Rainy day fund – why you need one

What is the rainy day fund?

This is the money you set aside to pay for small expenses that are the result of unforeseen circumstances.

We say small expenses when we think of fixing a broken appliance or a doctor’s appointment.

It’s certainly an excellent way to have peace of mind in times of emergency, while at the same time avoiding getting into unnecessary debt.

Read on to find out more about this strategy, including how to set up your fund in a simple way.

Do you need a rainy day fund?

According to Kenneth Chavis IV, CFP, senior wealth advisor at Versant Capital Management, a rainy day fund is essential for everyone.

Chavis says that no matter the size of your assets or the stage of life you’re in, the fund remains essential.

The consultant invites us to think of the rain itself, which is natural.

We know it’s going to rain at some point, so we prepare for it with an umbrella.

The rainy day fund serves exactly as an umbrella because it provides cover for life’s inevitable rainy days.

It may take a day or a year, but we can be sure that a difficult day will come, and we should prepare for it.

Differences between an emergency fund

Some people believe that both represent the same thing: a fund to deal with unforeseen events.

In fact, the rainy day fund is similar to an emergency fund, but its function is to pay for minor expenses.

For example, it can be used to buy a new phone if your current one is stolen, or for car repairs.

As well as paying vet bills if your dog needs medical attention or buying a new fridge if you just stop working.

Note that although these are necessary expenses, they are not as expensive or dramatic as the reasons for drawing on the emergency fund.

For example, the emergency fund can be used to support your family in a time of crisis or unemployment.

The amount in the rainy day fund would not be able to cover such expenses.

Among the benefits, you should know that saving money for small unexpected expenses is peace of mind for the future.

The moment your expenses increase, it won’t affect your stress levels.

In fact, you’ll be able to relax because you know you’re prepared.

Another positive point would be the change in mentality.

Bearing in mind that creating your rainy day fund will bring you greater financial security will stop you making rash financial decisions.

Instead of spending your money on things you don’t need, you’d prefer to save it.

What is a good rainy day fund?

A good rainy day fund is one that has enough money to cover small unexpected expenses.

So note that the right amount changes from person to person because it depends on different factors.

These factors include how many people you are responsible for, what your living expenses are and what your short, medium- and long-term goals are.

Generally, the amount is between US$500 and US$2000.

Always remember that this fund is not meant to cover major expenses.

So you don’t need to save as much as you would for an emergency fund.

How do I make a rainy day fund?

The first step is to incorporate it into your monthly budget.

The money needs to come from somewhere.

And if you don’t have any money left over each month, you need to cut some spending.

Next, think about speed.

If you want to build up a fund of US$1,000 in just 4 months, you need to save US$250.

If you prefer, you can also save every week, saving US$62.5 over 16 weeks.

It’s interesting that you divide the amount into weeks or months because this makes the goal easier to achieve.

And as mentioned above, you should incorporate it into your budget, making the rainy day fund a priority.

Treat it like a bill that can’t even be delayed so that you can save all the money you need.

Other tips

Secondly, think about possible future expenses.

Certainly, no one has the power to predict the future.

But it is extremely useful to analyze your life to try to understand what will need your attention and your money in the future.

For example, if your washing machine isn’t working properly, this indicates that you will probably have to repair it or buy another one in the future.

Stop ignoring this kind of thing because then you can anticipate possible expenses.

Is this sense, you’re have enough money to deal with the situation.

Finally, consider increasing or decreasing the fund according to your financial situation.

The moment you get a raise or a better job, don’t forget to think about how much more you can allocate to the fund.

At the same time, you may want to reduce the amount you put into the fund each week or month if:

Your working hours are reduced or your freelance workflow ends,

Should I invest my rainy day fund?

Absolutely! Investing is a 100% better alternative than letting money sit idle in your account.

Therefore, an excellent alternative would be a high-yield savings account.

This type of account is FDIC-insured.

That means you’ll get federal coverage while earning interest on your money at a much higher rate than typical deposit accounts offer. 

Another plus is that, with this type of account, you can make free and fast withdrawals (although there is a monthly limit).

Also, if you already have a high-yield account, you don’t need to open another one.

You can set up separate savings “pockets” or funds in a single account.

So it’s easy to distinguish between your emergency fund, rainy day fund, vacation fund and so on.

On the other hand, you can also invest in an interest-bearing money market account with a bank or credit union.

It can also be known as an MMDA and the added benefit is that you can issue checks.

However, be aware that much money market accounts have high minimum deposit requirements.

When choosing between the two accounts, remember that high-yield savings accounts are FDIC-insured, while money market funds are not. 

But money market funds are considered very low-risk investments and have higher interest rates than high-yield savings accounts.

That’s why you just need to analyze the characteristics of each account.

And then, you can choose the best one for your needs when investing in your rainy day fund.

Daniel 29 de April de 2024