Rainy Day Fund

Rainy day fund summary:

• A rainy day fund is a pool of money you set aside for financial emergencies. 

• Rainy day funds could help you handle unexpected expenses or navigate a temporary financial hardship.

• A high-yield savings account can be a safe, secure place to keep your rainy day fund. 

Rainy day fund definition and meaning

A rainy day fund is money you set aside in case of an emergency. For example, if you get a nail in your tire that isn't fixable or your dog needs an unplanned trip to the vet, you could use your rainy day money to pay for it. 

Rainy day funds are meant to cover expenses that aren't part of your regular budget. They could also help you get through a short-term financial hardship. If you lose your job, for instance, you could rely on your rainy day savings to cover the bills until you find work. 

Key concept: Money you save for financial emergencies.

More on rainy day fund

Life has its ups and downs, and it's comforting to have a rainy day fund to fall back on when an emergency comes along. This is money you set aside for the unexpected. 

An emergency fund gives you peace of mind. When you have a financial hiccup, big or small, your rainy day money is there to get you through it. You don't need to use a credit card or a loan to pay—you've got savings on standby. 

How much should you save for a rainy day fund? And what counts as a true emergency? Let's dig into the details. 

Rainy day fund: a comprehensive breakdown

A rainy day fund or emergency fund is money that you use to cover unplanned expenses or unexpected situations. It's separate from the money you save for specific goals, like retirement or college tuition. 

Here are some examples of when you might use your emergency fund. 

• You get laid off from work on short notice. While you're waiting for your unemployment benefits to kick in, you use your rainy day fund to cover the mortgage and other bills. 

• Your dog swallows its favorite chew toy and needs emergency surgery. Your rainy day money pays the vet's bill. 

• Out of the blue, your fridge conks out. You use your emergency savings to pick up a new one. 

Rainy day funds aren't for things you're already budgeting for, or for non-essential expenses. 

For example, it wouldn't make sense to pull money from your emergency stash for a vacation or new furniture. If a real hardship were to come along, you'd be at risk of having to use a credit card or an emergency loan to cover it. It's better to set up separate savings funds for those kinds of expenses. 

You also wouldn't use a rainy day fund to pay off debt. Instead, you could look into debt relief options to manage what you owe. For example, you might try a DIY method like the debt snowball. Or you could explore the benefits of debt resolution if you have unsecured debt you can't afford to repay due to financial hardship. 

Now, how much should you save for emergencies? It's really up to you. A general rule of thumb is to save three to six months' worth of expenses. So, if you make $5,000 a month, you should have $15,000 to $30,000 in a rainy day savings account. 

You might save more or less. Your rainy day fund number hinges on your income, expenses, and how many people you're financially responsible for. 

Rainy day fund real-life example

We've covered what rainy day funds are for, so here's an example of how to build one. 

• Decide how much you want to save. You might start small, with a target of $500 or $1,000, then keep on adding to the fund until it’s a few months’ worth of expenses. 

• Review your budget. Look at how much money you could realistically save in your rainy day fund right now.

• Estimate how many months it will take you to hit your savings goal. If you don't like the answer, look at your budget again to figure out if you can find any more money to save. 

• Open a high-yield savings account and link it to your checking account. Keeping your rainy day fund separate could mean there's less temptation to spend it.

• Set up an automatic transfer from checking to savings each payday. Or, set a reminder to transfer the money when you get paid. 

Once you hit the target number, you can switch to other financial goals. If you need to dip into your emergency fund, you can switch your focus again until it's back to a comfortable level.