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Rainy Day Fund: What is it and Why You Need it

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You’ve probably heard of emergency funds, but not much about the rainy day fund. It’s a fund that’s part of the purposeful emergency savings strategy. The traditional emergency fund is meant to cover periods of unemployment and underemployment for 6 to 9 months.

With rainy day funds, it’s meant to cover unexpected and occasional smaller expenses. For example, your tire blew or the furnace broke and you need to fix it. You can think of it as a type of emergency fund but typically you’ll have saved a smaller amount for one-time unforeseen events.

How much should you have in a rainy day fund? Save at least $500 in a liquid account with your primary financial institution so the cash is immediately accessible. I tend to recommend people save at least the amount of their car insurance deductible. If the deductible is $1,000, then the goal is to save that amount.

The fund can help you avoid using credit cards to pay for unplanned expenses. It provides you peace of mind and quick access to cash to set things right. While a $300 repair to your car may not seem a lot, it can throw off your monthly budget creating a ripple effect on your finances.

How to Start a Rainy Day Fund

  1. Open a savings account with your existing financial institution and title it Rainy Day Fund.
  2. Transfer $500-$1000 into the account or make automatic transfers each payday until you have reached your goal.
  3. After using the money in the fund, you’ll want to replenish the account.
  4. Review and revise your rainy day fund requirements. Your life and finances change so you’ll want to ensure your fund reflects those changes.

Just keep in mind, you’ll need to factor this “expense” into your budget.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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