What Is It and How Much Do You Need to Save

Unexpected expenses like parking tickets, minor home repairs, or a small financial hiccup can happen anytime and derail your budget if you haven’t planned for unforeseen issues. But a rainy day fund can help you deal with life’s mishaps without dipping into savings.

Keep Reading: 7 Reasons You Should Consider a Financial Advisor — Even If You’re Not Wealthy

What’s a Rainy Day Fund?

A rainy day fund is “usually thought of as readily available cash savings to cover relatively minor unexpected expenses that come up in day-to-day living – without having to rush for the credit card,” consumer finance expert Kyle Enright, president of Achieve Lending, explained. “These expenses might include things like a repair on a needed appliance, a vehicle repair, or a trip to the doctor or urgent care not covered by insurance.”

It’s called a rainy day fund because while “we all love bright, sunny days, one inevitable thing is that some days, it can and will rain. When it does, you feel good having an umbrella in the car,” Adam Nash, CEO and Co-Founder of Daffy and personal finance lecturer at Stanford University, told us.

Is a Rainy Day Fund the Same as an Emergency Fund?

A rainy day fund differs from an emergency fund, which is “meant for unfortunate life events that last longer than one day, usually more like months. Think of job loss, a chronic medical condition, the loss of your breadwinner, etc,” Jenny Groberg, CEO of BookSmarts Accounting and Bookkeeping, told us.

Since an emergency fund is meant for larger-scale financial setbacks, Dan Kroytor, the founder of TailoredPay, said, “Three to nine months of expenses, depending on your discretionary income and situation.” He explained, “If you ever have a sudden mouse infestation and your things are ruined, and you must move out immediately, an emergency fund could help you get situated in a new space with some basic necessities without having to take on a loan or go into other debt.”

How Big Should Your Rainy Day Fund Be?

Determining how much to save for your rainy day fund depends on several factors. “The size of your fund can be influenced by factors such as your income stability, monthly expenses, and the likelihood of unexpected costs,” Mike Roberts, mortgage broker, loan originator, and co-founder of City Creek Mortgage, told us. For instance, if you own a home or car, you might need a larger fund to cover potential repairs.”

So, how much should you set aside for a rainy day fund? “Anywhere from a few hundred to a few thousand dollars,” Adam Nash, CEO and Co-Founder of Daffy and personal finance lecturer at Stanford University, told us.

Real-Life Examples of Rainy Day Fund Usage

A rainy day fund can come in handy when you least expect it, which was the case for Ruth King, Profit & Wealth Guru, Founder and CEO of FinanciallyFit.business and her family. When her daughter started her first job as a teen, she encouraged her to set aside 1% to 2% of her paycheck into a savings account.

“She didn’t like it, but she did it,” King told us. “When she was in college, she had an unexpected minor truck accident (too small for the deductible). “She had the money to fix her truck. She told me she now understood why I “made her” put the money away and was glad she had it. Now, she is 35 years old and still does it.”

Strategies for Building a Rainy Day Fund

When planning your rainy day fund, there are many ways to approach saving, but Groberg advised, “Budgeting it in as an expense or a need in your budget is how you will be successful.”

Here’s a few other key strategies Enright suggested to help create a rainy day savings:

• Use a good budgeting app. There are many easy-to-use, free ones are available, like Achieve MoLO, or a spreadsheet, or paper and pencil.

• Commit to a plan. Decide what you can do based on your budget, knowing that it’s about being consistent. You may start by transferring just $10 to a savings account every week. If you were to do this, you’d have more than $500 in a year.

• Make it automatic. Most financial institutions allow you to set up automatic transfers from a checking account to a savings account.

• If you have a one-time financial gain (e.g., tax refund, commission check, proceeds from a garage sale) coming, put it toward the fund.

• Get creative with generating extra income. Get organized and sell unneeded items online or hold a yard sale. Devote all proceeds to the fund.”

Common Mistakes to Avoid

Having a rainy day fund can help keep your finances on track, but experts recommend avoiding common mistakes.

“One mistake I see is people going into the rainy day fund too often. It shouldn’t be an everyday type of vehicle,” Eric Mangold, CWS Founder of Argosy Wealth Management, explained.

“Another common mistake is not replenishing the rainy day fund after you use it. You should have at least three to six months’ worth of expenses in the rainy day fund. If it dips below that, work to get it back to that level again,” he stated.

Tips for Maintaining Fund Adequacy

Between the high cost of living and trying to have a little fun in life, maintaining a rainy day fund may not be a priority, but it’s important to put money aside every month to cover unexpected situations. Here are a few tips on maintaining the fund.

• “Be clear on when to use the money in your fund,” Enright said. “Have enough to cover the inevitable unexpected short-term expense without incurring credit card debt. If you need to dip into the fund, use the same techniques to build the fund to replenish it.”

• “If you notice you can’t keep your rainy day fund it to its max very frequently, I would address your budget as a whole,” Groberg stated. “Your expenses are likely too high, so where can you cut back?”

• “After the unfortunate event that caused you to dip into your rainy day fund, go back to the building phase and categorize this buildup as necessary,” Groberg advised. “Pay yourself first. Cut back unnecessary expenses to make it happen.”

Have Multiple Savings Accounts

Having different savings accounts can help keep your spending and savings on point.

“There is a lot of value in separating your day-to-day spending accounts from savings for financial goals, and in many cases, having a separate savings account for different goals can also be helpful,” Nash said. “If you are single, having separate accounts for your day-to-day spending (checking) and high-yield savings accounts for your savings and emergency fund can be very helpful,” he added.

According to Groberg, “Your basic savings accounts will include your rainy day fund, emergency fund, and a tax savings account (especially if you are self-employed). She added, “You should also have separate accounts or sub-accounts for any big items you save for, like a new car, couch, flooring, or whatever it might be.  Each of those goals can be separated into a different savings account.”

How to Categorize Your Savings

There are many ways to categorize your rainy day fund, and Mangold recommended how to organize the savings account.

“The first bucket could be the emergency fund, which would have three to six months of expenses saved,” he said. “This is to help should you lose your job or have a major unexpected expense like you didn’t know you needed a new roof until you found a leak, and $20k later, you have less in your emergency fund.

However, Mangold said, “You could also use your rainy day fund to save for things like family vacations, new furniture, or the home remodel. The foundation of the rainy day fund should be the emergency expenses, and then on top of that could be the funds for the other goals.”

He added, “For the other goals, I would ensure that you haven’t reduced your retirement savings but perhaps reduced other monthly discretionary expenses to help build them up.” Mangold suggested, “One way to think about that is to have a monthly savings goal towards those extra goals. If you have that monthly goal, then maybe you don’t make that daily trip to Starbucks or do the extra dinner out, knowing you are aiming for the bigger goal of a family vacation.”

FAQ

Unexpected expenses like parking tickets, minor home repairs, or a small financial hiccup can happen anytime and derail your budget if you haven’t planned for unforeseen issues. But a rainy day fund can help deal with life’s mishaps without dipping into savings.

• Why is it called a rainy day fund?

  • It’s called a rainy day fund because while “we all love bright, sunny days, one inevitable thing is that some days, it can and will rain. When it does, you feel good having an umbrella in the car,” Adam Nash, CEO and Co-Founder of Daffy and personal finance lecturer at Stanford University, told us.

• How many months expenses should your rainy day fund be?

  • So, how much should you set aside for a rainy day fund? “Anywhere from a few hundred to a few thousand dollars,” Nash said.

• How many types of savings accounts should I have?

  • Having different savings accounts can help keep your spending and savings on point.“There is a lot of value in separating your day-to-day spending accounts from savings for financial goals, and in many cases, having a separate savings account for different goals can also be helpful,” Nash said. “If you are single, having separate accounts for your day-to-day spending (checking) and high-yield savings accounts for your savings and emergency fund can be very helpful,” he added.

  • According to Groberg, “Your basic savings accounts will include your rainy day fund, emergency fund, and a tax savings account (especially if you are self-employed). She added, “You should also have separate accounts or sub-accounts for any big items you save for, like a new car, couch, flooring, or whatever it might be.  Each of those goals can be separated into a different savings account.”

• How should I categorize my savings?

  • There are many ways to categorize your rainy day fund, and Mangold recommended how to organize the savings account. “The first bucket could be the emergency fund, which would have three to six months of expenses saved,” he said. “This is to help should you lose your job or have a major unexpected expense like you didn’t know you needed a new roof until you found a leak, and $20k later, you have less in your emergency fund.

  • However, Mangold said, “You could also use your rainy day fund to save for things like family vacations, new furniture, or the home remodel. The foundation of the rainy day fund should be the emergency expenses, and then on top of that could be the funds for the other goals.”

  • He added, “For the other goals, I would ensure that you haven’t reduced your retirement savings but perhaps reduced other monthly discretionary expenses to help build them up.” Mangold suggested, “One way to think about that is to have a monthly savings goal towards those extra goals. If you have that monthly goal, then maybe you don’t make that daily trip to Starbucks or do the extra dinner out, knowing you are aiming for the bigger goal of a family vacation.”

This article originally appeared on GOBankingRates.com: Rainy Day Fund: What Is It and How Much Do You Need to Save