A rainy day fund consists of a small amount of money in a savings account separate from your checking that you do not have easy access to. Saving for this fund starts with small, regularly scheduled contributions that build up over time.
It’s the money that you hope you’ll never need: the “rainy-day” fund. That’s because if you have to reach for it, something expensive happened unexpectedly.
While you can’t stave off every unexpected expense, you can take some of the financial sting out of the unknown by salting away a little extra money. A rainy-day fund is “for unexpected and unanticipated” expenses. It’s not for personal wants or desires for which you didn’t save. Like a new car, wardrobe, vacations or dinners out.
A rainy-day fund is also different from an emergency fund. While your rainy-day fund may pay for things like unplanned repairs, medical deductibles, or unexpected medical or dental bills, the emergency fund is what keeps you afloat for a few months if you lose your job or can’t work. Your rainy-day fund will typically be $1,000 to $5,000, while an emergency fund is more likely $10,000 to $15,000.
If you’re living close to the bone, paycheck to paycheck, you will likely build your rainy-day fund before you build your emergency fund. A rainy-day fund is a more “digestible goal. If you can build a rainy-day fund, it will motivate you to go the next step and build an emergency fund.
Select your savings vehicle
No-fee savings account: Shop your local credit union, along with a few local banks. What you want: An account with no fees whatsoever. Since you’re saving small amounts — and trying to recapture “lost” money — fees are the last thing you need.
Be honest with yourself
Want to find the “extra” money in your life? All you need to do is have an honest conversation with yourself. Is there something you could do differently, or do without? The answer almost always comes back yes.
Lay off the credit cards. Your goal is to save out of your income, but not to go into debt to do it. Do a semiannual review of bills and see where you can cut back. Then be very deliberate with that amount of found money. Bump up your savings by that amount so that you’re actually saving it.
Bank any extra income
Getting a raise? It’ll have a lot more muscle if you concentrate it into your rainy-day fund. It’s a common technique for retirement savings, but you can also use it to beef up your rainy-day fund. Any time you get a raise at work, you put that extra into your savings account.
Finished paying off a loan for a car, furniture or some other item? Keep paying that same amount — this time into your rainy-day fund. You’re already used to living without that cash.
Ditto for that tax refund. If you’re already getting a refund check, deposit it into your rainy-day fund. If you typically get a refund, adjust your W-4 form, and immediately arrange direct deposit to bank any extra money you’ll be receiving.
The best part: You’re building a rainy-day fund, and you haven’t changed your take-home pay at all.
Keep separate accounts
You need the rainy-day stash to be liquid, but you don’t want to make it easy to raid, either. If this is truly going to be your rainy-day fund, keep it at a separate institution than your checking account. This is the strategy my husband and I use. The temptation to spend more than I have in my account is minimized
If you create some separation between your spending account and your savings account, it’s less likely that you’ll dip into it for something other than an unexpected expense.
If you’ve built up a rainy-day fund, and are ready to establish a financial capability fund, keep those in separate accounts, at least in the beginning. I know it sounds cumbersome to have two accounts, but this is a mind game that you’re playing with yourself. Once you have about $10,000 in your financial capability fund, you can meld the two.
Want to maximize your success? Put those savings on autopilot by setting up direct deposit via an automatic transfer from your checking account or straight from your paycheck. You can read about creating an automated saving plan here.
Stash your spare change
You know that spare change that gathers in your wallet or purse? Empty it out and save it. You’ll be amazed how it adds up. Another way to amp it up: Gather up every dollar or every $5 bill (pick 1) that you have left at the end of the day. That goes into your rainy-day fund.
Do you have a rainy-day fund? I do and I’ve had to use funds out of it too. It really comes in handy!