Unexpected expenses are a bane and can just as easily disrupt your financial stability, that is if you are not ready. Life is uncertain and an emergency can occur in any form or place, be it car repairs, medical emergencies, or unexpected job losses. It is important to be prepared for these unexpected scenarios by creating a solid financial safety net that can shield you from unexpected expenses.
Stockpiling savings for rainy days can help you cover your financial problems without burning through your savings. According to research by the Federal Reserve Bank of St. Louis, savings levels hit an all-time high at the onset of COVID-19 but dropped significantly just two years later.
Moreover, a 2021 Federal Reserve Board study found that more than 32% of adults in America would not be able to completely cover a $400 emergency expense with cash.
All these statistics are evidence that the average adult is not familiar with the benefits of building a rainy fund. But exactly what is a rainy day fund? In this blog, we will explain what does rainy fund means and how you can build up enough to cover unexpected emergencies.
Let’s dive in.
- What is a Rainy Day Fund?
- Understanding the Importance of a Rainy Day Fund
- Rainy Day Fund vs Emergency Fund
- How Much Should I Save in a Rainy Day Fund?
- Where Should I Keep a Rainy Day Fund?
- How to Start Building Your Rainy Day Fund?
- Benefits of Building a Rainy Day Fund
- Final Words: Strengthen Your Financial Health With a Rainy Day Fund
- Frequently Asked Questions(FAQs)
What is a Rainy Day Fund?
In simple terms, a rainy day fund is money that is particularly saved for unexpected lower-cost expenses like home maintenance and parking tickets. It is typically a savings account for expenses that you generally don’t account for in your budget but are bound to happen. These expenses include car repairs, routine medical checkups, parking tickets, etc.
However, a rainy day fund should not be confused with an emergency fund. While both typically serve the same purpose there is a major distinction between them. The main difference is the size of the funds and what they are used for.
A rainy day fund is used for low-cost unanticipated expenses whereas an emergency fund is reserved for unexpected major events like medical emergencies, loss of income, or car repairs that can have a severe impact on your financial stability.
Experts suggest it is wise to have both a rainy day fund and an emergency fund for unparalleled financial stability.
Understanding the Importance of a Rainy Day Fund
As mentioned above, a rainy day fund is a sum of money set aside for unanticipated expenses that you don’t account for but are bound to happen sooner or later. These can include medical bills, home maintenance or other events that can disrupt your budget.
Having a rainy day fund at your disposal can provide you with a financial safety net to fall back on without burning through your savings. It also provides peace of mind and avoids relying on high-interest instruments like credit cards or loans.
Your rainy day fund must be able to cover small expenses that could hamper your savings. Some of the common examples include-
- Medical Procedures
- Routine Medical Checkups
- Replacing Automobile Parts
- Fixing or Replacing Broken Appliances
- Vehicle Maintenance
- Home Maintenance
Rainy Day Fund vs Emergency Fund
While both rainy day funds and emergency funds serve the same purpose, they have distinct differences. Think of a rainy day fund as a cash reserve to handle minor inconveniences and unexpected costs. As the name suggests, rainy-day funds are specifically to weather the small unanticipated challenges that are bound to happen sooner or later. Be it vehicle repairs or medical bills, rainy day funds can help you cover these extra expenses without any hassle.
On the other hand, emergency funds are designed to help you weather more than just a rainy day. They are equipped with enough cash reserves to weather a storm. Emergency funds are cash reserves particularly set aside for large unexpected expenses like loss of income or medical emergencies. According to experts, an emergency fund must have at least three to six months of your income. Some large emergency reserves even have up to a year of living expenses.
|Rainy Day Fund
|At least $500-$2500
|Three to Six Months of Living Expenses
|Medical ExpensesCar RepairsEmergency TravelRoutine CheckupsUnplanned Education CostsParking TicketsVeterinary ExpensesHome Maintenance
|Loss of IncomeChronic Health IssuesHome RenovationsMajor Life ChangesMedical Emergencies
|Where to Keep Your Funds
|Money Market Accounts, High-interest savings accounts
|High-interest savings accounts, money market accounts, and certificates of deposits.
How Much Should I Save in a Rainy Day Fund?
While there is no fixed amount, experts suggest having at least $500 to $2500 in a rainy day fund, depending on your income and expenses. The amount of money you want to save will ultimately depend on your individual circumstances. If you’re having trouble deciding, evaluate your home appliances. If your appliances need servicing or repairs, consider pricing an emergency repair and set that amount as your rainy day fund savings goal.
It is essential to assess your financial situation and determine the right amount of savings that can sustain you and your family in case of an emergency. However, don’t be intimidated by sheer numbers. Having a little savings is always better than having none.
Start with a realistic goal and set aside a little each month to work your way towards it. If your bank allows it, you can even set up an automatic transfer to ensure regular contributions towards your rainy-day savings. Once you reach your financial goal, you can determine whether you want to keep building your funds or use the extra money for investments.
Where Should I Keep a Rainy Day Fund?
While there are many instruments to keep your rainy day funds, it is best to keep them in a high-yield savings account at a bank or credit union. These accounts offer minimal risk and allow you to access your funds quickly.
When choosing a savings account, you should consider a high-yield savings account that offers high-interest rates. While the interest rate may vary, it can help your funds to grow faster over time. You can also opt for a no-fee saving account to save some additional cash.
If you’re worried about financial loss, make sure to open your savings account at an FDIC-insured bank or NCUA-insured credit union. These accounts protect your money from bank failure, up to $250,000 per institution and per ownership account.
You should also consider using more than one account or subaccount to effectively organize your rainy-day funds and emergency funds. It is essential to be able to access your money at a moment’s notice. Make sure to find an account that offers quick and easy withdrawals but also offers high-interest rates.
How to Start Building Your Rainy Day Fund?
First and foremost, you must identify what will you use your rainy day funds for. For most individuals, monthly expenses like rent, utilities, and groceries are steady. There are other costs that are unexpected but not exactly emergencies. Those are the costs that your rainy day fund will cover. Here’s how you can start saving-
Evaluate Your Financial Situation
Before you start your saving journey, you must assess your financial situation and consider the following factors-
Income: How much is your income? Is your income stable or fluctuating?
Expenses: Your regular monthly expenses. Are there any areas where you can cut corners to save more money?
Debts: Do you have any outstanding debts like high-interest credit card bills or loans? If yes, paying them off should be a priority.
Savings: Do you already have a savings fund that can be included in your rainy day fund or another financial goal?
Consider these factors and evaluate your financial situation before you start saving for a rainy day fund.
Set a Rainy Day Fund Goal
After you have carefully evaluated your financial situation, the next step is to set a savings goal for your rainy day fund. You can determine the amount by figuring out what expenses may arise in the near future. This can be done by evaluating the condition of your appliances, the age and condition of your car, or your insurance coverage.
Moreover, if you have a home and have an insurance deductible you may need to save more than someone who rents.
Choosing a Suitable Savings Account
The next step is to choose the right savings account to make the most out of your rainy day fund. One of the best options is an FDIC-insured high-yield savings account that offers quick and easy withdrawals.
This way you can be assured that your money is safe while earning interest over time. Not to mention, you can access your funds at a moment’s notice.
Saving Strategies to Build Your Rainy Day Fund
After setting a realistic goal, you can use these strategies to effectively build up your emergency fund-
Set up automatic payments: You can ask your employer and arrange for a portion of your paycheck to be deposited directly into your rainy-day savings account. This way you won’t even be tempted to spend it on unnecessary expenses.
Use a budgeting calculator: A budgeting tool like the one available at YourMoneyWise can help you track your earnings and allocate funds towards your rainy day savings goal.
Transfer money monthly: Make it a habit to regularly contribute to your rainy day fund to easily grow your savings.
Use dedicated mobile apps: There are several applications that round off your online transactions and transfer the money to your savings account. This way you can slowly but surely build up your rainy day fund.
Cut back on incessant spending: Reduce your unnecessary spending and try to allocate extra money towards your rainy day fund account.
Manage and Maintain Your Rainy Day Fund
Once you have finally reached your rainy day saving goal, it’s time to manage and maintain your funds so they are available at the time of need. It is also important to replenish the fund after using it for an unexpected expense. Most importantly, review your savings goal at regular periods to ensure it aligns with your current financial situation.
Prepare for Unexpected Events
Besides building a rainy day fund, you can also prepare for unexpected events in other ways-
Have sufficient insurance: Make sure you have adequate insurance coverage for your car, home, and health. Make sure to review your insurance policies to ensure they cover necessary expenses as your circumstances change.
Create a plan for emergencies: Create a plan for emergencies. While it is hard to plan for emergencies beforehand, you can create a guide on what to do in case one arises. Keep contact information of banks and insurance companies in check if you are in need of immediate cash.
Keep your skills updated: Regularly update your skills and qualifications to ensure better employability in case of a job loss.
Build Good Financial Habits
Lastly, building a rainy day fund will get you into the habit of saving and developing good financial habits. Budgeting, tracking expenses, and working towards your saving goals contribute to your overall financial well-being and help you achieve long-term goals.
Benefits of Building a Rainy Day Fund
Small expenses can snowball into something big and can easily disrupt your financial stability. However, a rainy day fund can provide you with a financial safety net and help you in tough times. Here are some benefits of creating a rainy day fund.
Reduces Financial Stress
Financial stress can be detrimental to your physical and mental well-being and may negatively impact your work and relationships. A rainy day fund acts as a financial buffer that helps you tackle unexpected challenges and provide stability. Not to mention, you are always at peace when you know you have something to fall back on.
Unexpected expenses like car repairs, emergency room visits, or more are totally out of your control. Having a financial safety net provides you with a sense of control when it feels overwhelming. Being prepared for the unexpected offers a lot more options and allows you to get back on your feet quickly.
Helps in Avoiding Debt
If you don’t have a rainy day fund, you might have to resort to other options like high-interest debts or credit cards to handle those unexpected expenses. This will incur high-interest debt that will be a thorn in your financial stability. Having a well-allocated rainy day fund allows you to handle unanticipated financial challenges without incurring additional debt.
Develops the Habit of Saving
Once you start saving for a rainy day fund, you will have to make regular contributions to ensure proper growth. This will help you develop a habit of saving without even being aware of it. If you have trouble saving money, you should try building a rainy day or emergency fund.
Final Words: Strengthen Your Financial Health With a Rainy Day Fund
Building a rainy day fund is the first step towards strengthening and maintaining your financial stability. If any mid-sized unexpected expenses arise, you can easily handle them with money from your rainy day funds. This helps you avoid high-interest debts like credit cards or loans.
Saving particularly for rainy day expenses and separating them from your emergency fund also provides additional benefits. You will be less likely to use those funds for purposes other than what they are meant for. While it is impossible to be prepared for everything life throws at you, knowing you have a financial safety net to fall back on can help you ride those waves to the shore.
Remember it is never too late to start saving and a little savings is always better than no savings. Take the first step today and start building your financial safety net.
Frequently Asked Questions(FAQs)
Ans. While both serve the same purpose, a rainy fund is smaller than an emergency fund and is often used for small unexpected expenses. There is no fixed amount but experts suggest having at least $500 to $2500 to ensure you have enough money to cover expenses like car repairs, emergency room visits, and replacing old appliances without disrupting your budget.
Ans. There are many financial instruments that can be used to put your rainy day fund. A savings account is one of the best options as it allows easy access to your funds while earning decent interest over time. If you are worried about financial loss, you can also opt for an FDIC-insured high-yield savings account that offers higher interest rates and also covers losses due to bank failure up to $250,000. Some other popular options include-
Money market accounts
Certificate of Deposits
Ans. You can easily start building your rainy day fund by following these steps-
Assess your financial situation: Evaluate your income and expenses and determine how much you need.
Set a Financial Goal: Determine a set amount that you need to save. You can do this by pricing out appliance repairs and using that amount as your goal.
Start saving: Regularly contribute a certain sum of money to your rainy day fund to slowly build it.
Manage and Maintain: Once you have achieved your saving goal, you must also manage and maintain it. It is also important to replenish those funds after using them for unexpected expenses.