Rain or shine, sometimes things just go awry. Maybe your decades old computer has finally stopped working, or rattling noise in your car has turned out to be a $500 repair. The cost of these problems may be sudden, but they’re not completely out of the blue. Rainy day funds exist to cover these types of expected expenses that aren’t included in your normal monthly budget.
Rainy day funds are separate from emergency funds in a couple different ways. An emergency fund typically contains 3 – 6 months of living expenses for large, unexpected financial events, like job loss or major medical procedures. Rainy day funds, on the other hand, range from only $500 – $5,000, depending on the size of your family. They’re designed to act as a financial buffer to keep you from spiraling into debt over a one-off expense, like vet bills, trips to the dentist, or home repairs. Rainy day funds allow you to pay in cash, rather than putting the expense on a credit card. This saves you from potentially incurring interest fees or having to take out a loan. They also work to keep your emergency funds intact, so you’re prepared for an actual emergency when one arises.
To begin your own rainy day fund, start by taking small $10-$20 pieces from your monthly paycheck and setting them aside in an easily accessible account. Or, if you’re interested in growing your rainy day funds faster, try placing tax refunds, inheritance, or other lump-sum bonuses into the account. When it comes to choosing an account, a good option might be a high-yield savings account. High-yield savings accounts are “liquid” — that is, the money is easily accessible, and you can transfer your rainy day funds to checking whenever you need to use the funds. They also offer higher interest than traditional accounts, so your funds will grow naturally on their own. Other types of accounts, like certificates of deposit (CD), may offer higher interest rates, but the funds cannot be withdrawn without penalty for a set amount of time — from a few months to several years. It’s best to avoid placing your rainy day funds in stocks, since the value can fluctuate and the money won’t be readily available. It’s important that your rainy day funds are as stable as possible. Another thing you may want to consider for your rainy day funds account is whether or not it offers debit cards, online transfers, or checks. The key to a rainy day fund is its accessibility, so choose an account that works best for you. You will also want to double-check withdrawal limits and fees, which could result in additional costs. Since the rainy day funds are relatively small in comparison to your emergency funds, every little fee counts.
Rainy day funds keep you from worrying about minor expenses, so that you can focus on your larger financial goals.
Once you meet your goal for your rainy day funds, you can safely leave it alone until the funds are needed. Since the goal of rainy funds is being a financial buffer, you don’t need to keep funneling money into the account. Instead, put the excess funds towards your emergency funds or pay off debt. Rainy day funds are your “break glass in case of fire” money, while the actual fire extinguisher is your emergency funds. You want to invest your resources in a good fire extinguisher, rather than a pane of glass.
If you need to dip into your rainy day funds, it’s important to replenish the money as soon as possible. You may need to hold off on non-essential purchases, like fast food or subscription services, until you have built your rainy day funds back up. While it may be annoying, you never know when another rainy day will strike.
