With a windfall what comes first: Building a rainy day fund or paying off debts?

By Dian Vujovich

What we do with the money we have is pretty much our own business. That said, it’s a business everybody wants to get into the act of participating in. As a result, advice is plentiful and comes from everywhere and everyone. Not all of it worth taking mind you, which brings me to my point.

I recently read advice from a financial advice columnist who had been asked by a reader about what to do with some inheritance money they’d received. The money wasn’t a huge sum, if you’re a multi-millionaire, but for many this tidy five-figure amount would represent a lot.

The advice given was to put between 5 and 10 percent of it into an emergency fund—I call those rainy days funds—and to use the remainder to pay down credit card debt. The author said that credit card debt wasn’t “normal” and that most people don’t have any.

Well, I’m not so sure about what’s normal and what’s not any more but I do know for sure that having a substantial sum of money stashed into a rainy day or emergency fund makes a whole lot of sense these days. Money, that is, that one can get their mitts on without incurring a lot of penalties or fees.

Conventional advice has always suggested people have between 3- and 6-months worth of money put aside for emergencies. That’s poppycock. People ought to have at least three or four times that amount saved. Emergencies cost a lot in today’s world. This I know personally and have witnessed as I’ve watched others face economic challenges they never before imagined possible.

Having a family-sized five-figure rainy day fund available can do all sorts of things. Like help to put your mind at ease should you lose your job in this economy where finding a better or equal-paying position isn’t easy and may take months or years to find. It also won’t cause you to break into a sweat if you need money for say repairs to your automobile, a new air-conditioner –or furnace– for your home, a pet that needs emergency care or couple of teeth that need root canals and caps.

Having a sizeable chunk of money readily available also means you’ve taken some time to really think about things –like emergencies and have created a plan to face the possibility of them occurring. And more importantly, it means you’ve executed that plan.

Having a stash of cash may also be comforting. Simply knowing that you have the cash to pay for things rather than having to put them on a credit card feels good and costs less.

So I’m saying that there’s a new normal money sheriff in town. And she says to focus on building a big fat rainy day fund with any windfall dollars that come your way. After it’s in place then deal aggressively with the credit card debt.