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What is a "Rainy Day" Fund?

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  • Written By: Tricia Ellis-Christensen
  • Edited By: O. Wallace
  • Last Modified Date: 24 September 2016
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A rainy day fund is also called an emergency fund, or an emergency savings account. It is money that is held if the worst should happen, such as a layoff, the illness of a child or spouse, or any other great emergency that might cause loss of work or loss of a job. Most financial experts advocate that the rainy day fund should contain enough money to help a family survive for three months if a layoff or something similar occurs. Some have now raised the bar on the rainy day fund and believe it should have enough for five months of survival on no income.

Lots of people might wonder if they’d need an emergency fund. Wouldn’t they get unemployment benefits and such if they lost jobs? While it is true that some people do get unemployment pay, this is of short duration. Plus, it is usually less than pay for a regular job, and people may have to pay huge amounts to maintain health insurance in countries that don’t have government health programs. These large health insurance payments could easily eat up most of the pay of an unemployment check.

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If people don’t have a rainy day fund now, it’s very advisable to start creating one. Simply open a savings account or checking account that is separate from any other savings or checking accounts, but can still be accessed easily. There shouldn’t be any restrictions on the account if money is withdrawn early, and the funds shouldn’t commingle with other savings or with a regular spending account or they may disappear quickly. Start adding small amounts to this emergency fund as is possible. Even if it’s only possible to save $10-20 US Dollars (USD) per paycheck, and that won’t fully fund an emergency, it is still money that will be had if an emergency strikes.

There are other ways to add to the fund. Look at ways to cut budgeting costs and add any savings to the rainy day account. Deposit income tax return checks or cash gifts from family members into the rainy day fund. Any government stimulus payments can start a fund too. Also consider adding checks for stock benefits or rebates from purchases into the emergency account.

For those just starting a life together, think about wedding budget. If a couple has a $40,000 USD budget for a wedding and honeymoon, think about taking at least $10,000 of this budget and using it for a rainy day fund instead. While it’s great to have elaborate weddings, it’s even better to know that financial security exists if job loss, disability or illness occurs.

Each individual and family needs to figure out a monthly budget in order to determine how much money should be held in an emergency fund. Multiply the monthly budget number by three for the conservative three-month estimate or by five or six for a more realistic estimate of how long finances could be straightened by poor economic circumstances. Consider placing any saved money in an interest bearing account, because even if interest rates are low, it will still help add a little extra to the emergency fund.

Lastly, many financial experts believe that the first thing a family should do, before putting together any other types of savings or investments, is to create the rainy day fund. Most suggest this fund should be full before starting to invest or save in other ways. The money should additionally be considered untouchable for anything but the gravest of emergencies.

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Ana1234
Post 3

@KoiwiGal - I tend to take the approach of putting all my change into my rainy day fund jar and then cashing it into my savings account at the end of the month. So that way I've got some cash on hand (albeit in the form of coins for the most part) and I've also got a little drip feed into my savings.

It's not a huge amount, but I don't have a lot of money in general at the moment and this way at least I'm saving a little bit.

KoiwiGal
Post 2

@bythewell - It's definitely a good idea to keep it in a secondary bank. My parents had savings in a particular bank when they had just gotten married and it went bankrupt and they lost their money. That doesn't seem very likely for most people, but it can happen to any bank, no matter how large or established they are and then your rainy day fund will be gone forever.

So when people tell you to diversify they are quite right. I try to make sure I have a small amount of actual cash on hand as well, since you never know when you're going to need it. I've noticed that I use my cards for almost everything these days, but if the electricity goes out or there is an emergency, I don't want to have to sit and wonder about how I'm going to get my virtual funds into my actual hands.

bythewell
Post 1

One of my friends told me that he always makes sure to put aside 10% of whatever money he makes into a savings account that he's not allowed to touch except for emergencies. His plan is that it will eventually be invested and used as money to buy a house or something like that.

I'm not quite that disciplined, but I try to keep at least a few thousand in an account with a bank different to my main one, just in case. I absolutely hate having to use it for anything, but having it there for a rainy day gives me comfort.

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