What is a rainy day fund, how does it differ from an emergency fund? Do you need a rainy day fund? How do you go about starting one? All these questions and more will be covered off below!
THE DIFFERENCE BETWEEN A RAINY DAY FUND AND AND EMERGENCY FUND
There can be confusion between rainy day funds and emergency funds.
Proponents of emergency funds advise you to save enough money to cover you for between 3-6 months of expenses should the need arise through such things as losing your job, a serious medical diagnosis, natural disaster. That money, by nature of it being for emergencies, needs to sit in a regular savings account.
RAINY DAY FUND
A rainy day fund is money you set aside to cover unexpected expenses that might occur throughout the year. Replacing white goods that have stopped working, car repairs, house repairs.
DEBT IS THE BIGGEST FINANCIAL EMERGENCY
I am not a fan of emergency funds, I think it’s better to focus on being debt-free and then investing your money wisely to grow it. This is how you find your way to true financial freedom. You can read my post on why you should think twice about having an emergency fund to find out more about why I think this and my tips for alternative ways to handle big life financial emergencies.
But I do believe in having a rainy day fund of around $1000 that you can use to cover off unexpected costs. You would also do well to read this brilliant post by Mr Money Mustache of why debt is the biggest emergency.
THE BENEFITS OF A RAINY DAY FUND
Having a rainy day fund will help you avoid going into debt by mounting unexpected costs in a year. We all know there’s a good chance there will be costs we haven’t planned for each year, so it makes sense to add those costs into your financial planning for the year.
HOW MUCH SHOULD YOU HAVE IN A RAINY DAY FUND
Take a look back at the kind of extra expenses you’ve had over the last couple of years, think about the things that could arise:
- How old are all your white goods?
- What state of repair is your house in?
- What’s the age of your car?
- Are there any life milestones coming up for your kids?
- Do you have pets who aren’t insured?
Once you’ve built up a financial picture, you can decide how much you need to have set aside to cover you for the year.
I aim to always have around $1000 in our family’s rainy day fund, which allows for several withdrawals each year.
HOW TO BUILD YOUR FUND
You might be able to simply set some money aside for your fund. But the best way to build your fund is to divide the total by 12 months and then plan to set aside that amount each month.
TOP-UP YOUR FUND
My aim is to always keep our rainy day fund at the $1000 mark. So whenever we make a withdrawal from it I work out a way to add money back into it until we’ve hit $1000.
I sell some of the stuff we no longer want, I tend to use eBay for non-tech stuff like toys, clothes and household stuff. I’ve got a post on how to make the most money from selling your stuff on eBay.
Look at ways you can cut back on other costs and better manage your money to allow you to create your fund. It’s amazing how easy it can be to save money if you know how. Read some of my money management posts for ideas:
- How to manage your money better
- How to stop shopping
- Bad money habits to break and fix
- 5 Personal finance tips
WHERE TO SAVE YOUR FUND
You will need easy access to your fund, so the best place to save the money is in an easy access everyday saver account. You are never going to earn big sums of interest on easy access saver accounts. But I’d suggest shopping around to get the best interest rate you can to mitigate against losing money due to inflation.
I really hope you’ve found this post useful and manage to get to grips with setting up your own rainy day fund.