Rainy Day Fund

Rainy Day Fund

Everyone surely knows what’s a rainy day fund. However, knowing and doing are two different concepts. Are you actually doing something to have your rainy day fund there for you to back you up if and when the day comes? What’s the size of your backup fund? What’s the ideal size of such a financial backup? These are all the other questions you need to be asking yourself and secondarily, what are you doing to have a such a fund? Are you putting enough aside every week, month or year? 

To define a proper rainy day fund size you must first do an audit of your overhead. How well do you know your monthly overhead? Do you have your finances broken down to necessities and extra expenses? Your rent/mortgage, credit card or other loan payments, phone bill and food are your primary components of your monthly essential overhead. These are followed by such things as car related expenses, your cable bill and other service subscriptions.

Secondary and so on expenses can vary a lot according to your age and where you live. No matter what else is included, the number one question here is how long will your Reserve Fund take you if you should lose all of your income tomorrow? The absolute minimum is three months of your primary overhead costs, and of course, the longer the better.

A Whole life policy for example can help you achieve many of the goals above. After some time it creates a cash value, which you can tap into by taking out loans against it. These loans do lower the death benefit, but are taken out tax free since they are not considered income. A great advantage is also the fact that the loans do not effect the growth of the policy, because your policy grows as per schedule regardless of the loan amount.

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