Reports from a number of sources say that most Americans have no rainy day funds and at best, have about $400 in savings. How long do you think that will last you if you have financial crisis needing attention?
Your rainy day fund has two components. You need a fund to handle an unexpected expense like your heating/cooling system suddenly stops working and you find out the cost to repair it is more than you currently have on hand in your bank account. The second component would be for a longer term emergency such as a loss of employment.
Most Americans are living paycheck to paycheck and are doing very little to improve their savings habit. Did you just say that you do not make enough to have a savings account? My question is — who is in charge of your finances? Of course, you are in charge.
Let’s take another look at a rainy day fund. This fund is to cover your expenses for a period of time when you have a financial crisis. Looking back, the economy was moving along in a positive way; however, watch out because the economy can turn quickly into a downturn. What happens if you lose your job?
You do not want to be caught off guard. Your anxiety, stress and worrisome feelings will propel you into a hopelessness that you may not be able to overcome. It could even send you into bankruptcy and perhaps ruin your credit for a period of time. You could become homeless.
It is true that you may be able to get 26 weeks of assistance from the state of Tennessee in the form of an unemployment check. But that is only true if your employer was required and has been paying unemployment taxes to the state.
To qualify for unemployment income you must be unemployed or working part-time (20 hours or less a week), through no fault of your own, have earned at least $780.01 in two quarters within the base period, and be physically able, available, and seeking work. You could be disqualified if you are fired for misconduct, willful behavior or other justifiable cause.
The maximum benefit paid in Tennessee is $275 per week which equates to be $1,100 per month. The minimum amount per week is $30. Using a formula, your benefits are based on two highest quarters of your gross wages. Don’t forget, you may have to pay federal income taxes for the amount you receive. This will depend on your total income for the year.
Your rainy day fund needs to have at least six months of funding to cover your financial requirements. If you can count on having a weekly unemployment check, you now have a number to help guide you with making contributions to your rainy day fund. To put your mind at ease, you need to begin putting as much as possible into your rainy day fund simply because you are behind.
So you ask. How do you do that? First, you need to determine what your financial needs are currently either weekly or monthly. Next, find your total need for six months. This amount becomes your goal.
Second, you need to examine how you are spending your income on a weekly or monthly basis. Are there any areas where you could eliminate some of your spending? How much cash do you burn through for things you really do not need? Find the amount that could be placed into a rainy day fund.
Third, go to your chosen financial institution, open a savings account and begin to place your rainy day cash into that savings account. It is OK if the amount is only $10 or $20 a paycheck. The smaller amount just takes longer to reach your goal. Being consistent in saving is more important than the amount.
Fourth, look for unexpected amounts that could go into your rainy day fund. An example would be a federal income tax refund. That only comes around once a year but it can help to get you to your goal faster. If you are fortunate to receive a bonus from your employer, that would be another source. Any time you get unexpected money for whatever reason, always think about placing some or all of that money into your rainy day fund.
Once you reach your goal and you are currently working; then continue to build your rainy day fund until it reaches an amount that will take care of your financial needs for a year. And if you are fortunate in avoiding having to use your rainy day fund, now look what you did. Wow, you have a good beginning for a retirement savings account. Stay on course, stay focused and accomplish your goal. You may need that rainy day fund sooner rather than later.
Ed McKinney of Johnson City is a retired business educator.