A rainy day fund is a separate account you maintain to cover unexpected expenses. Different from an emergency fund, a rainy day fund is money you set aside for somewhat smaller, more everyday items. Everyone should aim to keep some amount of cash set aside for safekeeping so that other more expensive ways of accessing money, like financing expenses with a credit card, don’t have to be resorted to. Avoiding going into the wrong kind of debt is important to building wealth.
Learn what a rainy day fund is and why it’s a key piece of a smart long-term financial plan. We'll also point you to the right places to house your rainy day fund money.
What Is a Rainy Day Fund?
A rainy day fund is an account with cash set aside for everyday expenses that do not often fall into your usual monthly budget. The distinct account helps smooth out the inevitable rocky periods in your financial life so you don’t have to tap more expensive cash avenues. Think of the money as the in-between of ordinary everyday expenses and large, one-off emergencies. For example, filling up your gas tank would not be done with a rainy day fund. A flat tire, however, would qualify.
Other common expenses that might fall under the rainy day fund umbrella include routine medical expenses, home repairs, replacing items around the house, items your children might need (like braces), and even veterinary bills.
It’s important to know that a rainy day fund is not an official type of account at, say, a bank or credit union – you wouldn’t go to a bank’s website and look for a ‘rainy day account.’ Instead, it’s more of a mental account to help you manage your overall financial picture.
Why Should You Have a Rainy Day Fund?
Americans are not great savers. While folks filled up their checking and savings accounts during and immediately after the pandemic, data show that the national Personal Saving Rate has dipped back near 15-year lows. Moreover, the Federal Reserve recently reported that 68% of adults would not be able to cover a $400 unexpected expense with cash. With so many people in a perilous financial position, simply stashing away some cash puts you way ahead of the pack.
Also, think about just how expensive the alternatives are. Today, you can earn upwards of 3 percent or 4 percent on cash in the right account and then simply tap those reserves for unusual items. Credit card debt, when not paid in full each month, often features annual percentage rates (APRs) north of 20 percent. Other alternatives might include accessing your 401(k) or Individual Retirement Account (IRA) but doing so often includes owing income tax on the distribution and paying a 10% early withdrawal penalty.
How Much Should You Have in Your Rainy Day Fund?
Ok, you get it. You should have a rainy day fund.
But people are often unsure how much cash to keep on hand for those one-off expenses that crop up during the year. There’s good news: A rainy day account is generally smaller than, say, an emergency fund’s balance. You should target between $500 and $2,500.
A good rule of thumb, too, is to fund your rainy day account up to your health insurance deductible. That strategy does a couple of positive things for your financial habits. First, at the start of each year, you beef up your rainy day fund, perhaps using a raise you got at work or even with your tax refund. That can help you avoid what is known as “lifestyle creep” whereby people spend more over time without noticing. Second, as the year progresses, you can simply match your rainy day fund balance to your remaining deductible, so it becomes a flexible account as life happens and your situation changes.
Another tip: tally up all the unexpected bills and expenses that might pop up over the course of a month or even a year. If you have a budget or expense tracking tool, now would be a good time to review your cash inflows and outflows. By listing out all of your historical expenses you get a better gauge of how much cash to keep in a rainy day fund.
Also, think about seasonality. Back-to-school shopping can be pricey these days, and were you too blown away by the high prices on Halloween candy last year? Family vacations sometimes bring about odd costs, and the holidays can swell your expenses column, too.
Like anything in personal finance, you must assess your individual situation. Some folks might require a smaller rainy day fund while others, maybe a large family with many non-recurring expenses, would be better served with a larger balance. Rainy day funds are important for all people from young adults just starting their careers to folks saving for retirement to even those enjoying their golden years.
Where Should You Keep Your Rainy Day Fund?
What’s great about a rainy day fund is that you do not have to open another account type. The simple strategy is to ensure your primary checking or savings account has an adequate amount.
For those looking to squeeze a few extra bucks each month out of their cash, you can look to park money in a low-cost Treasury exchange-traded fund (ETF) such as the iShares Short Treasury Bond ETF (ticker: SHV) or a similar ETF that only holds very short-dated Treasury bills. Another option is to park cash in a money market mutual fund account. With higher short-term interest rates today, some of these accounts sport yields above 3%. Allio can also help you automatically save for a short-term goal, like a rainy day fund, where you can access the money whenever you need it.
An interesting behavioral quirk that we find helps savers is to have a designated account for a specific purpose. For example, your emergency fund would be housed in its own account as would your rainy day fund. While having so many accounts sometimes gets confusing, this so-called “bucketing” strategy tends to get people to use money in better ways.
5 Strategies for Building and Maintaining Your Rainy Day Fund
First, give yourself a pat on the back for embarking on shoring up your personal finances. Seriously. Most people don’t take the time and effort to cover their bases when it comes to money. Here are five ways to establish and keep your rainy day fund.
Nobody likes to hear this. After all, eating out, going to the movies, spending without much regard on vacations, and simply enjoying leisure time are the pleasures of life for most people. Just find a few ways to cut back in each of those situations. Maybe just do one meal out per month instead of two or try to stay with friends and family for a night on a trip. Also, consider swapping for a cheaper phone plan or consolidating streaming services.
Perhaps you’d rather pick up a side hustle rather than taper your spending. That’s easier than ever these days. You can set up shop online or offer a service in your community. Gig income can build quickly.
Be Intentional With Unexpected Cash
Use your annual pay raise or tax refund to build a rainy day balance. This might be the easiest approach of all since it doesn’t require significant lifestyle adjustments. Be careful, however, as too large of an annual tax refund is often not the best planning tactic since you are essentially giving Uncle Sam an interest-free loan which can hurt you when inflation is high.
Focus on the Big Items
Honestly, don’t sweat the small stuff like a daily coffee or ordering off the dessert menu at a nice restaurant. Instead, long-term strategic decisions like where to live, the best health insurance to have, owning an economical car, and simply being healthy all add up to smaller and fewer month-to-month expenses in many cases. Making the right choices around big-ticket expense categories often frees up cash flow for a rainy day fund.
Finally, the less you have to think about your money, the better! Setting up automatic transfers from your primary checking account to whichever account type you have designated as your rainy day fund makes saving a breeze. If you set your rainy day fund up with Allio, you can opt-in to round-ups, which automatically saves and invests your spare change from everyday purchases. Your employer’s direct deposit system from your paycheck to your rainy day account is another great hack.
How Is a Rainy Day Fund Different From an Emergency Fund?
You might be thinking that a rainy day fund sounds a lot like an emergency fund. True, but there are differences. The main thing is that a rainy day fund is used to cover random mid-sized costs whereas an emergency fund’s purpose is for bigger items and financial calamities.
The latter is your backstop in the event of a sudden job loss, large medical expenses (above your deductible, but below your max out of pocket), major car and home repairs, and unanticipated travel costs like those for a death in the family. Both your rainy fund and emergency fund can be housed in the same type of account, though.
Celebrate the Wins
Once you have your rainy day fund in place and a plan of attack if and when unexpected costs hit, take a moment to reward yourself. That goes for reaching any financial goal. Often, saving, delaying gratification, and managing risks are not the funnest things. That’s why you should spike the football in the proverbial endzone to an extent.
Another upside is that having a rainy day fund often provides people with financial peace of mind. There’s comfort in knowing that when an unfortunate event strikes, you have the cash to cover the situation. Finally, celebrate that you have developed a saver’s mindset and have proven to yourself that you can make a financial goal and achieve it!
The Bottom Line
A great way to manage day-to-day financial risk is to always have a rainy day fund to cover unforeseen, but inevitable expenses often brought about by the ills of life. The last thing you want to do is whip out a credit card to pay for a mid-sized expense you did not see coming. By keeping the right amount of cash in a highly liquid and safe account, you can earn interest while protecting your financial life. A well-funded rainy day account allows you to take more risk for greater upside potential with your other investments.