What is a rainy day fund and how do I save for one?
You’ve probably heard the saying “save for a rainy day” but what does that mean? Saving for a rainy day means putting aside money with the intention of using it when it is needed in the future. We can’t predict what will happen in the future, that is why it is important to put away money every month for those unplanned emergencies and here is how to start!
How much do I need to save?
One of the biggest misconceptions about a rainy day fund is that you need to save thousands and thousands of rands each month but that isn't the case. Typically, you only really need to save about 10-20% of your annual income. Ideally, try saving up at least 3 months of salary.
The key is to start somewhere, just to save what you can for the first month. Even the smallest amount every time can make the biggest difference in the end. Many of you might be wondering “how do I save in the first place”, well the answer is quite simple - evaluate your budget.
The sooner you start, the more you'll save. Even the smallest amount saved can make a big difference in the end.
Spend less than you earn
A key way to save for a rainy day is to ensure that you are spending less than you are earning, and the best way to do this is to evaluate your budget. By regularly evaluating your budget, you can see exactly where you are spending money carelessly and where you can improve on your financial habits. If you notice that you tend to go out for food quite often, you can make a conscious effort to prepare meals at home and save on food. But if you want a step-by-step plan, here it is:
- Have a monthly saving goal. Decide for yourself how much you want to save each month and work towards it.
- Make a separate account. By setting up a rainy-day account, it’s easier to track how much money you are saving and it also prevents you from unintentionally spending your savings.
- Automate your finances. If you’re worried about forgetting to put your money into your rainy-day account, set up a system that automatically deducts money from your account and puts it directly into your rainy day account each month.
- Understand what amount of debt you have. Knowing how much you spend on repaying your credit could help you with your budget. If you're unsure, you can check your credit report to see what your credit repayments are each month. Knowing what information credit bureaus hold could be helpful in understanding your credit report and what is on it.
- Keep in mind that it is a process. Saving is a journey and there will be a few hiccups along the way but don’t let them demotivate you from trying.
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