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.
Savings account #1 – The Rainy Day Fund
What is a rainy day fund?
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- it should serve as your 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.
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
The TL: DR – 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!)
Savings Account #2 – The Emergency Fund
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.
Money to get you through those tough times.
And trust, there are gonna be tough times. And I'd rather you have the money than hit the skids and wish you'd been saving all along.
What is the recommended amount for an emergency fund?
So, 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.
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 laying 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 saving money?
How do I save up an emergency fund?
You’ll need more money and more patience when saving up a true emergency fund. It's very hard to save up thousands of dollars in months or even one 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.
Here are a few other things to know about saving an emergency fund:
- 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.
- Setting new savings goals can also be a great reason to finally start your side hustle so you can earn more and reach your goals faster. Here's how to save your next $100, $1000, or $5000 dollars.
- 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.
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.
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.
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.