We’ve all been there before: The dishwasher breaks down, the family pet needs stitches, or a car tire needs to be replaced. Ironically, these expenses hit us when we least expect them—and that is exactly when a rainy day fund swoops in to save the day.
But what exactly is a rainy day fund and what type of account is best suited for it? In this blog, we’ll investigate the ins and outs of rainy day funds so that you’re well-prepared when lightning strikes.
A rainy day fund is a separate account for money to be used for the express purpose of paying for those smaller, unexpected expenses that life often throws our way. For many people, a surprise expense that’s even only a few hundred dollars can send their budget into a tailspin. But a rainy day fund can cover those costs immediately to keep your finances in order.
How Much Money Should I Keep in It?
Financial advisors recommend keeping $500-$2,000 in a rainy day fund, but you should figure out the amount that is optimal for your financial circumstances. The best way to determine that is to assess what will likely need a repair or replacement in your world over the next 6-12 months and then estimate the associated costs.
Think of things like the furnace needing new parts or a fallen tree that has to be removed from the yard. Remember to consider family members too. For example, your son might break his orthodontic retainer which will need to be replaced to the tune of $150.
A high-yield savings account is the best option because you can earn “easy” interest money while your funds are parked in it. Consider creating separate accounts or sub-accounts so that you can categorize and keep your money organized. For example, you could have accounts tagged for medical, home maintenance, car repair, etc.
You could also opt for a money market or share certificate account, but keep in mind that these typically have higher minimum initial deposits and/or limited withdrawals per month.
While both funds are meant to cover unexpected expenses, rainy day funds are intended for smaller ones like those listed above. Emergency funds are meant to stem the financial bleeding from major life events like a job loss, divorce, or significant medical expenses.
To that end, emergency funds should have several thousands of dollars in them to cover your living costs for three to six months. Check out the chart below to see the differences between a rainy day fund and an emergency fund.
RAINY DAY FUND EMERGENCY FUND
|
Recommended savings |
$500-$2,000 |
3-6 months of living expenses |
|
What it covers |
Smaller expenses like: -Routine medical or veterinary bills -Orthodontics -Minor car repairs or maintenance -Home appliance repair or replacement -Electronics or technological devices repair or replacement |
Larger expenses such as: -Sudden unemployment -Unanticipated medical expenses -Divorce costs. -Significant car or home repairs -Unexpected travel |
|
What type of account |
High-yield savings |
High-yield savings |
In theory, you could use rainy day funds for a surprise birthday trip or a new deck for your house—but try not to do that. After all, the purpose of a rainy day fund is to protect you from those unexpected expenses that can wreak havoc on your financial health. So let the fund grow steadily and tap into it only when you really need to.
At Foothill Credit Union, the financial well-being of our members is our utmost priority. Since we don’t want a surprise expense to rattle your financial stability, we offer a high-yield savings account that is perfectly designed to act as a rainy day fund and keep you covered.
To provide our members with a convenient and rewarding way to be ready for life’s emergencies, this account has incredible features such as:
Contact us today to start securely saving now for the unexpected financial rainy day that’s bound to come your way!
