The Importance of a Rainy Day Fund
Unexpected expenses, like a sudden car repair or a high utility bill, can throw your budget and financial plans off track. Having an emergency fund may help to prevent these surprises from becoming financial crises.
Both Oportun and Qapital offer automatic savings programs that can help you save for rainy days. They can also help you to save for other goals, like paying down credit card debt or saving for a vacation.
What is a rainy day fund?
A rainy day fund is a small savings account that provides a financial cushion for unexpected expenses. While most people understand the importance of an emergency fund, a rainy day fund can be a valuable addition to any savings plan. By allowing you to avoid the need to use high-interest debt, a well-stocked rainy day fund can help prevent an unexpected expense from derailing your budget and financial plans.
The best place to store a rainy day fund is in a dedicated account, such as a savings or high-yield savings account. This ensures that the funds are readily available, but also helps them grow through interest-earning opportunities. Keeping the rainy day fund in a separate account may also reduce the temptation to use it for non-emergency purchases, since it is not part of your regular spending.
Saving for a rainy day fund can be difficult, but it is important to establish a savings goal and stick with it. Aiming to save a certain amount of money each month can be helpful, as it will allow you to gradually increase your savings over time. Many banks offer auto savings programs that make it easy to set aside a set amount on a regular basis. Even if you only save $5 each week, this can add up to $260 over the course of a year.
How to start a rainy day fund?
The rainy day fund is one way you can prepare for life’s inevitable financial hiccups without derailing your broader financial goals. It can also help you avoid the need to borrow or use credit cards, which can increase your interest expenses and lead to debt accumulation.
Start by making a list of expenses you might need to pay for in the future, such as car maintenance, home repairs, child extracurricular activities and pet vet bills. Then, set a savings goal to save toward those expenses. The money saved in your rainy day fund could also be used to cover unexpected costs that may arise, like a medical emergency or an insurance deductible.
There are many ways to save for your rainy day, including setting aside a portion of each paycheck, using cash-back apps on everyday purchases and tracking your spending to cut unnecessary expenses. Another option is to set up an automatic savings program with your financial institution, which can deposit a small percentage of each paycheck into your rainy day fund without you having to remember to do it manually.
It’s important to keep your rainy day funds separate from other savings, so you’re not tempted to spend them on non-essential items. You can do this by opening a dedicated savings account, which offers an FDIC-insured rate and fee-free withdrawals. Some accounts even allow you to create “pockets” or separate accounts within a single account, which makes it easy to distinguish between different types of funds.
How to manage your rainy day fund
Ideally, you should keep your rainy day fund separate from your emergency savings to avoid the temptation of using it for non-emergencies. You can use a traditional savings account or consider opening a money market account that often offers check-writing privileges and higher interest rates.
Start by setting aside a small amount each week or month, even if it’s only $20 or $50. Over time, these contributions can add up and help you feel prepared for life’s unpredictable financial hiccups. You can also save a portion of tax refunds, bonuses, or other windfalls to your rainy day fund. This is an easy way to rapidly grow your funds.
A rainy day fund can protect you from unexpected expenses that may derail your budget or lead to high-interest debt. But remember, it’s not a safety net for regular bills or non-emergency expenses like vacations or new clothes. You may check oportun app review here.
To make sure you’re saving enough, try tracking your spending with a budgeting app like YNAB. Its intuitive reports and powerful features can help you visualize your savings goals, track progress in real-time, and stay on top of your rainy day fund. Plus, YNAB automatically imports your bank transactions and syncs across devices, so you can track your progress from anywhere at any time.
How to replenish your rainy day fund
Ideally, you want to replenish your rainy day fund after tapping into it to cover unexpected expenses. That way, you don’t have to dip into accounts that are also intended to cover expected expenses like your monthly bills and savings goals.
A rainy day fund can help you cover a variety of unexpected expenses, including car repairs or home repairs, unplanned travel, and even vet visits for your pet. It can also help you bridge a financial gap caused by a job loss or reduced hours.
It’s important to separate rainy day funds from emergency savings, which is why it’s best to open a dedicated savings account for these purposes. This can help reduce the temptation to dip into these funds for things that are not emergencies, such as a new pair of shoes or a movie date.
Behavioral economists have even coined the term “present bias” to describe our tendency to focus on short-term needs rather than saving for the future. That’s why it’s so helpful to use a budgeting app that can help you set aside money each month for your rainy day fund. YNAB is a free, open source budgeting app that supports the principles of a rainy day fund by giving every dollar a job and aligning your spending with your priorities.
Another great option for growing your rainy day fund is a low-cost investing platform like MoneyLion, which makes it easy to invest on autopilot and see the growth of your investments. You can choose the amount you’d like to save each month, and then MoneyLion automatically transfers it from your checking account into your investment account for you.
