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Build a rainy day fund for fun as well as emergencies

Erica Sandberg

October 7, 2014

QHi Erica,

I know it's important to have a rainy day fund, but how do I start? At the end of every month, I'm at zero balance! The good news is that I don't have a lot of debt, except for my car loan, and I'm good about paying my bills on time. But, I can't seem to get ahead. I put 10 percent in my retirement plan. Should I cut back a little on that so I can set money aside for a rainy day? I'm 25.  —Patrick

ADear Patrick,

I believe you might be looking at the process of preparation in a somewhat depressing way. Cash set aside for the proverbial rainy day is meant to cover financial disaster. That could be something as frightening as losing all or part of your income so you can't pay your necessary bills, or being faced with a crucial yet unaffordable expense. Being prepared for emergencies is important, as you'll be self-sufficient and won't need to turn to a friend for help or a creditor for a loan. You can just dip into the savings account and save yourself.Ask Erica

The other side of savings is far more enjoyable. You can create net worth so you can pay for a vacation, splurge on luxury items or donate to a cause that you care deeply about.

If protecting yourself against the inevitable setbacks isn't enough to get you to build a savings account, focus on the more hedonistic reasons. The end result will be the same: money in the bank.

So how can you do it when you are spending every penny you make? There are three ways: Cut back on spending, add more to your income or combine the two for maximum effect.

Reducing the amount you spend each month may be right for you if you can realistically stick to a smaller budget. Go through your expenses and analyze each line item, asking yourself if you can really do without. For example, maybe you have an $85 per-month health club membership that you can cancel and, instead of running on a treadmill, you hit the paths. Have that sum automatically routed to a savings account, and in one year, you'll have over $1,000.

Or, increase your earnings. Is it possible to work more so your paycheck is larger? Can you get a second or part-time job? Check out the job board listings for weekend or evening positions. It need not be forever, but enough for you to amass an amount that you're comfortable with. Once you've reached the goal, you can scale back or just quit and relax.

And, of course, when you combine expense reduction with income increases, you can power things up.

Let's say you were able to shave $150 from your budget for six months. That would be $900. You also got a part-time job on the weekend netting $12 per hour, for six hours. The total for that, at the end of six months, would be around $1,800, less taxes. The end result: upwards of $2,000! With such a figure, you'll be fine if your dentist says you need a crown, and after insurance, your portion will be $800. And if your friend asks you to join him for a weekend fishing trip to Mexico, costing a grand, you've got that covered, too.

As for the retirement account, stick with it. You're doing the right thing. Not only are you reducing your taxable income so that more is available for bills and savings, but (presuming you're properly invested) the money you're saving is growing. Decades from now, you'll need those funds, and will be so happy that you started early.

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