Create Your Rainy Day Fund

Create Your Rainy Day Fund

A rainy day fund provides us with a lot more than cash in case of an emergency. It gives us freedom to make choices, take risks, and have peace of mind, and it leaves space for creativity.

For most of us, a rainy day fund is the first savings goal on our list. It protects us in case something unexpected comes up so we don’t have to put it on a credit card (and pay high interest rates) or borrow from elsewhere.  

Despite the practicality of a rainy day fund, so few of us have them. How do I know? The average American has less than $400 saved, at any age. That means the average Amercian has very little to no rainy day fund. 

Here’s what you need to know to get started. 

First, how much?

This is the most common question I get. Here’s a simple two step process for calculating how much you’d like to have in your rainy day fund. 

Think through and list out a few emergency situations. I know - super fun. But, it’s important. The most common situations I see are someone losing their job or an illness in the family. How many months savings would make you feel comfortable in each of the situations you listed? 

Many people jump right to the end here and multiply that number of months by their typical monthly spending, but in the case of an emergency our spending will probably look pretty different. Let’s say you lost your job. You may really decrease your spending to bills and some food. Calculate what your rainy day spending amount would be.

Then, multiply your rainy day spending by the number of months you’d like to have saved. Let’s say you decide you’d like to have three months saved and you’d spend about $5,000 per month. That’s 3 x $5,000 = $15,000. 

If the number you calculate is overwhelming start with $500 or $1,000. You can work your way up from there. 

Create the space.

From there, we want to create the space to put aside money for our rainy day fund. Open up an online savings account (or if you already have one, open another account) and label it “rainy day” (or whatever you want). 

Decide how much you want to set aside each month or each paycheck.

How much and how often do you want to contribute to your rainy day fund? If you are living paycheck to paycheck, you can start with as little as $5 and work your way up. You might also decide to make a lifestyle change to make room. Maybe you swap out a takeout lunch for groceries and that saves you $10 per week that can go towards your rainy day goal. 

Set up an automatic transfer.

Whatever you decide, set that transfer up to be automatic so you can rest assured your rainy day fund is building without you having to do any work or remember anything. Once you set it up, check in after a few months to see if you’d like to increase your contribution. You can always adjust over time. 

What if I have other goals?

While we can put money towards multiple goals at the same time, I’m a big proponent of building up some rainy day fund before prioritizing other goals - even before paying off credit card debt. It might sound counterintuitive but if we don’t have any buffer, we open ourselves up to getting further in debt if an unexpected expense were to come up.