If you’ve ever been caught in a thunderstorm without an umbrella or a raincoat, you’ll know how miserable you feel. However, unless you catch pneumonia, you can recover pretty quickly. The same can’t be said for your finances.
The expression “Saving for a rainy day” has been around for about 400 years, so lets just assume there is some wisdom to it. A rainy-day fund, or emergency fund, is what keeps you afloat during bad times. Sadly, for many Kiwis, their rainy-day fund is simply their next payday. How much you should have varies. Some experts say enough for 3 months of living expenses, but even a few thousand will help.
You can’t plan for the unexpected, but you should expect your plan to go pear-shaped. Events that can affect your finances include time off work due to illness or accident (ACC only pay 80%), car repairs, a car accident, breaking a tooth, appliances breaking down, medical events, excesses on insurance claims or the loss of a job.
A cash reserve should be the first part of your financial planning. There is no point in putting money into KiwiSaver if a sudden cash emergency means you have to use a high-interest credit card or a payday lender who charges up to 600%. If you don’t have a rainy-day fund, now is the time to start. Put a small amount away each week. Most banks allow you to rename your accounts, so call it what it is to avoid the temptation to use the funds for something else.
Make sure that the next time it rains on your finances, your bank account won’t get sick.
Mark Lynch is a Financial Adviser. His Disclosure Statement is available free upon request. Any comments in this column are the opinion of the writer and should not be construed as financial advice.