Sunday, February 04, 2007

Fully funded my rainy day contingency fund

For the past nine months I have been struggling to put away enough cash to fully fund my rainy day contingency fund to cover unexpected major expenses or loss of work. I had a recent windfall of money, which I quickly stashed in my rainy day fund, so it is now fully funded. It should cover an entire year of my minimum monthly expenses and then some. According to my spreadsheet, I am funded for 13.6 months.

I do need to go back and review my rainy day budget. It is not my full monthly budget, but more than enough to pay my rent, utilities, meals, and a modest amount of "miscellaneous."

In fact, maybe I should split the fund into two parts: a major expense chunk for one-off expenses and a loss of work chunk to cover monthly budget expenses for a year. I'll have to think about that some more.

Even though it is fully funded, I should push fund it for an even longer period. After all, from June 2002 through September 2004, I was able to find only a minimum amount of work and had to live off a combination of credit cards and premature withdrawals from my retirement account. That was a period of two years and three months. Granted, I am very unlikely to see such a drought of work again and it was probably one of those once in a lifetime occurances, but it did in fact happen.

Over the next two years I would like to push my coverage up to a full eighteen months. I could feel comfortable with that, and if I do lose work for more than six months I could take a part-term or minimum-wage job to push my coverage up over two years.

My entire rainy day fund sits in money market mutual funds, yielding a return of roughly 5%. Of course, that is taxable and we still do have inflation, so that does allow for a modest degree of coverage expansion even if I don't add one penny.

Since, in theory, I wouldn't need my entire rainy day fund within the first six months, at a minimum I could put half of the fund in 6-month CDs or T-bills for a modestly higher return. In fact, I could put a modest amount in 1-year CDs or T-bills. At some point I may do so, but right now I would rather see my finances stabilize over the next six months or a year before I make much in the way of commitments that cannot be unwound overnight.

-- Jack Krupansky

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