Benefits of having a rainy day fund
Quick insights
- Rainy day funds are savings intended for midsize, non-emergency expenses that could arise within the next few years.
- Examples of such expenses include routine medical expenses or purchasing new home appliances.
- The right amount for your rainy day fund may differ between individuals, but savings accountholders tend to keep between $500 and $5,000 set aside.
If you needed a new refrigerator or your child required braces, you may need to cover the cost. For many, these expenses might necessitate borrowing money, which could lead to fees and interest charges. Rainy day funds are savings set aside specifically for these situations, and starting one may make you feel more prepared to manage expenses that fall outside your regular monthly budget.
In this article, we’ll explore the potential benefits of rainy day funds.
Rainy day savings explained
A rainy day fund is a savings reserve set aside for the midsize expenses you anticipate in the coming years. These are non-emergency costs that fall outside of your regular monthly budget.
Here are some examples of expenses typically covered by rainy day savings:
- Routine medical or veterinary expenses
- Regular home or car maintenance
- Home appliance or electronics replacements
Rainy day funds may range from $500 to $5,000, depending on the anticipated future expenses. Keeping your rainy day fund in a savings account usually allows for penalty-free withdrawals, enabling you to access your savings when these expenses come up.
Keep in mind that rainy day funds differ from emergency funds, which typically cover 3 to 6 months of living expenses for unexpected emergencies like a job loss or major home repairs. Emergency funds typically cover expenses that can have a long-term impact on your financial stability while rainy day funds are for the hiccups that can disrupt your monthly budget.
Keeping emergency and rainy day funds in separate savings accounts may make managing your finances easier and discourage you from using funds for unintended purposes.
How rainy day funds work
To build a rainy day fund, consider the following steps:
- Set up the account: Determine the amount you’ll need based on your anticipated expenses over the next few years, and then you may choose a suitable type of savings account for your needs.
- Fund the account: When opening the savings account, you’ll likely need to make an opening deposit. You may work toward your savings goal by setting up recurring deposits.
- Assess your needs: As expenses arise, evaluate whether the situation involves an expected or unexpected expense. Rainy day funds are generally intended for occasional, anticipated expenses, such as new tires for your car or a dental cleaning for your dog.
- Replenish and adjust: If you use your rainy day fund or if your financial situation changes, you may need to reassess and adjust your funding strategy as needed.
Benefits of rainy day funds
Rainy day funds can offer advantages beyond covering specific expenses. Here are some ways a rainy day fund could positively impact your finances:
Avoid additional debt
Without a rainy day fund, some people might need to charge certain expenses to a credit card or take out a loan, which can lead to fees and interest charges. By maintaining a rainy day savings account, you may minimize debt and potentially earn interest on your savings.
Increase financial security
Maintaining a rainy day fund is a financial habit that can potentially enhance your financial health. By cultivating the habit of saving, you may feel motivated to pursue other financial goals. Additionally, having a rainy day fund may reduce the likelihood of dipping into other financial accounts, such as an emergency fund or 401K, for unintended purposes.
Of course, financial planning is complex, and many factors may influence your financial security.
Get peace of mind
With a financial cushion, you may feel more prepared to handle unexpected financial challenges. This may help you avoid additional debt, a financial stressor that can cause anxiety and even strain relationships with loved ones.
Potential limitations of rainy day funds
While rainy day funds offer several benefits, your overall financial health depends on various factors. Achieving your financial goals may require funding savings or retirement accounts in addition to maintaining a rainy day fund.
There may be opportunity costs associated with prioritizing your rainy day savings, depending on your financial situation. For instance, building a rainy day fund might not be the right choice if it means you must stop contributing to your 401K or delay paying down debt.
Additionally, rainy day funds typically require regular monitoring, and you may need to adjust your savings strategy periodically, especially if your financial circumstances change.
In summary
Rainy day funds are savings designated for anticipated non-emergency expenses over the next few years, such as replacing electronics or home appliances. They differ from emergency funds, which are typically reserved for unexpected emergencies like job loss.
Rainy day savings typically range from $500 to $5,000, depending on the expenses you anticipate. A rainy day fund can help you avoid debt, enhance your financial safety and provide peace of mind.
It may be helpful to consider any opportunity costs associated with starting a rainy day fund, especially if funding it requires you to delay paying down debts.
