Dealing with unexpected expenses such as car repairs or unplanned travel can be incredibly stressful, leaving you with hefty bills that weren’t part of your budget. 

Unfortunately, many Americans lack sufficient savings for unanticipated expenses: They resort to using credit cards or borrowing from family and friends, which can lead to higher debt levels. This is detrimental for those struggling with debt or rebuilding their credit score.

Establishing a rainy day fund can help you avoid resorting to these measures and offer financial security and stability in times of need. Learn below what a rainy day fund is, its benefits, and how to build one.

A rainy day fund is a reserve that can help you cover unexpected expenses, emergency costs, and other financial obligations when in a tight spot. It’s called so because it’s like an umbrella that shields you from financial surprises (rains).

It’s a financial safety net that can give you peace of mind and help you stay in control of your finances. You won’t have to rely on high-interest loans, credit cards, or family and friends in a time of need. Rainy day funds are typically separate from your regular savings and are best kept in a bank account that allows easy access to the funds.

Rainy day fund vs. emergency fund

Many people use rainy day funds and emergency funds interchangeably, but they differ in size and purpose. An emergency fund covers major expenses when you experience a life disruption — like job loss, major illness or injury, and natural disasters.

It’s ideal to have three to six months’ worth of living expenses such as rent or mortgage, debt payments, groceries, and utility bills set aside in an emergency fund. A rainy day fund is a more flexible reserve that covers smaller, surprise costs like car repairs, vet bills, routine health care expenses, or home improvements.

Think of it as a financial cushion to help you manage minor unexpected minor expenditures without impacting your day-to-day budget. Personal finance experts recommend having $500 to $2,500 in a rainy day fund.

You should stash your rainy day funds in an easily accessible account, such as a high-yield savings account at an FDIC-insured bank or credit union. This account offers higher interest rates than traditional savings accounts, so your funds will continue to grow as you save. It also allows quick and fee-free withdrawals, ideal for when you need to access your money quickly.

A money market account is another option that offers higher interest rates, check-writing capabilities, and debit card privileges but has minimum balance requirements and charges withdrawal fees. Avoid keeping your rainy day funds in a checking account, as it’s more vulnerable to unnecessary spending.

Accrue Savings is an excellent option for those looking to save more efficiently for their financial goals. This savings platform lets you set a goal and automatically deducts money from your checking account for easy, effortless saving.

You set the amount of money you want to save each week or month, which can be as little as $1, and track your progress. And since your savings are FDIC-insured and held in a secure account, you can rest easy knowing your funds are safe and sound.

Establishing a rainy day fund can help you stay on top of your financial goals and build financial stability over the long term. Here are some of the key benefits of having a rainy day fund:

Protecting against unexpected expenses

Unexpected costs can range from small, one-time expenses to larger, ongoing payments. These are enough to throw even the best budgets out of whack. A rainy day fund gives you enough flexibility to cover these costs without dipping into your regular savings or taking out high-interest loans.

Minimizing debt and avoiding financial stress

Without emergency savings, unexpected expenses can put you in debt or force you to draw on other resources to stay afloat — like credit cards or payday loans. A rainy day fund cushions the blow of unexpected costs and helps you avoid expensive debt. You won’t have to rack up mountains of debt or worry about your financial situation. Your peace of mind is worth the effort you put into building your rainy day fund.

Providing a safety net during income disruptions

Income disruptions can come from job loss, reduced hours, or unpaid leave. Having an emergency fund built up can provide a financial safety net while you figure out how to adjust your budget. A rainy day fund is also great if you plan to switch careers or take a sabbatical. You will have enough money saved to cover your expenses until you find a new income stream.

Preserving long-term financial goals and investments

A rainy day fund prevents you from drawing from your investment portfolio or retirement funds whenever unexpected costs arise. This helps you to stay on track with your overall financial goals and ensures your investments continue to grow throughout your lifetime. Drawing from your retirement savings can also mean paying early withdrawal fees and taxes, further derailing your savings goals.

Building and maintaining a rainy day fund starts with assessing your financial situation and creating a budget based on your income and anticipated expenses. Follow these easy steps to build your fund:

1. Calculate monthly income and expenses

The first step is calculating your total monthly income from all sources and creating a list of anticipated expenses. Track your expenses for one month to get an accurate picture of your spending habits. Differentiate between fixed costs like rent or mortgage, car insurance, debt repayments, and utilities from variables like groceries, entertainment, or travel. This will help you identify areas where you can cut back to free up more money for your rainy day fund.

2. Identify potential financial risks and vulnerabilities

Financial risks and vulnerabilities include job loss, illness, home repair, and other unexpected costs that can lead to a sudden reduction of income or increased expenses. Consider also potential risks associated with any debt you hold, like credit cards, student loans, or personal loans. Identify how much money you need for short-term needs and long-term goals.

3. Determine the ideal amount to save 

Based on your income and expenses, decide on the amount you can save from each paycheck as your rainy day fund. A good rule of thumb is to save at least a month’s worth of expenses, but you can save more if your income allows it. You shouldn’t be discouraged if you can only save a small amount. 

Every little bit helps, and it adds up to substantial savings over time. For instance, saving $30 weekly over a year translates to $1,560. A savings calculator can help determine how quickly your savings will add up with different APYs (annual percentage yields).

4. Create a budget and allocate a portion of it for savings

Creative budgeting helps you track your expenses, keep your spending in check, and grow your savings. A budget also allows you to track your progress and keep you motivated. Allocate a portion of your budget for savings, typically 10%-20% of your income, into a separate savings account. 

You can adapt the 50/30/20 budgeting system to help you prioritize your expenses and keep your savings on track. Set up automatic transfers from your checking account to your savings account for convenience.

5. Choose a savings platform

Saving your surpluses in a high-yield savings account is the most cost-effective way to start building your rainy day fund. Low-risk investments, like certificates of deposits (CDs) and money market accounts, can also provide potential returns to help your savings grow. Avoid high-risk investments like stocks and mutual funds, as these are more suitable for long-term investments.

Alternatively, consider the convenience and security of an online savings platform like Accrue Savings. It helps you save money effortlessly — all while earning rewards from your favorite brands. Simply create a free account, fund your wallet, and link your bank account and credit or debit card for automatic savings. Track and manage your savings progress with the app’s intuitive dashboard.

Experience a new way to save with Accrue Savings

Establishing a rainy day fund can help you build financial stability by providing a cushion against unexpected costs. It also helps to protect your day-to-day budget, minimize debt, and preserve long-term financial goals. 

With an easy-to-use savings platform like Accrue Savings, you can save effortlessly while earning money toward future purchases from your favorite brands. Don’t wait for the rainy days — make sound financial decisions now for a secure financial future. Set up your account today, browse our partners, save up and buy for less!