When It Rains, It Pours: Why Rainy Day Funds Make Sense
Having money set aside for unexpected expenses may make it easier to weather storms that come your way.
We all have those little back-of-our-mind money worries. “I hope the A/C makes it through the summer.” “What if my new teen driver scrapes up the car?” “How old is the water heater?”
While many of life’s expenses can be planned for, sometimes, they take us by surprise. (We’re looking at you, dogs who eat couch cushions.)
Rainy day funds are designed to help you deal with these unexpected expenses without dipping into other savings or taking on extra debt.
Let’s dig into how they work and why they’re a good idea.
Rainy day funds are different from emergency funds – they’re meant to help you cover smaller unexpected expenses.
The amount of money you need in a rainy day fund depends on your finances and life situation.
Keeping your rainy day fund in a high-yield savings account keeps it accessible and helps it grow.
Saving for a Shower vs. a Flood: Rainy Day vs Emergency Funds
A lot of financial advice recommends building up an emergency fund with three to six months of living expenses. A rainy day fund is different from an emergency fund, but it’s important to have both.
An emergency fund is for a major unexpected life event. You’re laid off from your job. You need to take an unpaid leave of absence. A health issue results in large medical bills.
A rainy day fund is for smaller, unexpected expenses. The fridge quits working. Your car needs new tires. The cat needs surgery.
To build on our weather analogy, a rainy day fund is for when you have a little leak in the corner of a room. An emergency fund is for when the ceiling falls down.
Don’t Let a Little Rain Ruin Your Day: Who Needs a Rainy Day Fund?
Like an emergency fund, a rainy day fund is a good idea for everyone, regardless of your net worth. Recent surveys have found that 57% of Americans can’t afford a $1,000 emergency expense.1
Hopefully you wouldn’t feel the pinch of a $1,000 unexpected charge. But most “rainy day” items may be well outside of our comfortable monthly spending limit. And if it “rains” a few times over several months, that adds up.
These situations could leave you relying on credit cards. It’s easy to think of your unused spending limit as an emergency cushion, but this may be a costly mistake if you have to carry the balance. The average credit card rate as of June 2023 is 23.74%!2
So bottom line, if you start saving in a rainy day fund now, you may save yourself from costly credit card debt down the road.
If you’re carefully tracking expenses and working on building your savings, a rainy day fund may help you stress less about life’s uncertainties and stay on-track to achieve your financial wellness goals.
Even if you’re farther along in your financial journey and have conquered some financial goals, a rainy day fund may still lower your stress levels and make it easier to handle unexpected costs.
Preparing for the Storm: How Much Should You Keep in Rainy Day Savings?
Similar to your emergency fund, the right balance for your rainy day fund depends on your personal financial situation and lifestyle. It could range anywhere from $500 to $5,000.
How much do you need? Here are some factors to consider:
Do you own or rent your home? If you’re a homeowner, your rainy day fund should account for regular maintenance needs, like broken appliances or repairs. If your home is older, you may need to set aside more. If you rent, repairs and maintenance likely won’t be on your rainy day list.
Do you have pets? Even an annual trip to the vet may result in a higher-than-expected bill. (Is it time for teeth cleaning again this year?) As pets age, you may need to spend more on their care.
Do you have kids? Children are full of (expensive) surprises, from extra trips to the doctor’s office for your toddler’s ear infections, to your middle schooler who decided to join the band — and needs an instrument.
What are your insurance deductibles? If you have a medical need, car accident, major home damage, or a loss at your rental, your insurance usually kicks in, but only after you pay your deductible — which could be $1,000 or more depending on your policy. If the cost is less than your deductible, you’ll need to pay for it out of your pocket.
What surprise expenses came up last year? A great way to gauge how much you might need in a rainy day fund is to look back at the expenses that snuck up on you over the last year. You may be surprised how much you spent on little fixes around the house, car repairs, or unexpected out-of-town travel for a family emergency.
What keeps you up at night? Think through a few of the smaller what-if expenses that worry you most, then research what it would cost to deal with them. What’s the average cost to maintain a car with as much mileage as yours? What would a new dishwasher (or stove, or washing machine) set you back?
Taking the time to consider these factors and their associated costs could help you determine how much to keep in your rainy day fund. Imagine the peace of mind you could have knowing you’ve got money set aside to handle those expenses if they come up.
Keep Your Umbrella in Reach: Where to Keep Your Rainy Day Fund
Think of your rainy day fund as the umbrella you hang by your front door — not the one you have to dig in the back of the closet for.
In other words, you want this money to be easily accessible and safe. Keeping your rainy day fund in a high-yield savings account that’s FDIC- or NCUA-insured means it’s in easy reach and also protected up to specified limits.
Choosing a high-yield account with higher than average rates also helps your savings grow when you’re not using it. (Pro tip: Do the same with your emergency savings so they grow as well.)
To help you avoid dipping into these funds, consider putting rainy day funds in a specified account, or, if your bank offers it, create a rainy day sub-account within your overall savings. This may make you less tempted to spend it on a sunny day.
Whether it’s a sprinkle or a brief downpour, financial rainy days may dampen your mood, but they don’t have to leave you struggling to keep your head above water.
A rainy day fund may help you be more prepared for the unexpected, may reduce your need to take on extra debt, and also may help you hang onto the primary savings you’ve been working hard to grow.