It is important to have strong reserve funds to be able to have a chance to withstand unforeseen financial emergencies in the future. This combines both your emergency fund and your rainy day fund both of which will help you get through tough times. To make this work, you also need to know how to use each of those.
One of the reasons you would need to use your reserve funds is that you missed the warning signs that you are headed for debt problems and you never stepped back to assess your situation. It also possible that you made just a few financial mistakes but the repercussions of those wrong decisions snowballed into unmanageable debt.
The idea is that the emergency fund is meant to cover the big problems that might come your way. This can be losing your job or even getting into a pretty serious medical emergency such as those that would need major medical procedures. This directly impacts your income that is why emergency funds are usually measured by how many months it can cover the expenses without any income coming in.
Another component of your reserve funds is your rainy day fund which is meant to cover the smaller unexpected expenses you will encounter. This can be minor car or home repairs that you never expected. Maybe that sudden rain suddenly drained all those dirt and leaves into your downspout or that your car needs a few more transmission fluid.
Nerdwallet.com shared that on an average, consumers has more than $205,000 in debt that consists of student loans, credit card debt and mortgage loans. This does not yet include other sources of debt such as payday loans, car payments and even those that you might have borrowed from family and friends just to get by.
Getting back on rebuilding your fund
It is important to use these funds appropriately and not squander off the amount buying discounted items you have no use for in the first place. The more you buy things you don’t need, the more you would have to sell things you actually need to make ends meet. Rebuilding your reserve funds may not be easy but not all impossible.
- Know when to use each of your reserve funds. As you should know by now, your emergency fund and your rainy day fund has specific uses. Misusing any of them could lead to problems along the way. One of the reasons why you separate your rainy day fund from your emergency fund is because you do not want to keep on chipping away small amounts from your emergency fund and render it useless when you finally have a valid need for it. Keep it intact and use your rainy day fund for the small ones.
- Plug up your spending. CNN.com shares that the top three expenses in a household budget which are housing, transportation and food expense. One way to help rebuild your funds is to look for ways to lower down costs on these three and also plug up some of the unnecessary expenses in the budget. To lower down housing costs which is usually mortgage or rent, you can look into renting out a room in your house or even basement or garage. Transportation expenses can be lowered down by considering carpooling with your officemates or even taking the bike to and from work. You get to save as well as get an exercise everyday.
- Take a close hard look at your budget. Your household budget is an important tool in personal management and taking a look and reviewing your budget can help you find loopholes that you can address right away. You can also re-organize your financial priorities to keep them aligned with your long term goals. Taking a look at your budget will also help you move funds around to help you build up your reserve funds as quickly as possible to make sure you are prepared for the next emergency.
- Look for additional ways to earn money. Extra income that comes into your budget will be a big help as you build your reserve funds back up again. You will get to put more towards that fund and prepare yourself a lot faster. If you already have your desired amount, you can then use that extra income towards other important financial areas of your life such as debt payments or even retirement planning.
- Use past mistakes in strengthening your fund. Experiences in life regardless how good or bad should help you make better decisions along the way and if you blew up all your reserve funds because you went to a sale event or you had a few hours in Vegas, these experiences should teach you what you need to avoid in the future. You need to learn from them when you make future financial moves.
Make saving a lot easier
One of the first things you need to do when you lose all your emergency and rainy day fund is to save back up. It would be a lot easier if you can just do what you used to do in the past and there is no problem with that if it can still work out for you. But chances are you might have different and more financial responsibilities now than before and might have a hard time replicating what you did in the past. Here are a few things that you can look into to help you save back up for your funds.
- Look to automatically transfer the amount. This makes the whole process a lot faster and smoother because the amount that you need gets automatically transferred and out your pay every month before you even get to use the amount for anything else. This helps and even complements your budgeting efforts because you already get to put the funds in specific amounts such as your reserves, retirement and even college fund for your children.
- Be frugal with your expenses. Frugality is trying to live below your means and it does a lot when you are trying to save as much as you can to bring up your emergency and rainy day funds. And if most consumers can save up to afford technology, so can you. This was from a CNBC.com survey where 49% of their respondents confirmed that they are saving up on entertainment, clothing, food and even health care just to afford gadgets and other technological gizmos. This means that if you really want it, you can find the means to save up and you just have to prioritize financial security as against the latest smartphone that is coming out.
- Sell those things you do not use anymore. One way to get a lot of savings fast and even get rid of debt is to sell those things that you are no longer using. Garage sales are a great way to get rid of old things that you no longer have use for but you need to remind yourself to sell only the items that you can live without. There are instances that because they are in dire need of money, some consumers sold appliances and furnitures that they were still using. They end up with an almost empty house and they have to buy back the same stuff at full price.
You need to build your reserve funds back right up when you misuse them because you might have a valid need for it but not have the money to shoulder your needs. Once you have enough, make sure to put safeguards in place to prevent the same thing from happening again in the future.