A rainy day fund is an emergency or contingency fund you can turn to for life’s unexpected emergencies, such as car repairs or medical bills. Having such a fund with liquid cash savings can also cushion you if you lose your job and help you pay for daily expenses until you find a new one.
Importance of a rainy day fund
Financial emergencies such as household repairs, job relocations, school-related costs, or money to retain a reputable lawyer when faced with a legal emergency can pop up unexpectedly. Your rainy day fund will not only minimize the financial strain, but also lessen the emotional impact to you and your family during the emergency.
Ultimately, having an emergency fund will give you the independence to make wise decisions and give you peace of mind.
Where to save your rainy day fund money
The funds in an emergency account must be kept separate from the money you need for daily expenses. You can save your rainy day fund money in:
- Short-term no–penalty CDs: A Certificate of Deposit account that can earn you high returns on your savings and doesn’t charge you penalties if you need to take the funds out before the account’s maturity date.
- High-yield savings account: Here, you can add to your savings by earning interest even as you save for unexpected expenses.
- Money market account: An account where you can benefit from higher interest rates and have the freedom to use a debit card and write checks.
How to create a rainy day fund
Now that you know where you can save your emergency funds, here are tips on how to create a rainy day fund for life’s unexpected expenses.
1. Open a savings account
Start by opening a savings account at a credit union or bank that you can access at a brick-and-mortar location near you or online. Don’t save your emergency funds in an account that’s difficult to maintain. For instance, it should not require you to pay exorbitant fees. Choose savings institutions backed up by reputable entities such as the National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation (FDIC). These regulatory bodies ensure that the money in your savings account is safeguarded in case of financial difficulties of the institution.
2. Set up automatic cash transfers
Setting up automatic transfers from a checking account where you receive your salary and other income will make it easier for you to put away money for your rainy day fund account.This will ensure you remember to save money each month and prevent you from keeping money in your primary account, which is easy to spend.
3. Have an estimate
Financial experts advise savers to put away 3 to 6 months’ worth of rainy-day money in an emergency account to cover unexpected expenses. You can determine how much money to save in your emergency savings account by writing up a list of all the expenses you incur each month, such as money for your children’s care, rent, groceries, utilities, and debt.
Add these expenses and multiply the figure you get by 3 or 6 to determine how much money you should save to create a substantial emergency fund.
4. Start small
You may be eager to save a lot of money from the start, but saving a small amount is better because you will be able to do it consistently. Start by saving a small amount, such as $200 a month, and build up as your saving muscles get bigger. If you get an unexpected windfall, such as monetary gifts, dividends from your shares, tax refunds, or unexpected inheritance, consider saving some of it in your rainy day fund. It will come in handy during emergencies.
5. Create extra income
Once you start saving for your rainy day fund, you may realize that your savings are growing slower than you would like, especially if you rely on a single source of income.
If possible, diversify your income by exploring other avenues of making money, such as starting a side hustle, selling merchandise on the weekends, or getting an extra job. You can also use cash-back apps to earn money from regular purchases such as fuel and groceries and save this money in your rainy-day fund.
6. Minimize your expenses
Go over your budget and cut out unnecessary expenses such as costly subscriptions, nights out dining, cell phone plans, and grocery purchases. This will leave you with more money to allocate to your rainy-day fund. If you have difficulty cutting down on your expenses, use an online budgeting tool to track your expenditures.
7. Increase your average propensity to save (APS)
Your average propensity to save (APS) is the amount of your income you can set aside for future needs. The higher your APS, the more money you can save for a rainy day.
Here’s how to increase your average propensity to save:
- Pay yourself first: Set aside money for your regular expenses before you send money to your rainy-day fund. This will prevent you from taking money out of your emergency funds account, ensuring it grows.
- Consolidate your debt: Reducing your debt will leave you with more money for savings. Therefore, negotiate a manageable payment plan with creditors to simplify your debt-paying process.
- Get inspiration: Follow people who are successfully maintaining emergency funds. These are individuals who share their experiences in personal finance blogs and online forums where savers share money-making strategies.
