Rainy day fund: Definition, purpose, how much to save, where to keep it

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What is a rainy day fund?

A rainy day fund is money that’s set aside for unexpected and lower-cost expenses, like home maintenance or parking tickets.

A rainy day fund is slightly different from an emergency fund. The main differences are the size of the fund and what they’re used for. A rainy day fund is for smaller unanticipated expenses, such as buying new tires or paying to repair a home appliance. An emergency fund is reserved for unexpected events or major life changes, such as a job loss or divorce, that can have severe consequences on your finances. It’s smart to have both a rainy day fund and an emergency fund.

Expenses your rainy day fund should cover

Use your rainy day fund to cover small issues — like needing to buy new tires for your car or fixing your furnace — that could force you to open your wallet on a less-than-perfect day. Other examples include:

  • Medical procedure
  • Doctor or vet visit
  • Replacing a broken windshield
  • Fixing a broken appliance
  • Vehicle maintenance

Where to keep your rainy day fund

Keep your-rainy day fund in an account that’s easily accessible, such as a high-yield savings account. Find an FDIC-insured account that allows for quick and fee-free withdrawals. This way, you’ll earn some interest on your money but will be able to access it at a moment’s notice.

How much money to put in your rainy day fund

The recommended amount to keep in a rainy day fund is $500-$2,000. However, it will vary based on your individual circumstances. And remember: This account does not need to be as big as your emergency fund.

Rainy day fund Emergency fund
Recommended savings $500-$2,000 3-6 months’ living expenses
What it covers Small, unexpected expenses Large, unexpected expenses or major life changes
Where to keep it High-yield savings account High-yield savings account

To figure out how much to put in your rainy day fund, do an assessment of what might go wrong in your life and how much it will cost to fix it.

Michael Kelly, CFA, CFP, equity analyst and financial advisor at Massachusetts-based investment firm Beck Bode, offers this guidance.

“For example, if you own a house, there is a lot more that you will need to replace if broken or worn down (such as) appliances, a boiler, an A/C unit or a driveway, whereas renting this is covered. Additionally, it depends on the amount of insurance coverage you currently have. Having high deductibles on your car insurance, for instance, means you would need cash to cover that deductible and would require more on the rainy day fund.”

When forecasting for rainy days, consider the rest of your family, too. If you have children, a rainy day fund may help pick up the bill for a doctor’s visit that isn’t totally covered by insurance. It may also be used to cover the cost of a medical procedure for your pet.

What experts say about rainy day funds

Greg McBride, CFA, Bankrate chief financial analyst: “Consistent contributions to savings are essential to being prepared for all life throws at us. Because savings may fluctuate due to one-off, even relatively minor, expenses, it is important to replenish this so you’re adequately saved for unplanned expenses large or small, or even opportunities that present themselves.”

Chloe Moore, CFP®, founder of Financial Staples: “If you’re unsure of what costs could be covered by a rainy day fund, make note of overlooked expenses as they occur. You can also look back at your expenses over the last year to see what costs could fall into this category. Be sure to replenish the funds after you use them so you have cash for the next time.”

Kenneth Chavis IV, CFP, senior wealth manager at LourdMurray: “A rainy day fund is essential for everyone — no matter what life stage you are in or how big your net worth. A rainy day fund, like an umbrella, provides cover for life’s inevitable rainy day. Whether it’s tomorrow or a year from now, a rainy day is bound to come, so it’s best to properly prepare for this with an adequate amount of cash in a highly liquid account.”

Malik S. Lee, CFP, managing principal and founder of Felton & Peel Wealth Management: “I am a big fan of rainy day funds because they add just another layer of protection to your nest egg. Subliminally, most Americans might already have some funds set aside for those rainy days. But in most cases, those funds are sitting in a checking account, earning nothing. By taking advantage of the higher rates inside a high-yield savings account, even your rainy-day fund can see some sunshine!”

Written by
David McMillin
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David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
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