For most people saving money may seem like a low priority. Our brains are usually too tuned in to the instant gratification of spending, (uhm…me. This is me. I have this problem and it’s a lifelong struggle) but a big way to maintain financial security while battling the urge to spend is having a rainy day fund.
Wait a minute, I need an emergency fund and a rainy day fund? WTF. I thought I just needed an emergency fund.
That’s right, I said and. You shouldn’t just be sticking your savings away into one giant account…or worse, leaving it in your checking (as I've learned throughout my twenties.) So that's why today I'm going to do a deep dive into what a rainy day fund is, how to use it, and how you can leverage the power of multiple savings accounts to live your financial best life.
Differences Between an Emergency Fund and a Rainy Day Fund
Wait, aren’t an emergency fund and a rainy day fund basically the same thing?
Nope. Not at all.
But you do need both because having both a rainy day and an emergency fund can help you weather the storms of life. While it might be scary to think about having to build up both of these funds, doing so will help ease the stress of getting through the unexpected.
This entire post aims to explain the difference between the two, why you need both, where to keep em', and how to build each of these savings accounts.
Rainy Day Fund – The TL: DR
Your rainy day fund is for smaller things. Rainy day fund is known by many names: f*ck off fund, as a regular ol' savings account, money under the mattress (seriously, don't do this) etc. but really these are fancy names for the true purpose of what a rainy day fund should do.
A “rainy day fund” is really just another name for short term savings.
Here are a few examples of when a rainy day fund could come in handy:
- Maybe it’s a fun-filled weekend of “treat yo self” spending.
- …or a higher-than-average utility bill that leaves you scrambling to make up the difference.
- Saving up for something in the near future like a vacation or a new couch for your place.
- When your car breaks down.
- An unexpected pet visit, a sudden trip to the ER.
And while it can be used for fun things, really a rainy day fund is what is going to help you get through your next paycheck, should something unexpected happen. Thus, your rainy day fund is liquid and needs to be somewhere easy to access.
Emergency Fund – The TL:DR
First, What Is An Emergency Fund?
Maybe it's best if I start by listing all the things your emergency fund isn't:
- An emergency fund isn't the small cash “buffer” you have in your checking account so you don't overdraft.
- An emergency fund isn't the separate account you have with money in it for your first home, your badass next vacation, or your bi-monthly contact lens order. (….just me?)
- An emergency fund isn't the amount of credit you have on your credit card.
So that leaves us with what an emergency fund is – a separate savings account where you have enough money stashed away for true emergencies – car repair, loss of your job or income, and sickness. It's meant to be long term savings…meaning you don't touch it for a long time.
An emergency fund is for when you need a lot of money. An emergency fund should be around six to nine months of expenses as this is what will help you get through a layoff or a sudden illness.
Since your emergency fund is for long-term problems, you’ll want to put it somewhere it earns interest. And yes, it can take a long time to fully fund an emergency fund, and you may not touch it for years and years.
More on the Rainy Day Fund
How much money should you have in a rainy day fund?
It depends on the goal. If you need $3,000 for your next vacation, then that’s how much you should keep plus $1000. If you’re looking to have a little fun money saved away for a shopping spree or to cover an unexpected vet bill for your doggo, I like to recommend at least $1,000 (although it can be less if your expenses are low.)
$1k can help keep you on track in the event of (most) emergencies.
Having a small rainy day fund set aside can give you peace of mind while you funnel the majority of your cash to debt payoff. If you really work at it and be patient with yourself, it's pretty easy to get to $1,000 either by cutting back, finding money in your budget, or picking up a side hustle.
See also – how I saved up $1,000 in 45 days using apps.
Where should I keep my rainy day fund?
Here are a few ideas on where to keep your rainy day fund:
- High yield savings account separate from your checking account.
- You can link it as the overdraft bank account for your primary spending account, but if you are over drafting every month, obviously you have a larger spending problem and need to rethink your budget
- A money-saving app that automatically saves on your behalf (here are my favorites)
How do I save for a rainy day fund?
Rainy day funds are one of my favorite tools because they are typically filled by small goals you can hit fairly quickly if you are motivated. You can save the old fashioned way by paying yourself first, even a small amount like $25 automatically paid into the separate savings account each month.
You can use cash windfalls, like birthday money or a work bonus. Or you can save here and there in small chunks. Here’s my tutorial on how I saved up $1,000 in 45 days just using the money I wasn’t expecting to receive.
- 12 money earning apps
- How to find money when you need it
- Ways to hustle your next $100 – $1,000
- How to make money by selling things you don’t need
A rainy day fund can be anything; a cushion to help fill in the gaps in your budget or a place to save up for larger expenses. That being said you shouldn’t be relying on your money cushion to get you through every month. (If you are, it may be time to re-evaluate your budget!)
More on Emergency Funds
How much money should you have in an emergency fund?
Experts recommend 6-9 months of expenses (i.e. what it would cost you to just keep the lights on and the fridge stocked in the event you were to lose your job and have to cut back to the bare bones.)
Do you know how much you spend each month on basic expenses? P.S. – The 50-30-20 budget is a great place to start when determining amounts to save!
If you don't, go and check your monthly budget or app (which you should have. If you don't, see this post for how to build an awesome budget and dig around to find out what your “bottom line” is.)
So whatever that number is, for example, if you're all in rent, utilities, car payment, groceries at $1,000…your goal emergency fund would be $6-9,000.
Or more, again, depending on your expenses. Folks with kids and mortgages will likely need to save a lot more. Either way, it's a lot of money. I know.
But it's important because you just never know. And this is now more important than ever in light of the COVID-19 pandemic of 2020.
Why is having an emergency fund important?
Did you know…
- 61% of Americans live paycheck to paycheck. 1 in 5 of those makes over $100,000 each year. (That's bananas!!)
- 51% of Americans have less than one month’s worth of expenses saved up.
- 38% feel ill-prepared to deal with even a minor emergency (those costing ~$500 or less.)
And if you're reading this site it means you want to get right with your money and be above average. You don't want to live paycheck-to-paycheck or not be able to cover a minor emergency, like spraining your ankle during your kickball league tournament or needing to put a stitch in your puppy's paw.
It can be very difficult for millennials, who are starting careers and contending with student loans to get to a point where they can have that amount of cash just lying around, but an emergency fund (that you…ahem, don’t touch) is the KEY to breaking the paycheck-to-paycheck cycle.
Also, my favorite thing about emergency funds is that it’s a financial goal that once you hit your target, it’s done.
How often can you say that about your finances?
How do I save up an emergency fund?
You’ll need more money and more patience when saving up a true 6-9 month emergency fund. It's very hard to save up thousands of dollars in a matter of months or even within one calendar year.
- Similar to how you approach a rainy day fund, figure out an amount you're comfortable putting into long term savings and then pay yourself first each month.
- If you do receive a windfall like a work bonus, split it in half. Put half in savings and spend the other half on what you'd like.
- It’s okay to start saving small – in fact, one of my favorite ways to start building your money cushion is to hack your budget.
- I would put all other financial goals on hold while building up an emergency fund…meaning all money (except anything devoted to getting a 401k match at work), so any extra cash goes into the EF and you can meet your goals faster.
Once your emergency savings are “fully funded” you can move on to other financial goals.
..And also sleep better at night knowing you're covered.
Emergency Fund vs. Rainy Day Fund – Why You Need Both
Listen, life happens. Sometimes it happens in small inconveniences like a sprained ankle, a flat tire, or a cavity that needs a filling.
And then sometimes it takes you to the major league of suck and makes it difficult for you to earn as expected.
Unemployment rates got as high as 16% in some states during the summer of 2020.
That’s higher than the rates during the Great Depression.
Add to that, many people are being furloughed, or working reduced hours. Add to that, 78% of the country is living paycheck to paycheck. That means they’re not prepared to take on sudden emergencies that would be tackled by funds like these.
With the pandemic of 2020 and social unrest, there’s no telling what might happen next. You want to be prepared, no matter what comes your way.
Building both an emergency fund and a rainy day fund is a great way to build solid support for anything that can come your way. It builds up the fortress of protection around your life so that unexpected expenses don’t completely break you. (Or your spirit, or your will to live.)
Having both of these funds also means you won’t have to rely on credit cards or other loans to get through the month. Your credit score will be better, and you won’t be paying an arm and a leg to dissolve your debt.
Planning For Your Emergency Fund and Rainy Day Fund
Before you can plan how you’ll contribute to your emergency and rainy day fund, you need to know how much money to put in both of these funds.
In a rainy day fund, you’ll want between $1,000 to $2,500. That’s for smaller things that come up suddenly.
For your emergency fund, you’ll want to have saved at least three months of expenses. Once we hit three, then we can work up to nine. This money is NOT TO BE TOUCHED unless you lose your job or get sick. Or maybe your roof caves in and you don't have a home maintenance fund.
But you get my point, don't touch it just because you want to start traveling (you know, whenever we're able to do that again.)
- If you don’t know what your monthly expenses are, you’ll need to take a look at your spending for the last 3 months and average them out.
- Sometimes trying to figure all of this out yourself can be frustrating. You can use this Emergency Fund Calculator to figure it out for you.
- You’ll also want to plan how much you’ll be able to contribute. You might have to cut down on expenses or get a side hustle so you have extra to add.
On top of that, you’ll want to figure out how quickly you want to build up your funds.
If you don't have either, It’s a good idea to build up your rainy-day fund first and as soon as possible.
Your emergency fund is going to take time to build up, so don’t push yourself beyond what you can manage.
As much as you might want to build up your funds quickly, you need to be reasonable with yourself. If you can only spare $100 a month towards your funds, let that be okay. Any amount contributed is better than nothing.
Best Ways to Build Both Funds
When you start building your rainy day and emergency funds, you’ll want to start small. Consider adding $20 a week to each fund. Once you get the hang of it, you can slowly increase your contribution until it’s where you want it to be.
Anytime you get extra money, consider putting it in these funds. Whether it’s extra birthday money, a tax return, or a bonus from work. These are all great opportunities to build up a cushion with these funds.
The great thing about these funds is that once you build them up, you don’t have to add to them anymore.
Once you have your rainy-day fund built up, you can then add everything extra into your emergency fund until it is where you need it.
When and How Often to Contribute
You’ll want to contribute to both of your funds at least once a month. Most experts recommend automating your contributions so that you don’t have to worry about remembering it.
Create an automated monthly contribution. Then take any extra money you get and put it in there as well.
But What If I'm in Debt? Shouldn't I Pay That Off First?
My short answer: build up your emergency fund, first. If you can’t do 6-9 months, try getting to three months and then tackle the debt. I used to say just having $1,000 rainy day fund saved while paying off debt was fine, but after the pandemic, I no longer believe this.
Debt is super expensive, especially if you have a lot of it. The fact that it costs you so much money is why many recommend paying off debt as fast as you can, even to the detriment of your savings. The reason I argue for an emergency fund first, even before massive debt payoff, is because life is so unpredictable.
For example, say you just finished paying off thousands of dollars in credit card debt – but then your car breaks down or you lose your job unexpectedly as soon as you made that last payment. The joy you felt at being debt-free would be fleeting without your emergency and/or rainy fund.
The TL:DR: The only way to get off the hamster wheel of debt-payoff-debt is to have an e-fund.
Additional Ways to Save Up an Emergency Fund
There are a lot of ways to beef up your savings, but below I'm going to cover the basics…aka the low hanging fruit that anyone can go do both quickly and easily.
There are the obvious six things to cut from your budget (nights out, shopping alcohol, etc.) when paying off debt or saving up an emergency fund. But if you don't want to cut the “fun stuff” from your budget just yet, consider auditing your bills for monthly savings.
The trick is, once you find the savings – i.e. shaving $80 off your cell phone bill each month – to then automate the amount saved into your savings account so you can fully realize the boost to your emergency fund.
Go for a raise at work
Increasing your income doesn't always mean you need to go out and get a side hustle (although it doesn't hurt!) Often, the biggest boosts to our income come from raises at a full-time job. It's important to time the ask right, and do your homework to prepare, but if successful, make sure to (Again) automate the difference between your old salary and the new to help out your savings.
More low hanging fruit? Take a walk around your home/apartment and corral all the items you no longer use: electronics, clothes, home goods. If they are gently used and in good condition, you can sell these items for additional cash to boost your savings. One girlfriend made $1500 selling old iphones on Ebay, and I recently made $845 selling gently used designer clothes out of my closet.
Get a side gig
Building a side hustle business is hard work, and maybe more time and effort than you'd like to put in. But a side gig you can work straight from your smartphone? Easy-peasy. Here are just a handful of easy side gigs you can do (click here to read the full post):
- Petsitting with Rover
- Rideshare driver with Uber or Lyft
- Delivering groceries with Instacart
- Delivering dinner after work with Postmates or DoorDash
- Becoming a “Tasker” for Taskrabbit and doing small side gigs on the weekends
How We Handle Emergency Funds and Rainy Day Funds in Our Family
We have three separate savings accounts for our family, and then we each have a savings account/fuck off fund of our own.
- We have an investment account for our emergency fund. We keep the money in low-risk investments like bonds just so the money is keeping up with inflation year after year.
- We keep a sizeable cushion in our checking account that acts as our “rainy day fund” for unexpected, necessary expenses.
- We have a separate savings account where we put anything over the minimum we keep in our checking. This is for items we want like home upgrades and travel. It's also where we go when we have a big-ticket emergency item, like this summer when we had to have our HVAC repaired to the tune of $10k. Ouch.
Now, when we spend the “rainy day amount” in our checking, this amount gets filled back up first before we contribute to our “wish list” savings. It means we save less each month, some months not even at all, but it keeps us from moving money back and forth between accounts every time we need something.
And because our EF is fully funded, we don't contribute to this anymore.
This is different than how I handled my money back when it was just me. I bucketed everything and automated all of my savings. It took me a while to come around to my husbands approach, but I have to admit it is easier.
The (Final) TL: DR
- You should have at least two savings accounts – one for long term saving and one for short term.
- An emergency fund is a separate saving account for the unexpected financial twists and turns; your emergency fund should have around 6-9 months of expenses – that means rent, utilities, and groceries. We're talking job loss, health problems, loss of home and/or auto. Once you save it, don’t touch unless you absolutely have to. You’ll never know when disaster can strike.
- A rainy day fund is used for short term savings like larger expenses you’re planning to make and want to fund in full. Can also cover smaller, unexpected bills. Is not meant to be a replacement for an emergency fund.
- Money cushion – We didn't talk a lot about this, but you should also have a small cash buffer in your primary checking account to keep you out of overdraft, especially if you like to automate bill pay or only look at your checking account occasionally.
There is also an amazing psychological component to emergency funds; they're incredibly empowering.
How would it feel to know that you could weather a storm or two (or five?)
When an actual emergency happens, it's nice to not have to worry about the financial side of things because you're likely dealing with the emotional.