The Rising Importance of the Rainy-Day Fund
America is, by most accounts, in the middle of an economic boom. Jobs numbers continue to impress, stock market gains continue to dot the pages of the Journal, and yet, millions of Americans remain just one paycheck away from financial disaster.
Last month, the country’s (lack of) cushion was revealed for all to see. When the federal government shutdown put 800,000 paychecks on ice, lines formed at food banks and red ink began appearing on bank statements. All this, experienced by a sector of the country historically seen as both middle class and stable.
Warren Buffett has a more creative way of describing what happens in moments like these: “You only see who is swimming naked when the tide goes out.” Last month, the tide was out for hundreds of thousands of our friends, neighbors, and family members. And boy, was our country’s lack of savings on full display.
According to Bankrate, 61% of Americans wouldn’t be able to come up with the cash to cover a $1,000 ER bill or car repair.
Sixty-one percent. That’s a number we can’t sustain. And one we need to do something about. Americans are divided on almost everything today, but one thing most agree on is that we’re living in unpredictable times. As last month’s shutdown revealed, paychecks can stop at any moment. Having a safety net has never been more important. So how can you practically make that happen? I’m glad you asked.
Making Way for a Rainy Day
Consider what you’d do if you had enough PTO reserved for a vacation, had babysitting all lined up, and your dream destination was on sale for just $1000, all-in. Chances are, you’d scrimp, save, and brownbag your way onto that plane. What can we learn from this hypothetical? For many of us, there is a way to save for a rainy day. It just takes getting creative about where you can cut back.
Withholding the Windfall
What do you associate with tax season? For some, it’s refund time. And as brands know all too well, most of us who receive refunds are quick to spend the unbudgeted funds on toys – TV’s, new clothes, and the like. But such windfalls are a rare opportunity to put away a financial cushion without taking a dime from your monthly budget. And what’s more likely to improve your sleep: a new mattress or a sound mind?
Slow and Steady
There’s a third option that doesn’t require radical frugalityor a lucky strike. It’s slow, it’s steady, and it works. Ask your HR department to automatically deposit a small percentage (perhaps 3-5%) of your monthly paycheck into a savings account. The modest sums will feel negligible in the short run, but can add up to big sums over time. The only problem with this strategy is you’ll be out of luck if hard times come before you’ve built up your cushion. In other words, you better start today.
Need another reason to start saving? Check out the Biz Kid$ episode, Wheel of Misfortune.