Rainy Day Funds: Why You Need One

From basic savings accounts with your bank to 401k’s, saving money can take a wide range of forms. Saving is a common component for anyone dealing with finances. It can lead to you buying a car or house or affording a lush vacation. A rainy day fund isn’t as exciting as those prospects, but it is an important saving strategy for when trouble strikes, for example, the Covid-19 pandemic. So, what’s a rainy day savings fund, and how do you start one?

Chapter 1

What is a Rainy Day Fund?

Financial mishaps and issues come up all the time, some bigger than others. Rainy day funds are designed for the “smaller” fiscal emergency. According to the Federal Reserve Board, about 44 percent of adults have to borrow money, sell belongings, or otherwise make sacrifices to pay for an emergency cost of $400. That means a sudden home repair or a parking ticket could be enough to throw a wrench into your monthly budget or even force you into debt due to this expenditure.

This is where a rainy day fund comes into play. This rainy day fund balance ensures that you have the money that you need for sudden spending or living expenses.

Chapter 2

Rainy Day Fund vs. Emergency Fund

It’s easy for people to group rainy day funds and emergency savings together, and it’s true that they share general similarities. They are both designed for expenses that can show up in your everyday life, but it’s important to treat the two savings differently because they do have their specific applications. The main differences between the two are their size and scope.

Rainy day funds are for smaller, occasional expenses, while emergency funds are for larger expenses that can truly upend your life.

Rainy Day FundEmergency Fund
Smaller unpredictable expenses that don’t cause finances to spiral out of controlLarger unexpected expenses that can have a significant impact on your finances
Home maintenance, routine medical expenses, car repairs, etc.Job loss, divorce, medical emergencies that prevent you from working
Most experts recommend having $1,000 for a rainy dayMost experts recommend saving about 3-6 months of average monthly living expenses in case of a fiscal emergency

You should ideally have both a rainy day fund and an emergency fund.

Both funds can be placed in separate savings accounts. Some experts suggest putting your emergency savings in an account that will gain interest, like a money market fund or certificate of deposit. While this isn’t a terrible idea, just keep in mind that money kept in an investment account typically takes a few days to access, which could be a problem if you’re in an emergency and need money at a moment’s notice. You generally want both rainy day and emergency funds to be as liquid as possible, ensuring easy and immediate access when you need it.

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Chapter 3

Why a Rainy Day Fund is Important

As rainy day funds can be such a relatively small expense (at least compared to other forms of savings), it can be tempting to not bother with them at all and dip into your main checking account when an expense does arise. Why is a rainy day fund important in the first place?

Financial Stability

As mentioned, even small expenses are enough to throw your monthly budget out of sync. At worst, a sudden expense can have you taking out more loans, which can lead to further financial issues. Keeping a separate rainy day fund keeps you financially stable. Your main checking account is left completely intact, so you don’t have to worry about your regular, everyday budget.

Peace of Mind

As much as you pay attention to your money and finances, it is easy for any expense to sneak up on you. That feeling can leave you perpetually anxious about every little thing. Having a rainy day fund just brings peace of mind. Whenever a sudden expense or unexpected bill comes up, you won’t have to worry about not having enough money or reaching a negative balance in your checking account. It’s just easier going to bed knowing that, even if something does come up, you are fully prepared to deal with it without going bankrupt.

Avoiding Debt

Without a rainy day savings fund, you may have to charge it to your credit card or take out a personal loan. Both usually involve high-interest rates, which means you’ll essentially be paying more for that unexpected expense than you initially anticipated. That could eventually lead to lower credit scores, which can have a larger impact on future spending.

Chapter 4

How Much Should You Have in a Rainy Day Fund?

The exact amount of money in a rainy day fund will vary from person to person based on a whole host of factors, from the monthly budget to job type to family status. For the average adult, most experts recommend $1,000 as a good goal. While you can obviously build off of that even more, $1,000 is usually enough to cover a car repair or minor health expense.

The recommended amount for a rainy day fund is $1,000.

To truly get a handle on your rainy day fund, start by considering any potential future expenses. Make a list of expenses that will likely come up in the coming years. That could include home repairs, car maintenance, veterinary bills, and your kids’ orthodontics. Your rainy day fund would ideally equate to at least the highest you might expect to pay for any single unexpected bill. Car repairs will range in price, but common repairs will typically cost about $400 to $700. It’s also a good idea to gradually increase your rainy day financial goal in case you get two rainy day expenses that happen close together.

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Where to Keep Your Rainy Day Fund

With your rainy day fund in hand, you need a safe and secure place to put that revenue. As mentioned, you want the money to be as liquid as possible. That means putting it somewhere that is easy to access at a moment’s notice, but adding some interest along the way doesn’t hurt.

Savings Account
A savings account is probably the easiest option for most people. They offer better interest rates than any checking account, and they are FDIC insured. They are also relatively easy to open, especially if you already have a checking account with the bank branch. 

Money Markets
Money markets are also a common place to put your rainy day fund. Money markets are essentially a type of short-term debt investment. They offer much higher interest rates than even savings accounts. However, money market accounts typically have minimum balance requirements, and they may limit the number of withdrawals you can perform each month.

Where to Avoid Storing Your Rainy Day Fund

Checking Accounts
You generally want to avoid just keeping your rainy day fund in a separate checking account. Most don’t offer any interest, and while checking accounts are easy to access, they might be a little too easy to access. It can be tempting to spend that cash.

Certificate of Deposit
Avoid keeping your rainy day fund in a certificate of deposit (CD). While they do offer good interest rates, CDs can be highly inaccessible. Withdrawn money can take a few days to process, and many CDs charge penalties when you make withdrawals prior to the end of the term. That can be a lot of trouble for a fairly small amount of money reserved for rainy days.

Chapter 5

Tips for Starting a Rainy Day Fund

Set up a direct deposit or money transfer

One of the easiest ways to get started with your rainy day fund is to make some small deposits or transfers from your paycheck every month to this reserve fund. Just $50 per month gets you to $600 by the end of the year. Factoring in interest and any cash gifts or other windfalls, it can be easy to build up a small rainy day fund fairly quickly.

Download a saving app

The digital market offers an expansive range of saving and budgeting apps that allow you to easily save and transfer money between bank accounts. Many of these apps work by building out your budget and calculating what you’re safe to save in a given month, which can take a lot of the math and pressure off your shoulders.

Set up multiple savings accounts

Go that extra step by setting up multiple savings accounts for different categories. For instance, you could have one account for potential medical expenses, one for automotive costs, and one for home repairs. Get into the habit of putting a little money into each bucket. This ensures that you are truly prepared for multiple rainy day emergencies. Mentally, creating these categories will prevent you from paying for computer repairs using your medical funds.

Avoid a single savings account

Most people operate their savings account as a sort of secondary checking account. They throw money into it and then take money out of it when their checking balance gets low. This sort of passive saving becomes purposeless, and you may find yourself without sufficient funds when you do run into an emergency.

Rainy day funds can seem extraneous, but you’ll thank yourself later for having this budget stabilization fund. If you need some extra help with a sudden expense, Possible Finance offers alternative payday loans that are easy to access and afford, giving you extra flexibility for when you do experience a rainy day.


Chang Fu

Chang is an avid writer, among other things. He grew up loving reading and writing, creating his own poems and even a book he's now hidden in an old closet, unpublished. His financial experience at a large bank along with his passion for technology to help underserved communities inspired him to write for Possible.

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