The Austerity Diaries: A Rainy Day Fund is Your Top Priority

When your finances are tight, sometimes your first impulse is to spend every dime.  Many people focus on things like paying off debts, stocking up on food and supplies, or paying more than the minimum payments on bills.

However, that may not be your best bet.  I know this may sound counterintuitive, but most experts recommend establishing an emergency fund as the first step back to financial security. There are several reasons why this should be a priority for you:

• What if you suddenly lost your job and it was 6-8 weeks before unemployment payments began to trickle in?
• What if your child suffered a medical emergency and you needed to purchase an expensive medication?
• What if your refrigerator began making a death rattle and you needed to buy a new one immediately in order to save your expensive frozen food stockpile?
• What if your car, that you needed to get back and forth to work, required a costly repair?

The reasons you might need to tap into an emergency fund are as varied as the news headlines – there are so many different disasters that can arise, and nearly every single one of them will require that you have some additional funds available.  You simply cannot call yourself “prepared” if you don’t have currency on hand to see you through the rough spots.

It’s important NOT to rely on credit cards, overdraft, and lines of credit for these unexpected events – these things will cost you far more in interest in the long run. Credit cards are NOT a rainy day fund. A rainy day fund is currency that you have on hand that will not cost your interest. Don’t make your personal disaster worse than it already is by paying compounded interest on it for the next two years.

How much should be in your emergency fund?

This is one of those numbers that will vary with different families. Most experts recommend a starting point of 1-3 months of expenses. And by expenses, I mean everything from house payments to car payments to projected utilities to food costs.

Don’t underestimate how much it takes to run your household every month – be sure to account for all of the regular expenses you might need to cover during an emergency situation.

Should this just be money in the bank?

Most folks who are paying attention to the financial news in our country are not big fans of fiat currency. Despite my personal uneasiness with cash, it’s still important to remember that in the world that exists today, government issued currency is most likely to be the unit of trade needed.  Most mortgage companies don’t really accept payments in gold ingots, and your mechanic might look at you funny if you present him with a pile of silver coins.

I recommend that you keep at least one month of expenses physically on hand, in cash.  This is instantly available, easily recognizable as money to those who are uniformed, and simple to trade for goods or services.

I personally don’t keep more than the bare minimum needed for monthly bills in the bank. I have a serious mistrust of these establishments, especially after what we witnessed last year in Cyprus when the government there took money directly from people’s accounts, triggering panic and bank runs across Europe. We aren’t protected here in the United States either – it is blatant that the banking industry is setting us up for the potential of a similar situation. Deposit accounts are no longer legally protected and the Federal Reserve passed a policy that in the event of an economic crisis (think “bank run) that accounts can be frozen to preserve the liquidity of the banks.

Once you have an amount saved that is greater than your one month of cash, consider investing in precious metals. Gold and silver retain their value far better than the dollar, and the metals are easily liquidated if an emergency arises and it becomes necessary to change them to fiat currency. This being said, metals are harder to spend, and it takes a little bit of effort to cash them in, so it can help deter you from spending unwisely if you tend to have difficulty saving money. Reputable companies exist that allow you to do all of your transactions online and have the metals shipped to your home, taking the hassle out of acquiring them if you happen to live in a remote area. (I recommend our sponsor, CBMint for your precious metal purchases.)

When budgets are tight, how can you bankroll your rainy day fund?

If you don’t have some rainy day money, it is of the utmost importance that you fund this right away It’s time to change your financial lifestyle.   This isn’t really fun, but the economy is continuing to freefall (despite the blithe reports from the White House and mainstream media).

Most of us have some places that we can cut the budget. To put it into perspective, a fancy frozen coffee concoction from Starbucks is about $6.  Today,  the price of silver is just under $20 per ounce.   Three and a half days without Starbucks =1 ounce of silver.  Exercise some “tough love” and strip your budget down to the bare bones until you have a months worth of expenses put aside.

Sell something.  Do you have a basement full of unused relics? Exercise equipment, old furniture, unused appliances -all of these things taking up valuable storage real estate can help you to establish your emergency fund.  Hang on to things like gold and silver jewelry, though – it will increase in value.

Get a second job. You don’t have to plan to work two jobs indefinitely, but spending one day a week babysitting or taking on a different part time job can help you get your savings into the comfort zone.

Make only your minimum payments.  I realize this is not the standard financial recommendation, but until you have a one month rainy day fund set aside, you should forgo making the extra payments even on interest-bearing accounts.

Eat cheap for a few months.  If you can manage one cheapo meal a day, this can result in massive savings. Look into different meals that are less than a dollar per serving – generally these will be vegetarian offerings like beans and rice, a bowl of cereal, or eggs and toast. Soup is also a great budget-stretcher.  Cheap doesn’t have to mean unhealthy – we never eat things like Ramen noodles in our family but we manage to have frequent low-budget meals that are tasty and filling. For the love of Pete, don’t eat out – the cost per serving is 5-10 times the cost of making the same dish at home.

Get rid of some fixed expenses. If you can get rid of some of your monthly fixed expenses, you can build your emergency fund very quickly. Cancel gym memberships, extracurricular activities, phones, satellite, cable and internet.  Funnel all of that money towards your emergency fund. Once the fund is built, you may discover you didn’t really need those services as much as you thought you did.

Personal note

I mentioned in my first article in this series that our family had some recent, unexpected expenses.  Things are tight in our household, but not nearly as tight as they would have been if I had not already built a healthy rainy day fund. The fact that we had some savings and some things to cash in de-escalated our situation from a crisis to an inconvenience. Because of this, my first step in getting back on my feet financially is to rebuild that one-month emergency fund before undertaking any other steps. Through living frugally, slashing the family budget, and careful planning, we’ll be back on track in just a few months.

Having the various currencies put aside like we did means that our current financial stretch is not a disaster, but a mild difficulty. We didn’t have to go into massive debt. After our unexpected expenses, we don’t currently have an emergency fund, but we will have rebuilt it within a couple of months of careful budgeting.

The other factors of our preparedness lifestyle will allow us to get back on track quickly. We have a full pantry, a budding garden, and all of the supplies we need to be just fine for a few months without undue trips to the store.

The most important piece of advice I’ve ever given is this: Get your rainy day fund in order first – you never know when clouds will roll up overhead.