The proverbial “rainy day” can be a lot of things: an upcoming medical procedure, replacing a broken windshield, or paying for moving costs. When one of these rainy days shows up, it’s always nice to have enough money saved that you can pay for it without scrambling to find a few extra bucks between the couch cushions. That’s why rainy day funds are some of the most essential savings to build up.
So are emergency funds, though they’re not exactly the same things as rainy day money. Let’s look more closely at the differences between a rainy day fund vs. an emergency fund, examine how much you should save, and dive into some smart strategies to do just that
Rainy day funds explained
Rainy day funds are money you set aside to pay for expenses like quick fixes, last-minute purchases, and sudden bills you didn’t budget for with your monthly accounting.
Things like a surprise doctor’s visit, home maintenance, or having to buy a new computer to replace one that crashes are all expenses that a solid rainy day fund can take care of. You might not know exactly what the money will be used for when you save it, but you'll always have it on hand when you need it.
Not only does a rainy day fund make it easy to pay for life’s unexpected costs, but it also provides you with plenty of peace of mind. When you know you have the money to cover surprise purchases or repair bills, you don't have to stress when one of those financial events crops up.
How big should a rainy day fund be?
If you’re wondering how much should go into a rainy day fund, the amount doesn't have to be massive. In fact, compared to emergency funds, rainy day funds are typically smaller. Rainy day funds are used for unanticipated costs that wouldn’t break the bank by themselves – think buying new tires for your car or paying the insurance deductible for a minor medical treatment.
On average, most people should aim to save between $500 and $5,000 for their rainy day funds. Anything more than that, and you're going more into emergency fund territory or general savings (which are also great to have!).
Comparing a rainy day fund vs. emergency fund
Emergency funds are a little different from rainy day funds, despite the fact that both are savings you build up for later down the line.
True to their name, emergency funds are safety nets of cash you can draw from in the event of an emergency, like:
- A major medical incident for a family member or a serious personal injury
- The loss of your job
- A divorce
- Major car or home repairs
- Unanticipated travel expenses, especially if it requires you to take a lot of time off work
Emergency funds are meant to keep you financially afloat for several weeks or months if necessary. Alternatively, they can cover expenses that are so high that they would decimate your normal checking or savings account if you had to draw from them instead.
For example, imagine that you suddenly lose your job due to unforeseen cutbacks at your company. It might take a few months for you to find a new position elsewhere. If you have an emergency fund saved up, you can buy yourself time to find a great new job – all while keeping your bills paid and your debts current – without having to settle for the first open position you qualify for.
How much to save for an emergency fund
Since emergency funds are meant to pay for pricier things or cover your daily expenses for longer periods of time, it's wise to save up significantly more for yours compared to a rainy day fund.
A good rule of thumb is to save up to three to six months’ worth of your average living expenses for your emergency fund. To do that:
- Take a look at your monthly financial activity. Tally up all your fixed costs, like your mortgage, your car payment, and any loan payments. Then add the average of your variable costs, like your grocery bill, your “fun money,” and costs for eating out.
- Multiply that number by three to six. Choose a multiplication factor depending on how large you want your emergency fund to be.
The bigger your emergency fund, the better. But if saving up six months’ worth of living expenses is a little too tall of an order, don’t sweat it – go for three months instead. Saving anything is excellent, and you can use other financial solutions, like personal loans, to cover anything your emergency fund can’t.
Where to keep rainy day and emergency funds
Ideally, both rainy day funds and emergency funds will never be used. You should keep the cash reserved for these funds in accounts that can benefit you in the long term (especially your emergency fund money, which should hopefully last for years before you need to dip into it).
Therefore, the best places to keep rainy day funds and emergency funds are in high-yield savings accounts. These are easily accessible – enabling you to take money from those accounts quickly without having to fill out a lot of paperwork or wait for lengthy money transfers – and they often come with FDIC insurance coverage.
Most importantly, high-yield savings accounts allow you to earn interest on your savings the longer you keep money in them. When you save hundreds or thousands of dollars, the best thing you can do is put that money to work for you when you aren't using it. Find a high-yield savings account at a bank or credit union you trust, then start saving up!
How to start saving for a rainy day fund and emergency fund
Starting a rainy day fund or emergency fund from scratch can seem difficult, especially if money is already a little tight. However, there are plenty of ways you can contribute slowly but steadily to both of these types of funds and progressively shore up your financial resilience.
Set up automatic contributions
The best way to save funds for anything? Set it and forget it. Set up automatic contributions from your checking account so you kick in a little money to your emergency fund and rainy day fund each month. That way, you don't have to remember to save. It'll happen automatically, and you'll build up reserves of cash sooner than you think.
Cut one unnecessary expense per month
When you initially calculate how much money you need to save for your emergency fund, you'll estimate your average unnecessary purchases each month. If you don't currently have any financial wiggle room to contribute money to a rainy day or emergency fund, pick one fun purchase or unnecessary cost and cut it. Then, put that same amount of money toward both of these funds.
Need an example? If you get coffee at your favorite shop five times per week, consider skipping one day (say, Wednesday) and putting that money in your rainy day and emergency funds. It might only be $10, but it’ll accumulate over time and help you begin saving for the future.
Earn more with a side hustle
Of course, you can also save money for a rainy day or an emergency by earning more money outright. Start a side hustle, sell some things around the house, or find other ways to boost your monthly income, then funnel that new money directly into your savings account.
Plan your way to financial flexibility
No matter how you choose to save, today is a great day to set up a rainy day fund and emergency fund. Get started today to be prepared for any possibility!
