It’s the money that you hope you’ll never need: the “rainy-day” fund. That’s because if you have to reach for it, something expensive happened. Unexpectedly.
And while you can’t stave off every emergency, you can take some of the financial sting out of the unknown by salting away a little extra money.
Following are 9 strategies for starting a rainy-day fund, keeping it safe and making sure you have enough when you really need it.
The Bankrate Daily
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Understand its purpose
“Defining it early on is extremely important,” says Wayne Bogosian, president of the PFE Group and co-author of “The Complete Idiot’s Guide to 401(k) Plans.”
For unplanned repairs.
For medical deductibles.
For unexpected medical or dental bills.
A rainy-day fund is “for unexpected and unanticipated” expenses, he says.
“It’s not for personal wants or desires for which you didn’t save,” he says. Like a new car, wardrobe, vacations or dinners out.
A rainy-day fund is also different from an emergency fund, says Bogosian. While your rainy-day fund may pay for things like unplanned repairs, medical deductibles, or unexpected medical or dental bills, the emergency fund is what keeps you afloat for a few months if you lose your job or can’t work.
A rainy-day fund will typically be $1,000 to $5,000, while an emergency fund is more likely $10,000 to $15,000, says Bogosian.
“If you’re living close to the bone, paycheck to paycheck, you will likely build your rainy-day fund before you build your emergency fund,” he says.
A rainy-day fund is a more “digestible goal,” Bogosian says. “If you can build a rainy-day fund, it will motivate you to go the next step and build an emergency fund.”
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Select your savings vehicle
You have a menu of vehicles in which to keep rainy-day or emergency funds. Among them:
Roth IRA: “You can always take out what you put in” with no penalty, says Bogosian. When it comes to investing your rainy-day fund, stick to cash investments such as money market funds, he says. “Your investment objective should be safety, not growth.”
No-fee savings account: Shop your local credit union, along with a few local banks, says Bogosian. What you want: An account with no fees whatsoever, he says. Since you’re saving small amounts — and trying to recapture “lost” money — fees are the last thing you need, he says.
Money market mutual fund: Whether you’re using a stand-alone money market mutual fund or one inside a retirement account, opt for a government money market fund over a traditional one, says Bogosian.
The reason: The rules on money market funds change in 2016. Under the new regulations, your investment return could result in a loss within your account, he says, so you could actually end up with less cash than you deposited.
Since “this is your safety money,” opt for a government money market mutual fund since these funds are exempt from the new rules.
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Be honest with yourself
Want to find the “extra” money in your life?
“All you need to do is have an honest conversation with yourself,” says Bogosian. Is there something you could do differently, or do without? “The answer almost always comes back ‘yes,'” he says.
And lay off the credit cards, says Rosa Maymi, project adviser for consumer and work issues with the AARP.
Your goal is to save out of your income, but not to go into debt to do it, Maymi says.
Do a semiannual review of bills “and see where you can cut back,” says Kelley Long, CPA, a personal financial specialist and member of the American Institute of CPAs’ National CPA Financial Literacy Commission.
Then, “be very deliberate with that amount” of found money, she says. “Bump up your savings by that amount,” Long says, so that you’re actually saving it.
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Bank any extra income
Getting a puny raise? It’ll have a lot more muscle if you concentrate it into your rainy-day fund.
It’s a common technique for retirement savings, but you can also use it to beef up your rainy-day fund, says Michelle Dosher, managing editor at the Credit Union National Association.
“Any time you get a raise at work, you put that extra into your savings account,” she says.
Finished paying off a loan for a car, furniture or some other item?
Keep paying that same amount — this time into your rainy-day fund, says Bogosian. You’re already used to living without that cash.
Ditto that tax refund.
Bogosian’s advice: If you’re already getting a refund check, deposit it to your rainy-day fund. And if you typically get a refund, adjust your W-4 form, and immediately arrange direct deposit to bank any extra money you’ll be receiving.
The best part: You’re building a rainy-day fund, and “you haven’t changed your take-home pay at all,” says Bogosian.
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Keep separate accounts
You need the rainy-day stash to be liquid, but you don’t want to make it easy to raid, either.
“If this is truly going to be your rainy-day fund, keep it at a separate institution than your checking account,” Long says, adding that she uses this strategy herself. “The temptation to spend more than I have in my account” is minimized, she says.
“If you create some separation between your spending account and your savings account, it’s less likely that you’ll dip into it for something other than an emergency,” Long says.
If you’ve built up a rainy-day fund, and are ready to establish an emergency fund, keep those in separate accounts, at least in the beginning, says Bogosian.
“It sounds cumbersome to have 2 accounts, but this is a mind game that you’re playing with yourself,” he says. Once you have about $10,000 in your emergency fund, you can meld the 2, Bogosian adds. “There’s no longer any need” to keep them separate.
Want to maximize your success? Put that savings on autopilot by setting up direct deposit via an automatic transfer from your checking account or straight from your paycheck.
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Stash your spare ‘change’
You know that spare change that gathers in your wallet or purse? Empty it out and save it, says Dosher.
It’s a trick she and her family use, and “you’ll be amazed how it adds up,” she says.
Another way to amp it up: Gather up every dollar or every $5 bill (pick 1) that you have left at the end of the day. That goes into your rainy-day fund.
She and her family used this strategy to fund part of their annual vacation, she says. “And you can certainly do that to start building up an emergency fund. After a year, or even 6 months, it can be a nice chunk of money.”
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Kick those vices
Whether you’re a smoker, drinker or overeater, these vices are costing you more than just your good health. They’re also costing you money.
For example, a pack of cigarettes costs an average of $5.51 in the U.S., according to the American Lung Association. If you smoke 5 or 6 cigarettes a day, that’s roughly 2 packs a week — adding up to about $570 a year that you could put into your rainy-day fund.
“You can quit a bad habit and save money, too,” says Eric Tyson, author of “Personal Finance for Dummies.”
Whatever your vice, do the math and see just how much you could free up. And that’s not even counting the money you’ll save on medical bills.
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Write it down
Got a goal for your savings, or a monthly budget in your head?
When you write it down, “you know what you have,” says Maymi. “And having something written down helps you stick to it more.”
Jonathan Fox, director of the Iowa State University Financial Counseling Clinic, agrees.
“Most people who aren’t working toward some kind of a savings goal don’t have a savings goal,” says Fox.
Looking to create a true emergency fund of a few months’ worth of salary?
A goal that large “can be daunting,” says Long.
One strategy is to try “thinking of the amounts you need in terms of expenses,” and use an ongoing series of smaller goals, she says. For example, plot to save 3 months’ worth of power bills, then 3 months’ worth of car payments, then 3 months’ worth of insurance bills, etc.
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Resell what you don’t use
Chances are you have a few things around your house that you wish you hadn’t bought or that you never use.
“If you haven’t used it in 1 to 3 years, you probably won’t,” says Bogosian. “Just sell it.” And this can apply to furniture, clothes or tchotchkes.
Two tips: Don’t sell anything if you don’t know the value. You don’t want to see your merchandise and your buyer on “Antiques Roadshow” in a few months talking about your former item’s stunning value.
Also, choose a selling format that’s comfortable for you. That might mean listing items on eBay or taking things to consignment shops. But skip anything that involves meeting sellers 1-on-1, even if friends are along for the ride.