May 8, 2012

Rainy Day Fund

Saving for retirement, like dieting is one of those things easily put off and easily derailed. 

You finally got your stuff together and signed up for your 401k at work or you opened an IRA (individual retirement account) and just started to make contributions, feeling good about yourself when your cars transmission goes out.  Now you have to go to the trouble of stopping or suspending the 401k or IRA contributions to have the money to make the necessary car repairs. 

A week goes by. A month goes by. And another month. Before you know it, you haven't contributed to your retirement account for months. It's a hassle to get those contributions rolling again so you put it off and off and off.

This is the cycle you need to break and now. 

The best long term investment plan can easily be derailed by not having a rainy day fund. A rainy day fund is an amount of money, set aside so that unexpected expenses will be covered without a disruption to your investment plan, so that your on-going contributions stay that way. 

It's hard to invest, especially in the beginning when the gains are slow to accumulate (a lot like dieting and finally seeing some progress). Make sure you have taken all the precautionary steps so that you can expect the most out of your retirement planning. 

First off, contribute only as much as you can easily afford, you don't want to have to stop and start your retirement plan.  Second, make it automatic so that you almost forget about it (like taxes taken out of your paycheck except its hard to forget about that :).

Your rainy day fund should have $1500 - $2000 in it which should bridge most unexpected bills so your retirement funding continues without a hitch. This is not to be confused with an emergency fund which is a larger amount set aside in case you lose your job, etc. 

Put your rainy day fund in a separate bank account, a savings account with no access via credit card or debit card.  Easy access means you will be tempted to spend it (and you know yourself :).  Sure savings accounts aren't paying much at all, less than 1%, that's not the point.

Some people ask why not just save that money in money market / cash within your retirement account and the answer is that should you need it, you do not want to have to pay taxes on the withdrawal. 

So get started on that rainy day fund now!