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Unexpected expenses are unavoidable. And while savings levels hit historical highs at the onset of the Covid-19 pandemic, they dropped significantly just two years later, according to the Federal Reserve Bank of St. Louis.
Whether it’s a medical emergency, car repair or a high utility bill, financial surprises are rarely pleasant. But a rainy day fund can lessen the stress of an emergency and help you avoid a financial crisis when they do occur.
What Is a Rainy Day Fund?
A rainy day fund is a dedicated cash reserve set aside to cover unexpected expenses. It acts as a financial buffer that can be used to cover random bills or unanticipated increases in the cost of living so you can avoid financial setbacks. The idea is to have enough money saved to avoid using a credit card or taking out high-interest loans to pay for these financial surprises.
Rainy Day Fund vs. Emergency Fund
Think of a rainy day fund as savings to handle minor inconveniences and unexpected costs. Like the name implies, it’s intended to help you weather the small challenges life throws at you. Be it medical bills, car repairs or broken appliances, a rainy day fund can help make an unpleasant extra cost bearable.
Emergency funds are larger and designed to cover the storms of life—so you’re protected during ongoing financial challenges like job loss. Financial experts recommend saving three to six months’ worth of living expenses. Some even recommend saving up to a year of living expenses.
| | Rainy Day Fund | Emergency Fund |
| | | 3 – 6 months’ of living expenses |
| | Emergency travel Veterinary expenses Car maintenance Doctor’s visit Unplanned school costs Parking tickets | Job loss Ongoing health issues Large home repairs Major life changes |
| | High-yield savings account, money market account | High-yield savings account, money market account, certificate of deposit |
How Much Should I Save in My Rainy Day Fund?
Personal finance experts suggest saving between $500 and $2,500 in a rainy day fund. But the amount of money you’ll want to save depends on your individual circ*mstances. Take stock of your household appliances. If your water heater or furnace are old, consider pricing out an emergency repair and set that amount as your goal.
It’s important to assess your own financial situation and determine the right amount of savings for you and your family. But don’t be daunted by the numbers. Having something in a rainy day fund is always better than nothing.
Begin with an attainable goal, and set aside a little each month until you reach that number. If possible, set up an automatic transfer to ensure you make regular contributions. Once you hit your goal, you can determine if that’s sufficient or if you should keep building your fund.
Why Is a Rainy Day Fund Important?
Extra expenses can easily snowball, with one unexpected bill causing you to fall behind on others. But a rainy day fund can keep life’s little annoyances from becoming crises.
Reduces Financial Stress
Financial stress can wreak havoc on your mental and physical health and negatively impact your work and relationships. Having a financial buffer can provide more stability and peace of mind.
Puts You Back in Control
So much in life is out of your control—flat tires, emergency room visits or climbing grocery costs. Having a financial cushion may provide a sense of empowerment when things feel out of your control. Being prepared for the unexpected provides you with options and allows you to act quickly.
Helps You Avoid Debt
Without a rainy day fund, some people end up turning to high-interest debt, such as credit cards or personal loans, to cover unplanned costs. A well-stocked rainy day fund allows you to handle financial challenges without incurring additional debt.
Where To Keep a Rainy Day Fund
It’s best to keep your rainy day fund in a savings account at a bank or credit union. These accounts offer low risk and allow you to access your funds quickly and as needed.
When choosing a savings account for your rainy day fund, consider a high-yield savings account. While the interest rates vary, an interest-earning account can help your fund grow faster over time. To save money, look for a no-fee savings account.
If you’re worried about losing money, make sure you open the account at an FDIC-insured bank or NCUA-insured credit union. This type of insurance protects your money against bank failure, up to $250,000 per depositor, per institution and per ownership account.
Find The Best High-Yield Savings Accounts Of 2024
FAQs
A rainy day fund is savings that's generally for expected, occasional expenses — events and things that you don't necessarily account for in your monthly budget but that are expected to happen over time. This list can include occasional expenses such as minor car repairs, routine medical expenses and home maintenance.
What is the point of saving for a rainy day? ›
Saving for a rainy day is not just about preparing for emergencies; it is also a stepping stone toward achieving long-term financial goals. Whether it's buying a house, starting a family or planning for retirement, having savings will help you stay on track.
How much should I save for a rainy day fund? ›
How would having a rainy day fund be beneficial for you and your family? ›
Having a rainy day fund with enough money to pay for those uncommon expenses can be a huge relief. It can take financial stress off your plate and protect your family's finances from debt. And remember, even a small amount of savings is better than having no savings at all.
What does we must save money for a rainy day? ›
Saving for a rainy day brings an element of flexibility and freedom to your life. It enables you to pursue new opportunities, take risks, and make major life changes without the constant fear of financial instability.
What is a rainy day fund and why is it important? ›
A rainy day fund is savings that's generally for expected, occasional expenses — events and things that you don't necessarily account for in your monthly budget but that are expected to happen over time. This list can include occasional expenses such as minor car repairs, routine medical expenses and home maintenance.
Should I invest my rainy day fund? ›
Most financial professionals recommend that you avoid investing your emergency fund in stocks because they are fairly volatile. So, if you need to sell your stocks to use the money for an emergency expense, you may be forced to sell at a loss.
What is the rule of rainy day fund? ›
Key Takeaways. A rainy day fund is money set aside to cover minor unexpected expenses, while an emergency fund covers larger, longer-term costs. A rainy day fund typically contains $250-$1000 to cover smaller financial hiccups until your next paycheck.
What is the 50 30 20 rule? ›
The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
How much money should you keep for a rainy day? ›
An emergency fund is money that you've saved for unexpected bills and costs. How much you put aside will depend on your circ*mstances. The recommendation is to have three months' worth of essential outgoings in your account to fall back on. This will give you a financial buffer if you need it.
to save money for a time when it might be needed unexpectedly: Luckily she had saved some money for a rainy day.
What is rainy day important? ›
The rainy season is important for our crops. It also keeps the surrounding flora healthy and thus takes care of the fauna living with it. Without it, our planet will turn barren. Life will not survive as we see around us.
How can I save for rainy days? ›
Making a good budget and sticking to it can be one of the best ways to save for a rainy day. Budgeting is helpful not only to help you reach your financial goals but also to take the stress out of saving money.
What is a good rainy day fund? ›
A rainy-day fund is smaller than an emergency fund and is often used for one-time small, unexpected expenses. A rainy-day fund should generally have $500-$1000 to ensure you have enough cash on hand to cover things such as car repairs, new appliances, etc. without affecting your monthly budget.
What you should keep for a rainy day? ›
How much do I need? Ideally, 6 months' essential expenses – for example, rent or mortgage, utility bills and groceries. If you're just starting out, you could set a smaller target – such as 3 months' essential expenses – to begin with. Any emergency fund is better than nothing, so don't be discouraged.
Why do people say saving for a rainy day? ›
This expression can be traced back to the mid-16th century in Britain. Its first known use is in a play, The Bugbears, first performed in or around 1561: "Wold he haue me kepe nothing against a raynye day?" (would he have me keep nothing for a rainy day?)
How much savings should you have for a rainy day? ›
An emergency fund is money that you've saved for unexpected bills and costs. How much you put aside will depend on your circ*mstances. The recommendation is to have three months' worth of essential outgoings in your account to fall back on. This will give you a financial buffer if you need it.
Why do people say save it for a rainy day? ›
This expression can be traced back to the mid-16th century in Britain. Its first known use is in a play, The Bugbears, first performed in or around 1561: "Wold he haue me kepe nothing against a raynye day?" (would he have me keep nothing for a rainy day?)
Is save it for a rainy day saving money? ›
What is a rainy day fund? Not to be confused with an emergency fund, a rainy day fund is money you have saved for unexpected, arguably minor expenses. Like your other financial goals, a rainy day fund usually accumulates over time as part of your regular budget.
How does a rainy day saver work? ›
The Rainy Day Saver is an instant access account. You can pay in and withdraw money whenever you wish. You can hold only one Rainy Day Saver account at any time. The maximum amount you can have in a Rainy Day Saver account is £10,000,000.
