Nearly 28% U.S. adults have no emergency savings whatsoever, according to Bankrate's latest Financial Security Index. Only one in four have a rainy day fund.
If you haven't built up your rainy day fund, you may want to add it to the top of your list of money moves to make in the new year.
Emergency funds, which typically have enough savings to cover three to six months worth of living expenses, are meant to help out when you have to deal with something big, unexpected, and expensive. You may have to draw from an emergency fund if you take an extended amount of time off of work or suddenly lose your job.
A rainy day fund is similar to an emergency fund but differs in scale. It's meant to help you tackle those smaller, unforeseen expenses that can occur in your day-to-day life. If you get a flat tire or a parking ticket, or have to rush your dog to the vet, you would tap into your rainy day fund.
Typically you'd keep either in an accessible account such as a money market fund or stable value fund, in the event that you need to pay for something at a moment's notice.
You want cash reserves, "money you can access without risk of principal" and without difficulty, says Marguerita Cheng, a certified financial planner and the CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. "In other words, no market risk or liquidity risk."
No matter how carefully you've budgeted, it's likely that you'll find yourself faced with an unanticipated expense. Rainy day funds can minimize the financial burden posed by the unexpected.
Though emergency car repairs or dental bills aren't uncommon, 27% of Americans would have to borrow or sell something to pay for an unexpected expense, and 12% would not be able to cover the expense at all, according to the 2018 Report on the Economic Well-Being of U.S. Households, which surveyed 11,316 respondents.
Having a rainy day fund will give you the peace of mind of knowing that you can cover these costs without having to dip into savings you've already set aside for retirement or college. It will also save you from accruing any additional debt.
There's no magic number for exactly how much you should have in your rainy day fund. The amount will fluctuate depending on your household income, your other expenses, and your financial priorities.
For example, if you have student loans, you might set aside more of your monthly income towards paying off debt and a smaller portion towards your rainy day fund.
One way to come up with an amount that's right for you is to anticipate potential expenses. If you know you'll be making several medical visits in the coming year, price out the cost of copays and/or meeting your deductible, for example. If you have a car, look up the make and model of your vehicle, and figure out if you could cover the cost of new tires.
Even if you can't meet those saving goals right away, Cheng says, having even some money in your rainy day fund is a good start: It will help you cover at least a portion of any unexpected expense that comes your way. Let's say you need $800 to replace the tires on your car. "Maybe you only have $500 [set] aside and the tires cost $800," Cheng told Grow earlier this year. "Charging the $300 difference on a credit card is a much more manageable sum to pay off."
The more you can anticipate and save, the better off you'll be. And, as your income increases, you can increase your contributions to your fund accordingly.
To get your rainy day fund started, try putting away any extra money you receive outside of your regular income. A $20 bill from a birthday card, an end-of-year bonus from work, or your income tax return can all provide that initial boost.
Cheng says you also can't go wrong with the "set it and forget it" approach: "Go automated to take the emotion out of it. Set up an automatic withdrawal into a savings account, contribute whatever amount you can afford, and after a few months, you'll be surprised by what you've managed to put away."
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