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So, you’ve painstakingly mapped out a budget that makes you feel confident. Then something crops up that doesn’t fit into any of your careful projections. Now what? This is where your rainy day fund comes into play.
What is a rainy day fund?
A rainy day fund is a fund kicks in for small, one-time expenses that you haven’t already accounted for.
Surprise expenditures might be a burden, like replacing your water heater after the bottom drops out overnight...ugh. They might also be happy surprises, like a friend announcing their destination wedding in Bali. (Yes please!)
Rainy day funds can cover these short-term, unexpected costs without disrupting your everyday budget.
Rainy day fund vs. emergency fund
A rainy day fund is about saving for small unforeseen expenses that aren’t related to financial disaster. They are almost like the first level or the foundation of your emergency fund.
An emergency fund kicks in when you lose your job, a family member has a medical crisis, or some other huge financial drain comes into your life.
Rainy day savings are smaller, whereas your emergency funds need to support 3 to 6 months of living expenses for you and your family.
A rainy day fund is almost optimistic—you’re stockpiling money now to take care of an opportunity (or challenge) in the future. An emergency fund is a worst-case-scenario prep that you hope you’ll never need to tap into.
Regardless, having a supply of cash to draw from without racking up debt will position you to tackle unexpected expenses with a sense of calm and control.
But what about sinking funds? Think of sinking funds as a much larger scale rainy day fund for bigger expenses.
Fun fact: Did you know that U.S. states have their own rainy day funds? Yup, they sure do. And if they do, then so should you!
How much should you save in your rainy day fund?
Saving money is more important than ever in today's world and having a rainy day fund is a great way to get started. Plus, having savings in place can help to alleviate stress related to financial issues.
Generally, you should aim to save $500 to $2,500 in rainy day savings, depending on your lifestyle and how prepared you want to feel.
How to start a rainy day fund
Setting aside cash for rainy day savings is fairly simple and definitely worth it. Here are 5 simple steps to get started:
1. Open a dedicated rainy day savings account
A great way to start is to set the intention of saving, even if you can't fund it yet. By opening a specific rainy day fund, you’ll have a reminder of how well-prepared you are, or where you need to continue to siphon spare cash. Most online accounts are free to open, so you don't need to worry about having an initial deposit.
2. Build your rainy day savings plans into your budget
Take a look at your monthly budget to see where you can draw from. The money has to come from somewhere, so you’ll have to cut back on an existing budget line to feed this new rainy day fund. Then, decide how quickly you’d like to build up this fund.
If you think your kid is going to have a $2,000 band camp four months from now, where can you pull from to save $500 each month between now and then?
Is your best friend pregnant with her first baby? Are you responsible for throwing her an epic baby shower, including the most expensive item on her registry? Start planning right away for where that money will come from.
3. Start with what you have, no matter how small
Decide how prepared you want to be. If a few hundred dollars is enough to cover your bases when something unexpected comes into your life, set that as your goal.
If you know an appliance in your home is on its last leg, aim to build up those savings bigger and faster because your “rainy day” might come soon and will likely be expensive.
Regardless, every dollar does add up. For every dollar you set aside for your rainy day savings, you’ll be that much more relieved when your unexpected expense gets invoiced.
4. Focus on building the habit and consistency of savings
Saving money is a lot less painful the more you get used to it. Imagine this: you eat in one Friday per month instead of going to your favorite restaurant with the best appetizers. Instead, you set that $30 aside in your rainy day fund. By the end of the year, you’ll already have $360 in savings after barely any effort.
Then, when your car’s fan belt suddenly breaks, you’ll get it repaired and be totally at ease. And because you’re in the habit of saving, you’ll constantly be refilling your rainy day fund, even after you use some of it up.
The habit of consistency saving matters a lot more than the amount you’re able to save, especially when you’re just starting out. It’s all about consciously setting aside a little over time so that you aren’t scrambling when something you couldn’t have predicted comes up. A helpful way to stay consistent is to automate your savings.
5. Ramp up on saving more when your financial situation improves
Once you have a habit of saving money regularly, make sure you take stock of your situation periodically.
When you earn a raise or you land a better-paying job, how much more can you allocate to your rainy day fund?
With a big life change on the horizon, like starting a business or planning a move, determine how that will affect your budget and your rainy day needs.
If your hours get cut back at work or your freelance pipeline dries up, evaluate if your immediate needs are taken care of and whether you need to cut back on rainy day savings for the time being.
There is no correct amount to save—it all depends on how you want to protect and improve your financial position as your life and income ebb and flow.
Your rainy day expense umbrella
Don’t get caught in life’s financial “rainstorms.” Your rainy day fund is the umbrella that will cover you from the stress and worry that comes from being caught short on cash.
Prepare yourself so that when a golden opportunity arises, you can take it without blinking an eye, or when a sudden expense throws off your budget, you can take it in stride. Start saving now for relief when that surprise comes your way.