What You Need to Include in Your Financial Toolkit – Part 2
One part of setting yourself up for success is having a financial toolkit that works for you. Everyone needs a financial toolkit – an arsenal of financial products and accounts to help you meet your end goals. Regardless of your financial standing in life, these products are so important, especially if you want to take control of your finances.
For the next month, I’ll be sharing ways to take control of your finances. In the meantime, start by making sure that you have these accounts!
Yesterday, I shared the “spending tools” that you need to have in your financial toolkit. Today, I’m going to share the most exciting part of your financial toolkit (yes, I get excited about nerdy things like finances and budgeting). 😉
Rainy day fund
If your roof caved in, how would you pay for it? Hopefully, you have homeowner’s or renter’s insurance to cover catastrophes like your roof caving in. Even so, there are many smaller-scale disasters that you may face, like needing a new ignition in your car, that you may not have included in your budget.
Experts suggest having a nest egg of three to six months’ expenses saved in case of an emergency. You may need even more if you have a seasonal job or work on commission.
If you don’t already have a rainy day/emergency fund, set one up immediately! It’s ok to start small. When the farmer and I moved back from New Jersey, we had used most of our rainy day fund as a down payment (and then furniture) on our house. We had to start from the beginning by saving $1,000 and then saving a little each month until we had a large enough nest egg.
Start using your spending tools (your checking account and credit cards) to track your expenses each month. Once you know how much you spend on your monthly expenses, you’ll have a starting point to figure out how much you need in your rainy day fund. You’ll also use that number to create your budget.
Funds for short-term goals
If you have a specific goal, like buying a new car or make improvements to your home, use a savings account and make monthly contributions until you have enough money to fund your goal. When we bought a new furnace, we set aside money each month for a year before we finally bought our furnace.
Some people open several savings accounts (one for each savings goal). Some budget programs, like Quicken, do this for you, though. You can use one savings account, and the program will allow you to make partitions in your account. For example, I save a set amount each month in my savings account, and a portion of that savings goes into my “rainy day fund,” and another part goes into my “furnace fund” or whatever I need to buy. The money is all in the same savings account, but the money is separated in my budget.
You can use these “goal funds” for large and small purchases. Some people create small funds for their annual vacations or Christmas/gift accounts. I tend to use these funds only for big-ticket items, like a furnace or new windows in my house. Since I buy my Christmas presents throughout the year and take mini-vacations with the farmer and my friends, I just add these expenses into my regular budget.
Regardless of how you use your goal funds, the principle is the same. Make sure that you save enough for certain items so you’re not surprised in December when you receive your credit card statements listing your Christmas purchases or your new furnace.
At this stage of your life, you may be more concerned about your day-to-day life and what you need to save now instead of thinking about what you’ll need 30 years from now. I get it. Even so, now is the time to plan for the future. Make sure that you’re maximizing your retirement savings benefits at work, and learn what you can do now to get on the right track for retirement.
Bonus for parents: College savings plan
If you’re a parent, start thinking about how you’re going to pay for your kids’ college. If you’re going to help them, start by reading about the different types of accounts. Open an account and start saving now!
Setting up your financial toolkit can seem overwhelming, but you don’t need huge sums of money in these accounts. You can start small, but the important thing is that you start now. Once you have your rainy day fund, goal funds, and retirement accounts set up, you will be on your way to financial security with a financial toolkit that works for you!