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When It Rains, It Pours: Why Rainy Day Funds Make Sense

When It Rains, It Pours: Why Rainy Day Funds Make Sense

Jenius Bank Team7/10/2023 • Updated 7/1/2024
Illustration of a piggy bank with an umbrella protecting it from rain.
Having money set aside for unexpected expenses may make it easier to weather storms that come your way. While many of life’s expenses are planned, some events take us by surprise. Maybe you got into a fender bender in the grocery store parking lot. Or perhaps your washing machine stopped working in the middle of laundry day. Whatever your unexpected expenses are, they could take a toll on your finances if you’re not prepared.Rainy day funds may help you deal with those unexpected expenses without dipping into other savings or taking on extra debt. Let’s look at how these funds work and why they’re a good idea.

Key Takeaways

  • Rainy day funds are different from emergency funds in that they help you cover smaller unexpected expenses.
  • The amount of money you should keep in your rainy day fund depends on your finances and lifestyle.
  • Keeping your rainy day fund in a high-yield savings account (HYSA) may help you grow your balance while still giving you easy access to the money when you need it.

What Is a Rainy Day Fund?

Rainy day funds are dedicated savings accounts designed to help you cover smaller unexpected expenses that may otherwise put a strain on your budget or encourage you to take on debt. These costs may include expenses like:
  • Repairing a broken appliance
  • Fixing a minor car problem
  • Paying for an unanticipated doctor’s appointment
These expenses are usually one-off costs that pop up when you’re not expecting them. While they’re usually small compared to worst-case emergency expenses, they could still make it hard to stick to your budget.

Rainy Day Funds vs Emergency Funds

Though both rainy day funds and emergency funds help you cover unexpected costs, they serve different purposes. Emergency funds are ideal for major unexpected expenses like getting laid off from a job or major medical bills. Rainy day funds are ideal for smaller unexpected expenses like fixing a broken fridge or replacing your car tires.Depending on your lifestyle and personal preferences, you may keep anywhere from a few hundred to a few thousand dollars in your rainy day account. For emergency funds, experts typically recommend that you keep 3-6 months’ of living expenses in available.1

Who Needs a Rainy Day Fund?

Just like emergency funds, rainy day funds are a good idea for just about everyone. They help reduce the risk of going into debt just to cover added expenses. And they could help you stick to your budget even when the unexpected pops up.Without a rainy day fund, you may be tempted to rely on credit cards. While that high credit card limit may seem like a great emergency cushion, it could get you in trouble quickly if you carry a balance from month to month. With the average credit card rate hitting 27.65% APR2, the interest you owe on your balance could add up. APR refers to Annual Percentage Rate, the interest costs you owe to the lender.Say you’re carrying a balance of $10,000 on a card with a 27.00% APR. If it takes you a year to pay off the balance, you would pay $1,522 in interest in addition to the original $10,000.3With a rainy day fund in place, you could save thousands of dollars in interest payments.

How Much Should You Keep in Your Rainy Day Savings Account?

As we mentioned earlier, there’s no hard and fast rule about how much money you should save in your rainy day fund. But there are a few factors to help you decide on your ideal balance.
  • Do you own or rent? If you’re a homeowner, your rainy day fund should account for regular home maintenance like broken appliances and minor repairs. If your home is older, you may need to set aside more. If you rent, repairs and maintenance may be covered by your landlord, so you may be able to set less aside.
  • Do you have pets? Even an annual trip to the vet may result in a higher-than-expected bill. As pets age, you may need to spend more on their care, so keeping more in your rainy day fund could help.
  • Do you have kids? Children are full of (expensive) surprises, from extra trips to the doctor’s office or surprise extracurricular activities. Keeping more in your fund could help you cover those costs.
  • What are your insurance deductibles? Insurance is there to help reduce the cost of covered events, but they usually come with a deductible. If your deductibles are high, you may want to keep enough in your rainy day fund to cover them.
  • What have previous unexpected expenses cost? Take a look at the expenses that snuck up on you over the last year. Total these up and use this number to help you set your goal.
  • What do you worry about most? If you have specific expenses that keep you up at night, make sure you have enough in your rainy day fund to cover them.
Taking time to consider your situation and the potential costs you might run up against could help you better set your target savings goal.

Where to Keep Your Rainy Day Fund

You want your rainy day fund to be in a safe place, have funds accessible when you need them, and ideally earning interest. Consider keeping your rainy day fund in a high-yield savings account that’s FDIC-insured or NCUA-insured. This insurance means up to $250,000 of your money per depositor, per account ownership type, per financial institution is protected if the bank or credit union goes under.Choosing a high-yield savings account with higher-than-average rates could help your savings grow when you’re not using it. Your balance earns interest on the money you contribute to the account as well as the interest already paid into the account. That means your money could essentially grows on autopilot.And by keeping your rainy day funds in a separate account, that money is out of sight and out of mind. This helps to decrease the risk of you spending it on other purchases and makes it easier to keep those funds available in times of need.

Final Thoughts

Financial rainy days can dampen your mood if you’re not prepared for them. By setting up a rainy day fund, you potentially have money set aside for the rain and could be better prepared for those surprise expenses when they pop up. Ready to open a rainy day account? Check out Jenius Savings to learn about our high-yield savings accounts.
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