Start Growing Your Rainy-Day Fund

First Republic Bank
February 8, 2022

  • A rainy day fund is a fixed amount of money set aside in case of unexpected expenditures, heightened living expenses, economic downturns and more.
  • Rainy day funds are different than emergency funds, which typically contain more money.
  • You can grow a rainy day fund in a high-yield savings account or money market account.

According to a 2021 report from the Board of Governors of the Federal Reserve System, only 55% of Americans say they have rainy day money saved. Unforeseen bills, economic downturns, situations that require extra expenditures, heightened living expenses and cash shortfalls can pop up at any time and leave you in a pinch if you're not prepared. This is why it’s important to have a rainy day fund set up.

Throughout life, it’s always prudent to expect the unexpected. Understanding the rainy day fund meaning, knowing how much money to put in your fund and knowing how to effectively save money can put you on the road to long-term financial health and wellness. 

What is a rainy day fund?

A rainy day fund is an amount of money set aside for costs that fall outside of normal living expenditures. The fund functions similarly to an emergency fund — savings on hand in case an unexpected situation arises in which you need quick access to money — but a rainy day fund generally contains less money than an emergency fund.

Knowing the differences between rainy day funds and emergency funds will help you determine which account to prioritize saving for.

Rainy day funds vs. emergency funds

While both rainy day funds and emergency funds are cash reserves that are important parts of financial wellness, rainy day funds typically contain less money than emergency funds. As opposed to a rainy day fund, emergency funds typically contain more money. Consider these additional differences:

  Rainy Day Fund Emergency Fund
Recommended Savings $500-$2,000 Three to six months' worth of living expenses
What It Covers Unexpected bills or costs, small one-time expenses Large, unexpected expense or financial strain during major like changes
Where to Keep It High-yield savings account or money market account High-yield savings account, money market account, certificates of deposit (CDs)

You can view your rainy day fund as a baseline for your emergency fund.

Small financial shocks, such as paying for a car or a home repair, are bound to happen. Emergency funds are useful for larger shocks, sometimes life events, including job loss or major medical expenses, that can’t be covered by a rainy day fund alone. 

Regardless of which fund you choose to focus on, saving money for unexpected expenses will reduce stress and allow you to avoid over-relying on credit cards.

How much money should be in a rainy day fund?

A rainy day fund will vary person to person, depending on your unique circumstances. Consider your income and lifestyle, how large your household is and how many months of savings you’d like to ideally have. Although a rainy day fund is intended to cover the unexpected, you can consider some types of emergencies that could be in your future: 

  • Do you have pets? Pet emergencies can be unexpected and expensive.
  • What’s the condition of your car? Larger repairs can be unexpected and expensive.
  • What’s the age of the major appliances in your home? Replacing major appliances, HVAC systems, etc., can be unexpected and expensive.
  • Are there athletes in your family? Emergency care for broken bones, root canals, etc., sustained during sports activities can be unexpected and expensive.

Evaluate your household costs to create an ideal rainy day fund for your living situation, and at a baseline, your fund should contain a balance amount of at least $500 to $2,000. 

What a rainy day fund should cover

A rainy day fund should typically cover smaller one-time expenses: essentially anything related to a small- to mid-level purchase. These expenditures could include new car brakes, a health care bill for an MRI or a new refrigerator for your home. 

Having a sense of how much money you’d like to have for a rainy day fund can help you begin saving right away. You’ll want to keep a few tips in mind while doing so.

Tips for growing your rainy day fund

The most efficient way to build your long-term financial security — think of goals like buying a home, retirement, college for your future children, etc. — is to take the short-term view of paying yourself first. Likewise, automatically funding your rainy day savings before your other expenses will help you adjust daily and monthly spending habits.

Smart ways to optimize your savings include:

  • Setting up automatic paycheck withholdings to transfer a portion of your paycheck into a separate account 
  • Setting up a regular monthly or a quarterly transfer from your checking account
  • Mentally earmarking any extra funds you’re expecting (a bonus payout, inheritance, the sale of a major asset) to help you reach your financial goals

After paying yourself first, you may find you don’t notice the difference in income, but your savings and nest egg will be steadily growing all the while. This all means you’ll be saving for the long run, and reaping the rewards as a result. Now that you know how to save, you should start to think about which kind of account is best to save for a rainy day.

Where to put a rainy day fund

Since the goal of a rainy day fund is rapid access to your money in an emergency, it's critical to place your funds in a bank account where you can pull the money immediately for the expenses you have to quickly cover.

Putting your funds into a separate high-yield savings account, such as Money Market Savings, can be a helpful way to grow your rainy day savings. You’ll still have easy access to your money, as you’re able to make a same-day withdrawal while continuing to earn interest. (It's important to note, however, that you may be limited to six transactions, including deposits and withdrawals, per month.)

Your account will also be insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account, per ownership category.

Knowing that your money is accessible and secure can give you peace of mind and reduce stress in an already stressful emergency.

Making a rainy day fund work for you

Saving money for a rainy day fund fosters better saving and spending habits while establishing a financial cushion for whatever life throws at you.

Having savings goals can aid in financial well-being. Working with a professional can help you find the best way to allocate funds in your individual situation, so you can ensure you’re covered when the unexpected happens.

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