What Is a Rainy Day Fund, and Why Do You Need One? (2024)

Vault’s Viewpoint

• Rainy day funds are used for minor, unexpected expenses.
• The money in your rainy day fund should be kept in an account that is separate from your regular savings or emergency fund.
• Your rainy day fund account should allow you to access your money when you need it.

What Is a Rainy Day Fund?

A rainy day fund is money you set aside to cover unexpected minor expenses that are outside of your normal budget. A few things that a rainy day fund may be used for include:

• Flat tire
• Towing fee
• Pet emergency
• Appliance repair
• Home pest control
• Eyeglass replacement
• Car battery replacement

The money you keep in a rainy day fund should be easily accessible when you need it. If your car breaks down on a Saturday, for example, you don’t want to have to wait until the bank opens on Monday to get the money you need.

It’s also important to make sure that the money in your rainy day fund is only used for unexpected expenses and not for other things. If you need to save for new furniture, college expenses, a down payment on a home or something else, a separate savings account should be used.

Why Do You Need a Rainy Day Fund?

A rainy day fund can be an important lifeline that helps you quickly recover from a situation. Here are several important reasons to consider starting one.

It Helps You Avoid Debt

A rainy day fund is a safety net that could prevent you from going into debt or experiencing financial hardship. Although many people use credit cards for unexpected expenses, they may not be able to repay the money they borrowed right away. If they are only able to make the minimum monthly payments, high interest rates could cause their balances to grow, making it even harder to repay the debt.

A rainy day fund may also be a better option than payday loans or title loans. Although these lenders are convenient, high interest rates and short repayment periods may make it difficult to repay the money you borrow. If you miss the repayment deadline, you may also lose your collateral.

You Can Save Money on Interest and Fees

Interest is the money you pay your lender for the money you borrow. If you don’t have to take out a loan, you can use the money you would have spent on interest for something else, like replenishing your rainy day fund. You could also save money on fees that some lenders charge, like loan application, origination and late payment fees.

It Gives You Peace of Mind

Having a rainy day fund may help to lower stress and give you peace of mind. Since you won’t have to ask friends or family members for financial assistance, it can help you maintain independence and preserve relationships.

It’s Faster Than Borrowing

If you need money quickly to pay for something, you may not have time to go to a lender. If you need money when lenders are closed—like in the evenings, weekends and holidays—you may have to wait, which could cause delays or other problems.

How Much Should You Have in Your Rainy Day Fund?

The size of your rainy day fund will depend on how much you can contribute to it each month and how much of a financial cushion you would like. It’s different for each person. You may feel comfortable with $500 in your fund, for example, while others may prefer more.

To build your rainy day fund, consider automating the savings. Employers that pay with direct deposit may allow you to allocate a percentage of your pay to one or more savings accounts. Another strategy is to deposit your annual tax refund into your rainy day fund.

Where Should You Keep Rainy Day Funds?

The money you keep in your rainy day fund should be separate from your regular savings. If both funds are kept in one account, you may be tempted to spend your rainy day money on other things.

When evaluating savings accounts at banks and credit unions, be sure to look for accounts that allow you to access your money whenever you need it. This will allow you to make convenient withdrawals without having to wait for regular banking hours.

The following three accounts may be used for rainy day funds, and it’s important to choose an option that works best for your individual personal finance needs.

Traditional Savings Account

Traditional savings accounts are common, easy to open and pay interest. Depending on the bank or credit union, a savings account may also come with an ATM card that you can use to make cash withdrawals at many different locations.

Savings accounts are insured by the federal government for up to $250,000. If your savings account is with a bank, it will be insured by the Federal Deposit Insurance Corporation (FDIC). If it’s with a credit union, it will be insured by the National Credit Union Association (NCUA).

The minimum deposit requirements for savings accounts are usually very low, which makes it easy to open an account and start saving. Most banks require a minimum deposit of $25 to $100, and credit unions typically require $1 to $10. The number of withdrawals you can make each month will vary depending on the financial institution.

High-Yield Savings Account

High-yield savings accounts are very similar to savings accounts. They are both offered by banks and credit unions, and they are both insured by either the FDIC or NCUA for up to $250,000.

The minimum deposit requirements and the number of monthly withdrawals you can make with high-yield savings accounts will vary but are similar to savings accounts. They may also come with ATM cards.

The primary difference between savings accounts and high-yield savings accounts is how much interest they earn. Depending on the financial institution, high-yield savings accounts may earn more than 12 times the interest that savings accounts earn.

Money Market Account

A money market account is a type of savings account that usually offers a higher interest rate than savings accounts and lower rates than high-yield savings accounts. They are insured for up to $250,000, and the number of monthly withdrawals you can make may be limited. They also usually have higher minimum deposit requirements than savings accounts.

The primary benefit of money market accounts is they usually come with debit cards. Some accounts also offer check writing privileges. This makes paying for things much more convenient than having to find ATMs to make cash withdrawals. It may also be safer than cash if you have to make an ATM withdrawal in an unfamiliar neighborhood or after dark.

Rainy Day Fund vs. Emergency Fund

Although rainy day funds and emergency funds are both intended for unexpected expenses, they are typically used for different purposes. A rainy day fund is for small, short-term expenses, while an emergency fund is for large, long-term expenses and is typically held at a qualified bank. Examples of things that emergency funds can be used for include:

• Car repair
• Home repair
• Loss of a job
• Natural disaster
• Unexpected travel

An emergency fund should have enough in it to cover three to six months of living expenses. It’s also a good idea to use different savings accounts for your rainy day fund and emergency fund to keep them separate.