just two cans will let you save approximately $180 a year if you purchase them at the supermarket and significantly more if you are buying them from a vending machine at work.
• When you feel that you need to reward yourself for an achievement such as completing a difficult class or getting your spring cleaning done in record time, forego transient activities. Instead of paying for a manicure or going to the movies, make your reward a lasting one and make a deposit to your slush fund.
• Keep your “eyes on the prize.” Once you have saved a little emergency money, it is easy to become complacent and abandon your goals. Remind yourself why you started saving for the time when you will need money now. Think back to when you had nothing in savings and remember how much it worried you.
• Make saving a habit. Once you have built your slush fund, keep going. Open a separate account to start your emergency fund. Sign up for a Christmas club account at your local credit union so that you can pay for holiday gifts with cash. Once saving becomes a habit, you will find many different goals to work toward.
When faced with a financial emergency, a payday loan or installment loan can be an excellent solution if you need money now. However, if you can meet your needs by tapping into your personal slush fund, you can avoid the fees associated with every type of credit product. If you would like to learn more, you can find a variety of helpful articles at the Personal Money Store.