Alternatives to the Rainy Day Fund: Better Things to Do With Your Money
Tomas McFie, DC, PhD
Google "rainy day fund" and you'll find the predominant and traditional advice given today is that you need to have three months of living expenses saved for an emergency. Some even recommend six months or more. Given the median household annual income of $51,017 and a 25 percent graduated income tax, that means the average household needs to have between $10,000 and $20,0001 stashed away someplace safe, secure and easily accessible.
Many financial advisors recommend a money market account, a simple checking account or a savings account as the best place to store this money. That way, it is quickly accessible when the "rainy day" arrives.
Interestingly enough, the average cost of annual financial emergencies only runs around $2,000 per household, according to the Consumer Federation of America (CFDA). That means if you follow the predominant and traditional financial advice, you're going to have a lot of money sitting around not working for you. Here are some better things you might consider doing with that money:
1. Pay Down Credit-Card Debt
The average credit-card debt in the U.S. has an APR of nearly 17 percent.1 That means you will pay more interest on revolving debt than you'll ever earn on money stuck away in some rainy day fund. Remember, money saved is money earned.
2. Think Before You Buy
making purchases if you don't have a need or a known use for them. The same strategy applies to buying in bulk – purchase what you need, not what you might need. Don't become a warehouse; let the store be your warehouse and save your money.
3. Start Thinking Percent, Not Dollars and Cents
A dollar today is not worth what a dollar was yesterday or what a dollar will be worth tomorrow. For example, "Forever Stamps" can be a huge way to save. A rise in postage from 45 cents to 46 cents is a 2.22 percent difference in cost. If you purchase "Forever Stamps" instead of 45 cent stamps, you'll win when the price of stamps goes up – and they will go up, guaranteed.
4. Become Aware of Cash Flow
Recognizing your cash flow can make an incredible difference down the road. For example: Don't cut up your credit cards or hasten to get out of debt too quickly. Why? It might actually end up costing you thousands of dollars. Paying extra principal, the predominant and traditional financial advice given to those trying to eliminate debt, is not always best.
For example, if you have $10,000 of revolving debt at 6 percent interest with a $150 monthly minimum payment, you'll pay that debt off in 82 months. In so doing, you'll pay a total of $12, 300: $2,300 in interest and $10,000 of principal. If you pay an extra $50 a month in principal on that debt, you will cut 24 months off your payments and pay a total of $11,600: $1,600 of interest and $10,000 of principal.
However, if instead, you pay yourself that extra $50 of principal each month, allowing it to earn just 4 percent, you'll still pay off your revolving debt in 82 months, but you'll also have $4,706.11 at your fingertips. That's $4,006.11 more than what you would have saved by applying that extra $50 to your revolving debt.
As chiropractors, we've all learned to think outside the predominant and traditional medical orthodox box of disease and sickness. Applying these same reasoning skills to money and finances will allow you to enjoy a wealthier and more prosperous financial future. If you want to experience different results than what everyone else is experiencing financially, you have to think and act differently than everyone else. It's that simple.
Reference
Woodruff M. "You Could Be Thinking About Your Saving Entirely Wrong." Yahoo Finance, Jan. 17, 2014.
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