Here’s Why a Rainy Day Fund Should Be in Your Forecast

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Life is unpredictable. Some days aren’t all sunshine, like when your car breaks down or your house needs a repair. These situations happen to everyone. That’s why it’s important to save while things are going well, so you can cover the times when things go wrong. By having a rainy day fund, you can pay for unexpected bills beyond your normal living expenses.  

In this article, we’ll share what a rainy day fund is, how much to put in it, and how to save for one. When you include a rainy day fund in your financial planning, you’ll be ready for when a storm rolls in.

Rainy Day Fund vs. Emergency Savings Fund

A rainy day fund is an amount of money set aside for small expenditures that are outside of your normal living expenses. The idea is to use a rainy day fund for one-off expenses, such as a car or home repair.

Why is it called a rainy day fund? Just like you need to adjust your plans to accommodate unexpected weather, so should you have a financial backup to accommodate unexpected expenses. You might not anticipate a thunderstorm or for your washing machine to break, but either could happen at any time. It’s always best to prepare in advance.

An emergency fund is a larger financial safety net — usually equal to three to six months of living expenses. If you were to lose your job, have a major illness, or go through a divorce, your emergency fund would keep you afloat. The idea is that you can pay for surprise situations without digging into funds set aside for normal expenses, like utility bills, mortgage or rent, groceries, transportation, and child care.

While a rainy day fund tends to be much smaller than an emergency fund, both are crucial to your financial plan. By having funds available for non-routine expenses, you can cover the extra costs without suffering too much hardship. For example, if you don’t have an emergency or rainy day fund in place, you may have to resort to a personal loan or payday loan. The interest rates on these types of loans run high, meaning you’ll end up paying much more in the long run. With backup funds readily accessible, you’ll have peace of mind knowing you can cover the extra bills.

How Much Money to Keep in a Rainy Day Fund

When you have a target number in mind for your rainy day fund, your savings plan will be more concrete. You’ll know exactly how much you need to stow away each month to reach your goal.

The right amount of money in a rainy day fund is different for everyone, but experts suggest $1,000 as a starting point. For instance, $1,000 should be able to cover things like a simple car repair or a new appliance.

Ideally, how much you keep in your rainy day fund should equal the highest amount you can expect to pay for a rainy day need. For example, if your health care deductible is $1,500, you’ll want to keep at least that much in your rainy day fund. Car repair prices range, but common fixes on the brakes or alternator cost between $400-$700. To be conservative — in case two rainy days happen close together — increase your savings goal.

With a solid amount in your rainy day fund, you’ll reap several benefits. You’ll be at ease knowing you can afford an unexpected bill or two. More importantly, you can cover the expense without charging it to your credit card or taking out a personal loan — both of which can have high interest rates. Additionally, keeping a rainy day fund will help you build financial discipline by making saving a consistent habit.

If you’d like guidance for your unique situation, consider reaching out to a financial advisor. They can look at your current finances and help you create an excellent savings plan. They can also help determine how much money to put in a rainy day or emergency fund.

How to Save for a Rainy Day Fund

Luckily, there are several great ways to build a rainy day fund. No matter your financial position, you can stow away cash every month.

Here are the best ways to save for a rainy day fund:

  • Set up a direct deposit: Create a separate direct deposit so that some of your paycheck goes straight to your rainy day fund.
  • Download an app: Sign up for an app that saves for you. For example, some apps automatically round up and move the change to your savings account.
  • Transfer cash monthly: Set up an automatic transfer that occurs once a month. For example, you may want to transfer $50 per month from your bank account to a money market fund.
  • Create a rainy day fund jar: Every time you have spare change, throw it in a jar or piggy bank. While your fund will start out small, it will build over time.
  • Replace some discretionary spending: If you normally have a latte in the morning or shop for new clothes every month, consider scaling back. Instead, place that money in your rainy day fund.

Your rainy day funds should be readily available. They should be in an account that’s liquid, meaning you can retrieve it quickly without any fees. Money markets, savings accounts, and high-yield bank accounts are great options. Shy away from certificate of deposit or investment accounts as they’re not easily accessible and may charge a withdrawal penalty.

To keep your finances organized, your rainy day fund should be separate from your other investments and accounts. That way, you’ll know exactly how much you have and can pull out the funds when you need it.

Having a rainy day fund gives you peace of mind and more financial stability. You’ll have a backup to cover expenses when dark clouds appear, like a medical bill or home repair. You’ll also be more skilled at saving, which can offer you new financial opportunities. With extra funds available, you’ll bring a little sunshine to your future rainy days.

Sources

CNBC | Investopedia | The Balance

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