We have all experienced a financial misfortune at one point or another.
Whether your experience was with an unexpected auto repair, an unforeseen deductible or some other unpredictable expense; we’ve all had to pay for one of Life’s unfortunate surprises.
But being surprised does not mean you have to be unprepared. In fact, having a reserve of funds that you can quickly and easily access in the event of something unfortunate can make all of the difference between staying on track or falling behind in your journey towards financial success.
Everyone needs a “rainy day” fund. And as difficult as it can sometimes seem to set aside money you’d rather be using now, you can be certain that there will come a time when you will need to use it. When that happens, you’ll be glad you have a rainy day fund.
Commit to a Goal Amount
The initial question that many people ask is, “How much do I need?” The short answer is that $1,000 to $5,000 is an appropriate, general goal for many people’s level of need. Keep in mind, though, that there’s no one-size-fits-all answer that is going to satisfy every person and their situation.
To determine how much you might want to save, it’s important to understand what a rainy day fund is meant to cover: Unexpected and unpredictable expenses. Often, these expenses are the result of one-time, isolated events such as a car tire going flat or a sudden trip to the doctor’s office. Typically, a rainy day fund will resolve your immediate financial need and allow you to continue with your daily life as normal.
This, of course, is a contrast to an emergency fund. An emergency fund is another necessary reserve of money you should keep available when you need it, but its purpose is to replace your main income in the event of a job loss, inability to work, or other major disruption. In general, the amount of money you keep in your emergency fund will be much more than your rainy day fund.
The amount of money you decide to save for unexpected expenses will ultimately depend on your need for comfort – or, conversely, your tolerance for risk – but, no matter the amount, it’s generally better to have more money set aside than you think you’ll need.
Start Building Your Rainy Day Fund
Of course, when it comes to having a rainy day fund, deciding how much to save is the easy part. The challenge that some people face is finding the extra money to save, particularly for those who are already in debt. Does that mean someone currently working to pay off debt needs to forgo building a rainy day fund? Certainly not! Everyone needs a rainy day fund and it should be considered a critical component of your larger strategy to become debt-free.
Here are just a few of the ways you can build your rainy day fund.
Reduce Your Current Expenses
In a previous post, we discussed how eliminating debt does not require radical lifestyle changes. When it comes to saving money, the same principal still applies.
Short of cutting off your cable services or vowing to never eat out again, there are likely a few commodities in your life that you can reduce or live without altogether. For those with a high degree of discipline, this could mean carpooling to work once a week or limiting the number of times you eat at a restaurant during a month. For those looking for more subtle ways to save, this may mean switching to a generic brand of product when you go grocery shopping. Either way, being honest with yourself about what you need, want, and don’t use can go a long way in helping you find the money you need to build a rainy day fund. Best of all, you can maintain the quality of your lifestyle and not have to worry about bringing in additional money.
Apply Your “Sunny Day” Funds
When it comes to building your rainy day fund, it’s easy to focus on the unfortunate side of life. Of course, there wouldn’t be rainy days if there weren’t “sunny days” and so it’s important to remember all of the ways that life can also provide you fortune. Whether you’ve received a raise at work, a holiday bonus, a tax refund, or another fortunate source of income, you can sometimes gain money when you least expect it. Of course, these events don’t happen every day and, just like misfortune, you can’t plan around it so make sure to save these surprise sources of income for when the surprises aren’t so pleasant.
Sell Unused Items
In line with reducing your current expenses, you may find that you have items around your home that have never been used or that you no longer need. Generally speaking, most people have a piece of clothing, furniture, appliance or something similar that they will never use or forgot they had in the first place. Since you are essentially already living without the item, you may want to consider selling it online, at a local consignment shop, or through a garage sale. Even making a small profit that you can put towards your rainy day fund will serve you better than an item just collecting dust.
Collect Your Loose Change
When was the last time you drove to your bank to the deposit the leftover dime in your pocket? Probably never, right? But while it may not be worth the money in gas to deposit an amount that is significantly less, all of the coins and dollar bills you collect throughout the day have value. All of these can add up to be a small or even a large portion of your rainy day fund and so it’s worthwhile to deliberately collect your leftover change and bills and keep it safe until you’re ready to add the amount to your other money.
Find a Method That Works for You and Start Saving
Keep in mind that building a rainy day fund and eliminating debt do not have to be mutually exclusive. In fact, if you’re already using excess funds you have to make additional payments, you may want to consider paying the minimums on what you owe while simultaneously allocating your excess cash flow to your rainy day fund. Why? Because from a broad perspective, it’s unlikely that you’ll be able to pay off $10,000 or more in debt over the course of a few months with a moderate amount of excess cash. On the other hand, it is possible to build a $1,000 “cushion” for yourself over the course of a few months using those same funds. Once you have enough money saved in your rainy day fund, you can resume allocating your excess cash flow to paying off your debt and be more or less in the same financial position you would otherwise be in – albeit with the additional benefit of a financial safety net. Thus, for some people, the security that even a modest rainy day fund provides may be worth the small detour in becoming debt-free.
Save Your Rainy Day Fund Until You Need It
Building a rainy day fund is a deliberate act and so is keeping it safe. You’ll want to ensure your funds are quick and easy to access when you need to but, depending on your level of temptation, you don’t want it to be too convenient either.
Consider keeping your rainy day funds in a Roth IRA, a savings account that does not charge fees, or a money market mutual fund. To minimize the temptation, you may also want to consider keeping your rainy day fund at a separate banking institution away from your primary checking account.
Are You Ready for a Rainy Day?
Imagine this scenario: You’ve made the commitment to pay off your existing debt by applying your existing funds to additional payments. You’ve demonstrated outstanding discipline in utilizing your raise, your tax refund, and even the pocket change you’ve collected to come closer to your dream of being debt-free. And then one day you get in your car to go to work – and it won’t start. You have a problem. And unless you have funds set aside to cover this momentary crisis, you may have to take on additional debt in order to keep going on with your daily life.
Ultimately, building a rainy day isn’t about focusing on all of the misfortune that can happen, though. It’s a way to empower yourself and to create fortune for you even when misfortune may arise. Most of all, you should consider your rainy day fund as an important milestone in your journey towards financial success – because that’s exactly what it is!