Why you NEED ‘Rainy Day Money’
(…and the difference between this and ’emergency cash’)
It’s been a lovely summer here in Edinburgh.
Whilst the South had flash floods, we’ve been enjoying the sun here.
Hot hot hot…
Which (almost) makes up for the disappointing result in the Euros!
However, we’re now in October. And Autumn is definitely here!
The days are shorter…
Darkness creeps slowly over the city of Edinburgh like a blanket after the working day is done.
We won’t see much of sunlight until springtime.
And would you believe it – but now we’ve actually got rain!
Imagine. Wet weather in Scotland…what are the chances?!
Feeling all melancholic, it’s got us thinking about rainy day money and emergency cash savings, for both business owners and everyone else.
Surely they’re the same, aren’t they? Well, yes and no.
But before you run off and start hyperventilating, here’s what we mean…
What’s a rainy day?
Despite our belief that we can, we cannot predict the weather all the time (even though we live in Scotland)
Rainy days are minor inconveniences. To dip into when the washing machine suddenly stops working. Or for tipping the Ocado delivery driver for bringing an extra avocado.
Emergencies? Sounds serious…
It can be. This is for the big moments – the funds you need for something monumental. This can be anything from finding yourself being furloughed or made redundant. Perhaps you’re potentially going to be off work due to sickness or ill health. Any situation where your outgoings could be adversely affected.
A good rule of thumb is to squirrel away an amount equal to between three and six months’ rent.
So for Scottish residents (according to stats*) this would be between £2000-£4000. Now we get that for some people this amount may seem unrealistic but break it down – that’s £176 a month over a year.
Remember also that this is a suggestion. You may be paying more or less rent. If something happens it may take you longer or less time to get back on your feet. And having something for an emergency is better than nothing.
So should you save or invest it? What to do with it?
Emergency funds are that – urgently needed. It therefore makes sense if you need them asap to put them in an easy access vehicle. Rainy day funds can be kept elsewhere, so unless you are particularly prone to injuries or bad luck, it would be worth looking at putting your rainy day funds into a high rate fixed term ISA or another savings vehicle, where it can gain interest.
And what about business owners? Does the same apply?
Yes. And if we’ve learnt anything, it’s that business owners are probably more at risk at being affected. Just take a look at how much has happened since Lockdown 1.0. We’ve gone from almost a complete shutdown, to a brief period of relaxation, back into a lockdown.
For business owners, they can start by making sure the following are addressed:
Remember that you come first
As a business owner, it can be easy to forget this simple fact whilst juggling work and life. Make sure you have enough cash to sort out yourself and your family. Remember that you can always start another business. You may not be able to start another family!
Calculate your essential expenses
This includes staff payroll and fixed expenses (this can include rent, utilities, insurance). These are the expenses critical to the daily running of your business. Set aside funds to cover these. Remember that whilst you may be able to defer payments for rent or utilities, your staff probably won’t be willing to work for free!
Prepare for slow and busy periods
Remember when hairdressers reopened and everybody wanted to get an appointment? Exactly – you need to capitalise on those moments. When you’re busy, try to save as much as you can – this will counteract the evitable downturn during the leaner months.
Getting into this mindset means your business will be ready for an ‘actual’ rainy day period. As well as this, your business expenses will also change so you will need to re-evaluate them every so often, for example, every business quarter.
Cut down on waste
Do you need to have every new gadget that comes out? Do you need to outsource everything because it’s easier? No you don’t.
Focus on what makes up your business, be it a service or a product, and get that right. Similarly, limit your outsourcing to what takes longer, for example, accounting or marketing.
Remember that your ‘rainy day money’ you’ve built up is there for an emergency. Much like your own ‘inner potential’ there could be less than you need. Especially if you are tempted to spend it. By all means, you can but really only if you need to!
Another good tip is to give it a name – calling it your “ICE” fund (In Case Emergency) for example, or something personal can work. Giving it a name makes it seem more real and psychologically, you should be less prone to temptation, if the name relates to what it’s actually there for.
Setting yourself the goal of saving a certain amount, should you need it, is also a powerful motivator.
* Scottish Government