The Importance of a Rainy Day Fund

December 19, 2020

A recent article published on Marketwatch.com made me think about how something as simple as a little extra savings can make a big difference. A financial advisor will likely tell you that, on average, you should have a savings account that amounts to three to six months of expenses. This is often referred to as a “rainy day” fund. This may sound easy on paper, but for many of us, it can be a little more challenging.

A rainy day account is money that is set aside to cover necessary living expenses such as rent or mortgage, utilities, and grocery expenses. The COVID-19 pandemic has recently highlighted the importance of maintaining a rainy day fund as unemployment has sky-rocketed, businesses have closed, and unemployment benefit systems have been overwhelmed delaying the distribution of unemployment benefit payments.

In today’s world, a rainy day account can also be drawn from to stay current on your debt payments such as car payments or personal loans. While debt payments may not qualify as a necessary expense to some, late charges, accrued finance charges or interest, and possible damage to you credit are avoided by staying current.

Following these three simple steps will help building a rainy day fund feel less challenging:

1. Set A Goal

Take a serious look at your basic monthly needs to determine your true monthly expenses:  Food, rent/mortgage, utilities, childcare, transportation costs, etc. While saving three to six months’ worth of those expenses is the goal, breaking that down to one month mini-goals can help this feel less daunting. And, getting to that first mini-goal is a definite feeling of accomplishment.

2. Set A Budget

This can be the tough part. After determining the amount of funds needed to cover your true monthly expenses, is there anything leftover that can be put into a rainy day fund? If there is, great! If not, you may have to look at whether certain expenses are actual necessities.  There is usually some expense that can be adjusted to allow for a regular contribution to a rainy day fund. For example, can you pack a lunch from home for school or work rather than getting takeout?  Or, can you make coffee at home rather than stopping by the local coffee shop?  Small adjustments can make a big difference.

3. Be Consistent

It may seem obvious but contributing to the rainy day fund on a regular basis, no matter the amount, is the quickest way to get to your goal. If a contribution to the rainy day fund isn’t made, it won’t add up. Stay at it. You’ll get there.

A rainy day fund is one of the most helpful ways to improve your financial health. For additional free resources on how to build up your savings, visit AmericaSaves.org, a campaign run by the Consumer Federation of America, and the Consumer Financial Protection Bureau’s Consumer Education resource called “Start Saving”.