Every Investor Should Have a "Rainy Day Fund"

A recent study conducted by the Investment Company Institute found that younger investors are moving away from mutual funds in favor of riskier, and potentially more rewarding, investments. While this approach to investing is understandable, one element these younger investors may not be taking into consideration is the importance of a “rainy day” fund.

Your parents always told you to put some money aside “just in case”. This money was for when your car needed repairs or you learned you needed emergency dental work. When you’re young, however, you tend to have fewer emergencies and, therefore, fewer opportunities to call on this fund. It is easy to believe that you’ll never need it. With this mindset, making risky investments makes more sense. You don’t feel like you have as much need for secure savings because you can easily live off your current paycheck.  You have the money available to take some higher risk and, potentially, reap some higher rewards. What is the harm?

When you’re young, there certainly is less harm in making riskier investments. Younger people tend to be healthier and have fewer bills to pay. As you get older, however, you’ll likely find that your bills get higher and your unexpected expenses appear more often. As you own more property, from cars to houses to dogs, you will encounter more bills. These bills and unexpected expenses increase even more when children come into the picture. It may be tempting to maintain a portfolio of high risk/high reward to counterbalance the increasing bills, but before you do, ask yourself, “can I afford to lose all this?” 

Something that people tend to forget is that the other side of high reward is high loss. Every time you make a risky investment, ask yourself if you and your family will still be ok if you lose what you just invested. If the answer is no, then you should consider a more secure form of investment. This isn’t to say that you should never take a little more risk with your money. It is simply to encourage a diversified portfolio. Investing can still be fun and rewarding. At the end of the day, however, investing should leave you with a comfortable “rainy day fund,” just like your parents suggested.

For help making the right investments for you, please contact us.