A rainy day fund is a savings cushion to help you cope with financial setbacks like unexpected expenses, heightened living costs or economic downturns. Having one can help you avoid costlier alternatives such as taking out a personal loan; withdrawing funds from a long-term investment account or 401(k) with early withdrawal penalties; or charging expenses to a credit card.
According to two recent studies from Bankrate, more than half of Americans couldn’t afford to pay a surprise $1,000 bill without siphoning their savings or racking up debt. Yet, many people don’t have money stashed away for these kinds of surprises.
The good news is that having a few hundred dollars in savings can make a big difference if something unplanned comes up. That’s why having a rainy day fund is so important, regardless of your income level or current state of finances.
In fact, rainy day What is a rainy day fund? funds are particularly important for people with unstable revenue streams such as freelancers and contractors. “Since these folks have a more unpredictable income, they tend to be more vulnerable in an economic downturn and can benefit from having an emergency savings account that’s separate from their regular budget,” says Anastasio.
So how much should your rainy day fund contain? The answer to this question will vary depending on your unique financial situation, but a general rule of thumb is to aim for a safety net of three to six months’ worth of living expenses. To calculate your target, tally up the typical monthly and annual costs you typically incur. Then, consider what might skew those figures, such as back-to-school shopping; a seasonal increase in expenses, like family vacations or holiday gifts; or a spike in expenses, such as a flat tire or medical procedure not covered by insurance.
Once you have a number in mind, stash your savings in an easy-to-access account that earns interest. You could consider an online savings account or a high-yield savings account, which can provide higher APYs than your checking account.
It’s also a good idea to set up automatic deductions from your paycheck into your rainy day fund so you don’t miss out on any opportunities to add to your balance. This is the best way to ensure that your rainy day fund will grow over time and remain accessible when you need it.
Having a rainy day fund can give you peace of mind knowing that you can cope with the little things that come up in life, such as an unanticipated vet bill or climbing grocery costs. It can also help you avoid relying on costly alternatives like racking up debt or delaying other savings goals in the name of paying for unexpected bills.
A rainy day fund can also be a critical tool in helping you achieve your larger financial goals, such as saving for retirement or a home purchase. If you’re able to put money aside regularly, it will grow over time and serve as a solid foundation for your financial future.