Rainy Day Savings Fund For Unemployment In Bad Economic Times

People who spend most of their payday money within a few days risk uncertainty and having to borrow money from friends and family if they suddenly need to pay medical fees, need urgent repairs to their car or lose their job and a few weeks later don’t have enough money for the next rent or mortgage payment.

One of the topics I’m keenly interested in is financial literacy and how people behave when dealing with money. Recent research by the Australian Federal Government into changing behaviour (PDF) revealed that:

“Most people heavily discount future costs or benefits compared to immediate costs or benefits. The further into the future the costs and benefits are likely to occur the more they are discounted. This is a key tendency in helping to explain the difficulties people experience in making lifestyle changes where benefits are longer-term”.

This applies to making the decision to start saving some money in a separate account for emergencies as much as it does to other big decisions like whether to quit smoking or binge drinking.

Piggy Bank
photo credit: Images_of_Money

“Temporal discounting is our tendency to want things now rather than later. In order to encourage us to save money, banks have to offer us a reward in the form of an interest rate. In order to delay gratification, we have to be convinced that the reward in the future is going to be sufficiently large to compensate us for going without right now.” – I Want it Now!Temporal Discounting in the Primate Brain

Setting Up an Emergency “Rainy Day” Fund

A good place to start would be to setup an emergency fund of at least $1000.

Call it a slush fund, self insurance or a rainy day fund, having one can mean the difference between the comfort of knowing you can pay an unexpected cost or the constant nagging fear that you’re one bill shock away from disaster.

Trapped inside, by Stormy weather, makes me Blue
photo “Rainy Day makes me Blue” credit: Neerav Bhatt

Mortgage Offset Account For Emergencies?

The chair of the Federal Government’s Financial Literacy Board Paul Clitheroe is a frequent guest on the ABC Local Radio Nightlife program and he often discusses how a home loan mortgage is a great form of forced savings, which compels people otherwise reluctant to save money, to do so by having to make regular mortgage repayments.

I agree but suggest that an emergency fund should be separate from your mortgage because otherwise instead of paying the mortgage debt off steadily over time you’ll be lured into using previous mortgage repayments as a piggybank to draw from for unexpected expenses.

Encouraging Your Kids To Setup An Emergency Fund

If you’re a parent you my have the nagging suspicion that your grown up 20-something year old kids (also known as “kidults”) think of you as their emergency fund in case dire financial circumstances befall them.

The concept which explains this behaviour is called moral hazard which means that “people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for”.

If your kids know that you’ll bail them out if they rack up a $1000 mobile phone bill, how do you think they’ll act when making mobile phone calls?

Evidently it’s in both their and your best interests to encourage them to setup a rainy day fund, so they build up a savings habit and don’t hit you up for “bailout money” at regular intervals.

Kickstart An Emergency Fund


One of the best ways to save money from your pay is to whisk it away from your transaction account before you get the chance to spend it.

Choose a small amount you won’t miss like $50/week and setup an automatic savings plan so the money gets withdrawn from your transaction account on pay day into a high interest savings account. After a year that adds up to $2600 plus interest.

Do you “live for today” or “save for tomorrow”? What do you think about the idea of having an emergency fund?


8 responses to “Rainy Day Savings Fund For Unemployment In Bad Economic Times”

  1. Stuart Grandquist

    Just some info in regard to your “rainy day” article.

    There have been extensive studys in regard to the psychology aspects of peoples spending & savings habits when economic hardship befalls on individuals, ie; how people react in times of economic hardship circumstances.

    Even when a major economic shift in peoples circumstances occur, GFC,loss of job,unexpected bills etc., over 86 % of people will spend as much money in alcohol & cigarettes whilst even major bills mortgage,rent etc. Will remain unpaid or late.

    This gives a insight as to the psychological priority people develop to their perception of which bills are important to their social status.

    Recently as economists try to ascertain the inflationary results as to our spending habits & should the Reserve Bank cut interest rates to stimulate the economy.

    Currently one in three mortgages in the outer south west area in sydneys metro area, campbelltown etc., are at least one mortgage payment in arrears, whilst pubs & clubs continue to thrive.

    Maybe this is why people who receive centrelink unemployment benefits, the money is classed as ” social security “.


    EDITOR: Thanks for that insight Stuart.

  2. My 16 year old got a application for a $4k to $36k car loan today. I sat down with my teens to discuss debt. I told them to stay out of debt. If you absolutely have to borrow money to buy a car you should buy a cheap piece of junk. I sell real estate in Utah and walk thru many homes. Most people here have a food storage of between a few month to a year. This is a very prepared state for economic hardships.

  3. I think that after this last recession people will be more likely to save their money in the future, or atleast the near future. I am 28 so I was pretty young when the whole thing melted down. Though I lost quite a bit I think it will be better for myself in the long run for the lessons that were learned.

  4. Personally I find it quite hard to tread the line of ‘living for the now’ and ‘saving for tomorrow’ – in all honesty my mindset is in two different camps.

    Firstly – the John Lennon quote always rings loud and clear ‘Life is what happens to you while you’re busy making other plans’. It reminds me that life is short and while saving for the future is required – it shouldn’t be at the sacrifice of fun and living life while you go.

    On the other hand, I work quite close to the Superannuation industry and see firsthand just how much money is required to live come retirement. Without proper planning and contributions above and beyond your normal 9% – most of us won’t hit the adequate savings level for a comfortable retirement. Especially considering that retirement isn’t just a few years – retirement can mean 20-30 years after you finish work.

    My ending thoughts? It’s not simple. I am trying to enjoy the now while planning for my future. That means ensuring I focus on getting a roof over my head and paid off, additional super contributions when I can + using any excess money to safely invest in assets that will hopefully appreciate well over the long run.

  5. I wish more people thought like this. Having no debt and a savings account is a great way to leverage against any kind of “bumps” in the road. Glad to see more people are advocating savings! Good post.

  6. Many employed people make the mistake of thinking they would be on the job forever and this notion is very wrong. I have seen a guy lose his job and had problems feeding his family the next week. He had no savings or backup whatsoever. It is imperative to always have an account where money would be lodged in case of unforseen circumstances. I advise the 30,30,30,10 rule whic is 30percent of your salary for savings another 30 for expenses, another 30 for investment and 10 to pay your tithes.

    That is my 2 cents

  7. cristyvenus

    I have open a dedicated savings account. Most banks offer flexible savings vehicles which allow you to earn a decent rate of interest while still offering you access to the money. Look around to see what the best deal appears to be and then open an account. Saving like a backup.

  8. Victor, your 30303010 rule may work for some, but unfortunatley there are so many people that live paycheck to paycheck and could never afford to put 30% of their earnings away each month. One hundred million americans make less than $40,000 per year. I imagine that kind of income would be tough to live on, especially if one had any children.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Related Articles