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Bringing back the "rainy day fund"

Do you remember your grandmother talking about “rainy day money,” or “saving for a rainy day?” The ‘rainy day’ term started in the 16th century and symbolized difficult times. Setting money aside in advance for these unexpected and difficult times helped many families survive. It made just as much sense then as it does now.

Today, we call it an “emergency fund,” and it is important to have one. Perhaps you’ve heard your Hefren-Tillotson advisor mention that you should have three to six months’ worth of living expenses in reserve for any unexpected occurrences. More American workers, in a variety of occupations, are greatly affected by these unexpected occurrences than you might think.

With the Dec. 22, 2018 government shutdown, U.S. Coast Guard servicemen, for example, were required to report to work even though they were not getting paid. That meant putting gas in the car or truck to get to work. Across America, one-income families living paycheck to paycheck had to cut back, and they started with fewer trips to the grocery store.

About 2,000 custodians, security guards, housekeepers and other federal building workers lost wages due to the holiday shutdown. And because contractors employ staffers, they were not eligible for any makeup checks. “My supervisor told me we won’t be getting paid,” said one State Department cleaner to the Post, “so my bills won’t be getting paid any time soon.”

The stress and untimely additional strain on finances deeply hurt families directly – especially special needs families who required medications. This experience should serve as a wake-up call to everyone, in every profession, to create a backup plan now for the future.

Let’s take a closer look:

Prudential Retirement recently did a study that revealed a startling statistic: 63% of Americans do not have enough savings to cover a $500 emergency.

Using a hypothetical $3,500 monthly expense to run a household works out to $875 per week x 4 weeks or $125 per day x 7 days. Even if saving had begun – but hadn’t fully funded a rainy day fund, they could have covered half of the $500 expense by making two previous payments of $125, equaling $250 toward the $500 bill.

Three months’ expenses in reserve at $3,500 per month - $10,500

Six months’ expenses in reserve at $3,500 per month - $21,000

Kevin Gallegos, vice president of Phoenix operations for Freedom Debt Relief, says to set your expectations at a realistic level. “Any action you can take to establish an emergency fund will do you good,” Gallegos says. “If you transfer $10 to a savings account each week, you’ll have $500 in a year.”

These expenses are ones you would expect to pay while collecting a paycheck. If that paycheck stopped – due to health problems, personal injury, bodily harm, and job elimination, factory or government shutdown or an Act of God – these non-discretionary expenses would still remain.

You don’t have to contribute to this adult piggy bank all at once, unless you want to. It shouldn’t cause any hardship or reduction in paying down high balances as you normally would by contributing. You contribute at your own pace – but you must contribute. This is where your discipline comes in. The money is earmarked for unexpected events.

For emergency use only

Your emergency fund must remain completely separate from any investments or bank accounts, and needs to be protected from loss while remaining totally liquid.

It is a stand-alone entity created specifically for emergency purposes – which also means, it should not be touched unless it is an absolute emergency, like replacing an air conditioning unit or new brakes for the family vehicle.

If you needed to use the emergency fund money, pay it back as soon as you possible so you will remain protected. The reasons for using an emergency fund are endless, so it’s critical to avoid letting unexpected expenses lead you down the path toward financial ruin.

By nature, unplanned expenses are unexpected, so the sooner you’re prepared the better off you’ll be when the inevitable happens.

Online banks are good locations for your emergency savings because you can’t just walk into the bank and withdraw your cash. Your Hefren-Tillotson advisor can assist you with the planning and also offer helpful alternatives.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
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Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.