There’s no better time than now to start saving – here are some tips on filling up your rainy day fund.
Rainy Day Fund or Emergency Fund: What is it, and why should I care?
A topic that often comes up in initial conversations with new clients is a rainy day fund. Some people call this an emergency fund. I don’t like the idea of having an “emergency” related to money, so I prefer the term rainy day fund. Rainy days come along, just like sunny days. On a rainy day, you bring an umbrella or wear your waterproof shoes. No big deal, right? Same thing with your money. Having funds readily available for those “rainy days” can really improve your peace of mind.
I know some solo-preneurs who completely lost their income during the initial months of the Covid-19 pandemic. While they waited for unemployment benefits or PPP/EIDL small business loans to come through which took about 3 months for some people, they were able to continue making ends meet with the use of their rainy day fund.
What’s a rainy day fund used for?
This can vary quite a bit based on your personal situation. The rainy day fund can cover things like a nail in your tire; replacing your refrigerator when it stops keeping the cold things cold; the health insurance copay for your son’s broken arm; losing a job.
How much should I keep in my rainy day fund?
Typically, a rainy day fund should contain enough money to cover 3-6 months of expenses.
To figure out how much your monthly expenses are, look at a recent bank statement and tally the expenses you paid. You can also note your monthly income, then note how much (if any) you have “left over” i.e., still in your checking account at the end of the month. Say your checking account balance at the beginning of the month is $1,000. You received monthly income of $5,000. At the end of the month, your checking account balance is $1,200. This suggests you have spent $4,800 ($1,000 + $5,000 = $6,000 – $1,200 = $4,800).
I don’t have enough saved in my rainy day fund. How can I build my savings?
It’s ok to start small. It doesn’t take much to make some big long-term improvements. Of course, next time you receive a “windfall”, whether it’s a check in your birthday card from your aunt or your annual bonus or raise, immediately allocate this found money towards saving.
Here are a few tips to increase your rainy day fund savings.
- Pay yourself first. Set up an automatic transfer from your checking account to your rainy day account, each day you are paid. Say you’re paid on the 15th and 30th of each month. On those days, set up an automatic transfer of a set amount into your rainy day fund.
- Get some information about where you’re spending your money right now. Create a budget using the method here.
- Look at options for cutting back monthly fixed expenses. Can you refinance your mortgage, or negotiate with your landlord for a decrease in rent? Can you cut back on monthly subscriptions to news services, or entertainment like streaming music or video services? Are you still paying for the international plan on your cell phone bill?
- Intentionally change your spending habits. In the past few months, Americans’ spending habits have changed significantly as we’ve been housebound and working from home. The morning commute Starbucks visit; lunchtime stop at a local clothing store, and dinners out with friends have been cut way back for many. Starbucks coffee drinks can easily cost $5. That could be $25 / week, or $100 / month. Have you found that your spending habits have changed amidst the pandemic? Take advantage of this to build up your rainy day savings, and consider how you can turn these unplanned changes into permanent habits.
- Food spending. I consider food to be discretionary, only because you can choose what you eat. Eating out or ordering take out is usually way more expensive than doing your own cooking. Spend a little time collecting some recipes in a folder that you know your family enjoys that are also simple to prepare (I’ve been loving this lime chicken and Mexican cole slaw on soft tacos – links open in new tab). Before you head to the grocery store, choose a few recipes you’ll make, and make a shopping list. Then only get the items on your shopping list (online ordering can help avoid impulse grocery store purchases). You’ll have the opportunity to eat healthier and also save some money.
- Make your credit cards less accessible. Put them in the back of your wallet, or keep them at home in a drawer. Put a sticky note on your credit card that says “rainy day” as a reminder to not mindlessly make purchases when you know you’re saving for your rainy day.
And don’t forget to celebrate your wins. Give yourself a small reward for reaching set goals along the way. The reward could be a pint of that gourmet ice cream, a kitchen gadget you’ve been eyeing, or a car wash and detail – whatever feels like a special treat for you.
Once you’ve started this saving process, keep going! When you’ve built up your rainy day fund, consider where else you can keep saving. Are you contributing to your company’s 401k or retirement savings program fully? Are you planning a vacation?Start saving now so it’s fully funded by the time the trip begins. And congratulations! You’re on your way to building healthy money habits.