We often here that we should keep some money for a rainy day. That we should have some money in reserve just in case we need it. However, often with these old sayings they are not really right, but what about this one? Is it something that we should be doing?
It is good to think about what rainy day money is for. It is not really to use on a literal rainy day of course, but it means having some money tucked away for the future. This is something which could be useful for a number of reasons.
If you are in a situation where you suddenly need to pay for something, perhaps an unexpected bill comes or you need to buy something to replace an item that is broken then you will need some money to do so. It can be tricky to find the money when you need it all of sudden like this and so it is wise to think about where it will come from. If you have nothing saved then you will really have two options. Find a way to very quickly earn the money, which could be very tricky or borrow it. Borrowing is easier but of course it costs money and so you need to think about whether it is an option that you want to take. Obviously, there are loans there that are designed to use in emergencies, but that does not mean that you have to use them. If you can have some money tucked away in a savings account then you will be able to use that and it will be a lot cheaper for you.
It can also be nice to have some money available to buy treats with. You will sometimes be in the position where you might like to treat yourself or others and if you have a bit of extra money then you will be able to afford to do so. This can be really nice and can give you a good feeling knowing that there is the money available. You might even want to save up towards things such as holidays or days out. It can be great to have the money there.
However, although having savings is great, it is worth being aware that any interest that you get on savings, tends to be a lot less than interest that you pay on a loan. This means that if you have debts, whether that is a credit card, overdraft or loan, then you should consider whether it is better to repay that rather than have savings. It is good to do some calculations and think about this. It is normally better to repay the debt, although a student loan is normally not worth repaying early as most do not get repaid before the thirty year loan term is up so the government writes them off. A mortgage can sometimes have a very low interest rate as well, but this will depend on the type of mortgage, the mortgage rate, the lender etc. So, it is well worth calculating whether it is better to pay off a loan rather than have lots of savings. You need to think that by repaying the loan you could save a lot of money in interest but you will not have those savings. However, if you do need money in an emergency you could borrow rather than use savings and just hope that this will not happen and you will stay well in control of your money and not need to borrow during this time.