If there is one thing the Great Recession has taught many of us, it's the need for an emergency fund.
An emergency fund is a cache of money--equal to at least three months of living expenses--that you have set aside and keep safe in the event you lose your job or get sick or injured.
Of course, that's easier said than done. A 2009 study by the Financial Industry Regulatory Authority found that nearly half of all Americans are having trouble covering their monthly expenses, and that a third lived from one paycheck to the next, their income matching their expenses. As a result, fewer than half of Americans have been able to sock away a rainy day fund.
That why a lot of financial advisors these days are urging Americans--75 percent of whom according to one survey couldn't come up with $2,000 within 30 days to pay for some kind of an emergency, such as a car repair--to use their tax return as down payment on that rainy day fund.
5 ways to build up a rainy day fund
It may not be enough to cover all your expenses but saving your tax return is a start. Here are some other expert tips for accumulating additional funds for your rainy day account:
- Find savings in your budget. Create a working budget that shows you just how much surplus cash you have each month after all your expenses are paid. Have all or a portion of that surplus transferred automatically into a separate account with the best interest rates on savings.
- Trim your expenses. The cell phone bill and cable bill are two likely candidates. Review your car insurance to make sure you're not paying too much and shop the policy around to see if you can get the same coverage for less. Put the money you saved into a money market account with highest money market rates you can find.
- Save your change. That's right--nickels, dimes and quarters. Always use bills to buy stuff and pocket the coins. In a few months, your might have a couple of hundred dollars. Sock it away.
- Sell some possessions. You might be surprised how much you can get on Craigslist for that bike you never ride or that antique typewriter.
- Share your efforts with your children. You don't want to scare them into thinking something bad is going to happen, but you can use it to help teach them the importance of spending less than you make. Get on the computer with them and have them help you find the best rates on savings accounts. It will pay off for them and it could pay off for you down the road if they become a good saver and don't need your financial help when you're retired.
Where to put your hard-earned savings
Once you've saved up a rainy day fund, the question becomes: Where should you put the money? The idea is to keep the money close and available, but not too available. For instance, putting it in one of your checking accounts might mean that it will evaporate paying every-day expenses. But putting it into a long-term certificate of deposit, stocks or real estate means it might not be available when you need it.
The National Society of Accountants recommend putting your refund into a high-yield savings account or money market account. Shop around for the best money market rates or the best rates on savings accounts. Although interest rates are relatively low on those accounts these days, that's OK. You will be rewarded, and if you chose the right account the interest rate will be higher if you maintain a minimum balance--another incentive for leaving the money where it is until you need it.