Rainy Day Fund: Meaning And Savings Methods

Are you familiar with the saying, “Save your money for a rainy day”? In personal finance, this adage refers to the process of saving money for relatively small, unforeseen expenses or spontaneous purchases. Given the “rainy day” expression, where would you store this money besides a “rainy day” fund?

Let’s explore the more in-depth meaning of a rainy day fund, along with its purpose. Then, we’ll consider a few strategies designed to help you build up your rainy day savings.

What Is A Rainy Day Fund?

A rainy day fund is a type of savings account that covers unexpected, one-time expenses. These costs are typically lower than your recurring monthly bills and unaccounted for in your monthly budget. Expenses you probably won’t cover with a rainy day fund include your mortgage payment, car insurance bill and household utilities.

Instead, you might use your rainy day fund to pay for minor car repairs (like new windshield wipers) or household items (like an updated toaster oven). You might also pull money from your rainy day fund to treat yourself to a spontaneous purchase like a new sweater or concert tickets. 

The purpose of a rainy day fund is to have money stowed away for occasional, unanticipated purchases you can cover without having to tap into your checking account, regular savings account or emergency fund.

How Much Should You Have In A Rainy Day Fund?

The right amount of money to set aside in a rainy day fund will vary from person to person. It can depend on factors such as your short- and long-term savings goals, your living expenses and the number of people you’re financially responsible for. All considerations taken into account, the total in your rainy day fund may range from $500 to more than $2,000.

Keep in mind that a rainy day fund isn’t for emergencies. That’s the role of an emergency fund, which is a savings account better suited for covering costlier expenses like an unforeseen medical procedure or major car repair.

With this in mind, you probably don’t need to save as much in your rainy day fund as an emergency fund. You’ll just want to have enough money in your rainy day fund to cover some last-minute, lower-cost expenses.

Rainy Day Fund Vs. Emergency Fund

Let’s take a closer look at some of the key differences between rainy day funds and emergency funds.

Where To Keep Your Rainy Day Funds

http:Just like with opening any bank account, it’s important to review your options when deciding on  a place to store your rainy day fund. A high-yield savings account may be an ideal choice because it provides the accessibility of a regular savings account – with the added bonus of a higher annual percentage yield (APY).

This means you’ll earn more in interest over the course of a year with a high-yield savings account than you would with a traditional savings account.

Comparing the features of different types of savings accounts – along with the financial institutions where the accounts are offered – is a great way to pick a location for your rainy day fund.

For example, one type of account might have more rigid withdrawal limits than another. And when looking at financial institutions, you might opt for a bank that offers a higher interest rate on a savings account than your local credit union.

How To Save For A Rainy Day Fund

Establishing a rainy day fund is a great way to be prepared for some of the smaller, unexpected costs life throws your way. Are you ready to start saving for a rainy day fund? Let’s examine some techniques intended to boost these savings.

Organize Your Budget

Building up a savings fund can be difficult if you don’t have a handle on your spending. Before you start setting money aside in a rainy day fund, you might want to create or organize your budget. A budget is an effective way to list out all of your monthly bills and expenses so you know exactly how much money you have left over to save.

Certain budgeting strategies can also make it easier to understand the amount of money you’re saving, or want to save, every month. The 50/30/20 budgeting method, for example, states that 20% of your monthly income goes toward savings. So, if you make $4,000 a month, $800 would be divided between your savings accounts – including your rainy day fund.

Cut Out Unnecessary Costs

As you create or revise your budget, take a close look at your spending habits. Can you identify areas where you’re needlessly spending or overspending? Cutting back on expenditures like costly shopping sprees or subscription services you don’t use can help free up some cash for saving.

Automate Your Savings

Most workplaces make it possible for employees to automatically deposit some of their paycheck into one or more savings accounts. Rather than calculating how much money to deposit into your retirement, emergency and rainy day funds every month, the process can be automatic.

Write Down Potential Future Expenses

No one can predict the future, but it can be helpful to have an idea of the types of expenses you’ll potentially cover with your rainy day fund. Maybe your car’s windshield wipers aren’t working properly, or maybe your coffee machine is on its last leg. Make a list of expenses you anticipate maybe spending money on in the near future and add money to your rainy day fund accordingly. 

The Bottom Line

A rainy day fund is a safety net for fairly small, unexpected costs that could come your way. Instead of reaching into your checking account or emergency fund, you can lean on a rainy day fund to provide some cushioning for these unforeseen expenses. The more you’ve saved, the more prepared you’ll be for these chance situations.

Are you looking to stay on top of your spending habits and achieve your savings goals? Download the Rocket Money℠ app and create a customized budget and savings plan today.