Emergency Fund and a Rainy Day Fund
Unexpected expenses can pop up at any time. Are you ready? Do you really need an emergency and a rainy day fund? Find out below with this question and answer set.
Q: Do I need a separate rainy day and emergency funds?
A: To simplify their money, people sometimes consolidate accounts. Consolidating is OK in many instances, but it’s important to remember that rainy-day and emergency funds serve different purposes. Additionally, it’s essential to have not just one but both funds available to tap into as needed.
Why have a rainy day fund?
Say your washing machine decides to quit and needs replacing suddenly. You’re now looking at an extra expense that can run anywhere from $350-$850 (or more). Where are you going to get that kind of money in a pinch?
According to a Federal Reserve Board report, if you’re like 44% of Americans, you’ll need to sell something you own or borrow money to fund such an unexpected expense. Or, you might choose to charge the purchase of a new washing machine to a credit card, which means you’ll pay extra in interest, and the cost of the new machine will haunt you for months — or even years — to come. Either way, a surprise expense of a few hundred dollars can be enough to send you into a tailspin of debt.
Is there a solution?
Here’s where your rainy day fund comes in. It’s a small savings account created just for these little, unfixed expenses you know will occasionally crop up. You’ll tap into your rainy day fund to pay for minor household and car repairs, to cover the cost of summer camp for your child, or to replace your broken kitchen table. When you have a way to fund these small financial hiccups, they won’t have as much of a chance to disrupt your financial health.
Why have an emergency fund?
In contrast to your rainy-day fund, an emergency fund is for much more significant expenses. It should have enough padding to keep you afloat even if you experience a significant disruption in your life, like a divorce, job loss, or illness. Without an emergency fund, any of these, or a similar event, can leave you scrambling to pay your bills and quickly send you into a debt trap that can last years.
How much money should be in each fund?
Your rainy day fund, created for minor expenses, only needs to hold $500-$1,000. That should be enough to tide you over in case of a small, unfixed cost.
Sometimes, you may be able to anticipate these expenses and save up for them accordingly. For example, if you know your child will need braces next year or your HVAC system will need replacing in a year or two, you can build up your rainy-day fund over the next several months until it has enough to fund these anticipated expenses.
Your emergency fund should be positioned to pull you through major financial crises. That’s why you need to have a lot more money in the account. Ideally, it should hold 3-6 months’ worth of your living expenses. This value will vary according to circumstance and can be anywhere from $3,000-$10,000 or more. Find your magic number by tracking all your fixed and discretionary expenses for a month and multiplying that amount by 3 or 6.
Where should I keep these funds?
By definition, the cash in both funds must be easily accessible. Don’t lock the money up in a savings certificate or another long-term savings account that will make it difficult and sometimes expensive to withdraw when the need arises.
Your Savings Account is a perfect home for your rainy day and emergency funds. You can even set up multiple accounts for each one. Your money is always safe at Elevate Credit Union and will grow at a .40% APY*. Best of all, you’re free to withdraw your funds without penalty whenever necessary.
* APY = Annual Percentage Yield and is as of 9/1/2019. Find the current rate on our website, elevatecu.com.
How can I build my funds?
Now that you know: You need an emergency and a rainy day fund. But how are you going to get the money for both? If you’ve never saved up for unexpected expenses, the prospect of doing so can be daunting.
No worries, though. It is easier than you think with a bit of discipline and hard work! Use these three tips to build your funds:
Start a side hustle.
Freelance for hire, take online surveys for spare cash, or accept a seasonal position. Keep all or most of the extra money you pull in for your funds, making equal contributions to each fund.
Trim your budget.
Take a long hard look at where your money goes each month and choose your biggest money-gobbler to cut. Use the money you save for your funds. If you need little help with this, we offer Free Budget Counseling.
Make it automatic.
Set up an electronic transfer from your checking account to your savings account so your funds grow on autopilot and are less tempting to use for fun. You can try Elevate’s Save the Change; without even noticing, you can build nice savings. Check it out here: Save The Change.
It may be some time before your funds reach your goal, but that’s OK. It takes time to save up that kind of money, and hopefully, you won’t need to tap into your savings until you’ve successfully built your funds.
Also, you won’t need to stick to your tightened budget or keep your extra job forever; you can drop both once your funds are built, taking them up again only when the money in one of the funds gets low.
Start setting up your rainy day and emergency funds today! Knowing you are ready for any financial eventuality, you’ll sleep better at night.
