When it comes to financial planning, one of the most important things to consider is how to protect yourself in case of an emergency. For many people, this means creating an emergency fund pile. An emergency fund (also called a cash reserve account or rainy day fund) is an interest bearing savings account that you set aside for unexpected expenses, like a job loss, medical emergency, or car repairs.
The goal of a crisis fund is to have enough money set aside so that you can cover your future expenses for a period of time, typically three to six months. This gives you time to find a new job or make other arrangements without having to worry about how you’re going to pay your bills.
Creating an rainy day fund and budget can seem like a daunting task, especially if you’re already living paycheck to paycheck. But it’s not as hard as you think. Here are a few tips to get you started:
- Start small. Even if you can only set aside $10 per week, that’s $520 over the course of a year.
- Automate your emergency savings. Set up a direct deposit from your paycheck into your rainy day account. This way, you’ll never even see the money and you’ll be less tempted to spend it.
- Make it a priority. Once you’ve started saving, don’t stop. Keep contributing your extra funds until it reaches your goal.
- Invest in yourself. A six-month cash reserves is one of the best investments you can make. It will give you peace of
Rainy Day Calculator, For Your Cash Reserves
It’s Time To Start Funding Your Cash Reserves
A cash reserves, a rainy day fund – whatever you want to call it – they are all phrases that refer to money set aside for surprise expenses. But what is the difference between these three terms? Why are they important? How do you build a rainy day fund? Where should you build a rainy day fund?
- A rainy day fund is money set aside specifically for unexpected, and often unforeseen, expenses. This could be anything from a medical bill to a car repair.
- Cash reserves are similar to an rainy day or emergency fund, but they are typically larger in size and are meant to cover living expenses that are anticipated, but not necessarily unexpected. For example, you may have a cash reserve for a down payment on a house.
- A rainy day fund is a catch-all term that can refer to either an emergency account or cash investments.
So which one do you need? And how do they work?
Well – you need all three.
But don’t worry. Within a few minutes of finishing this article you will know how to develop your extra liquid cash strategy
- Definitions and examples of rainy day funds, cash reserve, and emergency fund
- Exactly how to setup your rainy day funds
- Use a 6 Month rainy day calculator to determine your cash reserve goal
- How to increase these pots of money
- Where to put a rainy day fund / where to invest rainy day find – such as a money market fund account.
- Work with a rainy day fund checklist
- What is the rule of thumb for how much to keep in a rainy day fund
We have all been told to “save for a rainy day fund”, but how do we develop an adequate cash reserve account? First let’s understand each.
Then at the end, I will show you how it all ties together.
Rainy Day Fund – How Much Should I Have and Where Should I Invest It?
Definition
- What is a Rainy Day Fund? A rainy day fund is a sum of money set aside in case of an unexpected event or even medical expense. The purpose of an emergency fund is to cover unexpected costs without having to borrow money or rely on credit.
- The key here is these surprise expenses are unforeseen.
How much of a cash reserves fund should I have? Months of Expenses?
- Most financial experts recommend having a rainy day fund that is equal to three to six months of living expenses. The amount you should set aside will depend on your individual circumstances, but the goal is to have enough money saved to cover your expenses in case of an unexpected event.
- I typically suggest clients maintain 2-3 months of expenses in their emergency account. Some suggest 3-6 months living expenses.
- 6 Month Rainy Day Fund Calculator
Examples
Some common examples of basic expenses that could be covered by a rainy day fund include:
- Unexpected medical bills
- Home or car repairs
- Job loss
- Natural disasters
- Personal emergencies
Benefit – Emergency Savings & Money
- Having a cash reserves fund is a crucial part of financial planning and can help you weather any unexpected storms that come your way.
- An emergency fund can help you avoid consumer debt and financial stress in the event of an unexpected expense.
How to increase and Invest Your Balance
- There are a few things you can do to increase the size of your rainy day fund.
- One is to make sure you are automatically transferring a fixed percentage of your source of income into savings each month.
- Another is to cut back on unnecessary expenses and put that money into your rainy day fund.
- Finally, you can make extra money by picking up a side hustle or working overtime and putting that money into long-term savings plan.
Rainy Day Fund – How Much Should I Have and Where Should I Invest It?
Definition
- What is a rainy day fund? A rainy day fund is an account that can be thought of as a catch all account.
- It is money you set aside for unexpected expenses, but also for annual or daily expenses that can be somewhat expected or planned for.
- I prefer to think of a rainy day savingsas a “fun account”. Money set aside for an unplanned weekend getaway.
- Having a rainy day fund can help reduce stress and anxiety during tough times.
How much of a rainy day fund should I have? A contingency reserve fund
- I typically suggest clients keep one month of expenses set aside as a rainy day fund
- Whatever amount you decide to save, it is important to make sure that your rainy day savings is easily accessible. This means that you should not have to pay fees or penalties to access the money when you need it.
- A good option for an accessible rainy day fund is contributions to high-yield savings account at a bank or credit union. Do not use a Roth IRA as your rainy day fund.
- 6 Month Emergency Account Calculator
Examples
Some common examples of expenses that could be covered by a rainy day fund include:
- A quick weekend getaway
- A nice dinner
- A new pair of shoes
- A unique experience
How to Increase and Invest Your Balance
- Some people choose to keep a rainy day fund in a separate high-yield savings account at their bank, while others prefer to keep it in a money market account or a short-term certificate of deposit.
- Always add to the account, even if it is just $25 per month. It may take a while to build up a significant rainy day fund, but it will be worth it in the long run.
- No matter where you keep your rainy day fund, the important thing is to have one in case of an emergency.
Benefit
- Saving up for a rainy day fund can seem like a daunting task, but it is important to have in case of an emergency. By breaking down your expenses and setting small goals, you can make it happen.
- Whichever strategy you choose, the important thing is to be consistent with your daily or monthly savings goals.
- You will avoid going into debt (having debt payments) and feel less stress.
- You will be able to reward yourself without guilt.
How to save for a rainy day – an emergency reserve
- There are a few different strategies you can use for saving for a rainy day fund.
- One option is to set aside a fixed amount of money each month.
- Another strategy is to save a percentage of your income each month, or to save a certain amount of money each time you are paid.
Unfortunately, Rainy Day Lending will be shutting their doors soon. If you never heard of them – they basically would allow rainy day loans. Short term loans for as little as zero percent interest. An absolutely amazing idea and concept. If anyone knows of a similar service – please shoot me an email or type a comment below.
Rainy Day Fund Jar Instructions
One of the oldest money saving tricks in the book is to have a coin jar. Or a rainy day fund jar. The concept is incredibly simple.
No one likes to have loose change. So the rare time that you use cash, just simply place it into a rainy day fund jar. Take it a small step further, and put single dollar bills in there as well.
Now, this doesn’t seem like much. But after several months it is not uncommon to accumulate $75 or $100 in the rainy day jar. Bring it into your loc
Cash Reserve – How Much Should I Have and Where Should I Invest It?
Definition
- What are cash reserves? Cash reserves can be used to cover a variety of unexpected living costs, such as repairs, medical bills, or legal fees.
- Having a cash reserve can provide extra peace of mind and security in knowing that there is money available to cover unexpected expenses.
- When building a cash reserve for clients, I would always explain to them that this is what I call “the buffer”.
- Cash Reserve is the buffer between your rainy day fund & rainy day find – and your investment portfolio
How much of a cash reserve should I have?
- Since this is the buffer account – I suggest no less than two months of expenses as a cash reserve
- When you total up the cash accounts- they should total six months of living expenses.
- If you are conservative, feel free and maintain a larger cash reserve for cash preservation.
- If you have a larger non retirement investment account – feel free to keep a lower cash reserve.
- 6 Month Cash Reserve Fund Calculator
Examples
- These are dollars you will most likely never touch – so they don’t have to be as conservative as the two tiers above.
- There are many good cash investments, but some of the most common include short-term government bonds, money market mutual funds, and high-quality corporate bonds.
- Short-term government bonds are a good investment because they are backed by the full faith and credit of the U.S. government and they offer a relatively low level of risk.
- Money market mutual funds are a good investment because they offer a high level of liquidity and a relatively low level of risk.
- High-quality corporate bonds are a good investment because they offer a high level of income and a relatively low level of risk.:
Benefit
- A cash fund acts as a buffer, as I said before.
- This allows your investments to go untouched in case of an emergency – or if an opportunity presents itself to you.
- Finally, having a cash reserves fund can give you peace of mind. Knowing that you have money set aside for emergencies can help you relax and enjoy your life more. This can help you avoid financial stress and anxiety.
How to increase your cash reserve fund
- If you want to make increasing your rainy day fund a priority, there are a few things you can do to make it happen.
- First, make sure you are automatically transferring a fixed percentage of your family income into savings each month. This will help you make headway on your goal without having to think about it.
- Second, cut back on unnecessary expenses and put that money into your rainy day fund.
- Finally, make extra money by picking up a side hustle or working overtime and putting that money into rainy day savings.
- By following these steps, you can make sure you have a solid cushion to fall back on in case of an emergency
Rainy Day Fund Checklist
- Add up your monthly expenses
- Multiply the monthly expenses by 2 and by 3
- This is the amount you should keep as your cash reserves goal.
- You can use your checking account for the emergency fund
- Next, take the amount of one month of your monthly expenses
- This is the amount of your rainy day fund.
- Keep your rainy day find in a separate form of savings account
- Lastly, multiply your monthly expenses by at least two.
- This is the amount you should keep as a buffer in your cash reserve fund.
- You can choose to put more in a cash reserve if you prefer to be more conservative
- If you own your home you should immediately consider getting a Home equity Line of Credit (HELOC). This is the ultimate large buffer for your finances – and it cost next to nothing to have an open line of credit available to you.
Avoid These Mistakes With Your Rainy Day Savings Account
- Having an emergency savings target and goal is the first line of defense for healthy finances.
- You don’t have to limit yourself to a savings accounts that earns nearly no interest.
- At the same time – you want to make sure that your rainy day fund is safe and accessible
- Most experts will tell you not to not rely on money that is in the stock market as a form of emergency savings.
- Don’t ignore your debt payments – your debt repayments are way more costly than any little interest your cash reserves is earning
- The average credit card debt is over $6,500, and the typical interest rate on a card is near 20%.
Roth IRA For Emergencies? 401k Loan as an Rainy Day Fund?
Oh, it pains me when I get asked these questions.
NO
These are retirement accounts. Roth IRA and 401k are the complete opposite of an rainy day fund. The purpose of the emergency fund is to prevent you from going into debt.
The purpose of the cash reserve is to be the buffer between your emergency fund and your longer term investments.
FINRA Start a Cash Reserves Fund
I hope the above information has been helpful to you. Feel free to comment below, and sign up for our newsletter to keep up to date.
In addition, I am including a few budgeting articles I recently wrote below – I think it ties in really well with this.
Conclusion
When it comes to saving money, there are a lot of different options out there. You can choose to save up for a specific goal, like a down payment on a house or a new car. Or, you can choose to keep your savings in a more general “emergency fund” or “rainy day fund” in case something unexpected comes up.
But what’s the best way to save? Should you focus on building up a big rainy day fund, or should you just try to keep a few months of living expenses in cash reserves?
Here’s the thing: there’s no right or wrong answer. It all depends on your personal circumstances and what makes you feel most comfortable.
If you’re someone who tends to worry about money, then having a larger cash reserves fund might give you peace of mind. On the other hand, if you’re pretty confident in your ability to earn income and you have other savings goals, you might be fine with just keeping a smaller cash reserve.
Ultimately, the best way to save is the way that works for you. So, if you’re not sure where to start, just pick a savings method and give it a try. You can always adjust your approach later on if you need to.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
