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The rainy day fund covers emergency or large unexpected expenses and is an important element of a healthy financial plan. This page defines the important role a rainy day fund plays in a sensible retirement plan. Rainy day funds, also known as budget stabilization funds, are used by government to deal with On the surface, a rainy day fund may not appear to be important to the individual that is accumulating wealth utilizing a sound financial plan. Consider the following scenario. Mr. Smith is a hard worker who contributes to a 401K account at work, periodically contributes to his IRA account and has a small savings account at his local bank to cover those unexpected expenses that occur at times. He is involved in a serious accident or incurs an illness and is unable work for six months. Although Mr. Smith has a good health insurance policy that will cover his medical expanses, he still has a home loan, living expenses to contend with, and a family to support. Within two months his personal savings account is depleted. He is forced to barrow against his 401K and cash in some or all of his IRA funds to meet his obligations. Mr. Smith now owes his 401K account a substantial amount of money. Although he recovers and returns to work, his dreams of early retirement are seriously impaired because he did not have a rainy day fund. To cover scenarios such as the one just described a rainy day fund is necessity and should be a high priority consideration when developing a sound early retirement plan. The funds do not necessarily have to be sitting in a bank account, but do need to be readily available. There are other types' easily accessible savings tools such as certificates of deposit and money market accounts that yield a little more income than the personal bank account. Learn about Electric Orange from ING DIRECT. Every dollar earns high interest.
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unexpected or extraordinary expenditures due to emergencies and budget shortfalls. They are generated in good years in the form of budget surpluses. The rainy day fund concept should be a vital component used to reach your financial goals and retire sensibly.