The Importance of a Savings Account for Rainy Day Situations

July 30, 2015 | Mike Grundon

The Importance of a Savings Account for Rainy Day Situations

The Importance of a Savings Account for Rainy Day Situations

A good financial plan calls for saving money, regardless of the interest rate environment. Since we were kids, most of us have had our parents or grandparents remind us to “save for a rainy day.” The idea is that you need to put money aside when times are good so that you’ll have some money if hard times should arise. According to a Time Magazine survey conducted in 2014, “Families in the U.S. still don’t have a substantial amount of cash tucked away for a rainy day, despite the beating the economy took in the Great Recession.”

We all know unexpected issues in life usually happen at the worst possible time. Imagine having a car break down on a vacation trip, needing a roof repair amidst a rainy week, or having an unplanned medical emergency without any financial resources at your disposal. Borrowing money is always an option, but it costs much more than the initial situation, due to interest expense.

Although savings interest rates are low right now, systematic savings over time can assist in managing your financial future. Rates are not always going to be low as in today’s world. Saving money each paycheck is an easy way to build a retirement, emergency or rainy day fund. Most financial advisers recommend having a savings that equates to three to six months of living expenses. Even placing small amounts, like $50 a paycheck into a special savings account can add up over time. There are twenty six pay periods within a year (assuming you get paid every two weeks), which can add up to over $1,300 plus interest. Over a four-year period of time, that adds up to $5,200 plus interest.

A great way to view a savings account is that you are “paying yourself.” Let’s say you just paid off a car loan. By redirecting the amount you paid on the loan into a savings account, the balance can grow quickly. If the payment on the car loan was $300 per month, in one year the savings amounts to $3,600 plus interest. That is almost three times the savings rate at $50 a paycheck.

A solid rainy day fund is perhaps one of the most important tools in developing and sustaining financial security. However you decide to save, just remember that no matter how well things are going, it’s always a smart idea to be prepared for anything that may happen in the future.

Picture of Mike Grundon

Mike Grundon

Mike Grundon is Mission Fed’s VP Investment Officer and has worked in investment-related functions for over 30 years in the financial industry. His experience includes a variety of areas within the credit union industry, including investment and balance sheet management, interest rate risk management, secondary marketing pipeline risk management and loan securitization.

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