Revisit (or Create) Your Rainy Day Fund in 7 Steps
In times of uncertainty, our rainy day funds become more important than ever. Why? They provide us with cash in case of an emergency - like a change in income, job loss, or unexpected expenses.
They also give us freedom to make choices, peace of mind, and space for creativity. Think about it. Maybe you lost your job and are looking for your next career opportunity. If you have a rainy day fund, you’re better positioned to pass up on a job that’s not a good fit because you don’t need the cash as urgently.
This can make a huge difference in our career trajectories, future earnings, and our overall happiness and satisfaction at work.
If you already have a rainy day fund or a rainy day goal in mind, it’s a great time to revisit that number.
Here’s a step-by-step guide to reassessing (or creating) your rainy day fund to protect you during times of uncertainty.
Step 1: Re-evaluate your expenses.
Before we can decide how much we want to put aside in our rainy day funds, we have to understand how we’re spending. If this is something you’ve avoided, that’s okay. Many of our expenses have changed, making it a great time to reassess.
I use a budgeting spreadsheet to map out twelve months of expenses. We often think about the current month of expenses when making a plan, but monthly plans often fail to account for some of the larger, irregular expenses that will inevitably come up.
If twelve months feels overwhelming, start with one.
Ask yourself (honestly), would my expenses look different in the case of an emergency? Are there “frivolous” expenses that we would let go of? Or do we find ourselves increasing expenses during this stressful time? There is no right or wrong answer, but we do need to be honest with ourselves.
From there, we’ll calculate our total monthly expenses in the case of an emergency.
Step 2: How many months?
This is a very common question. How many months of expenses should I have in my rainy day fund? As depressing as it is, I recommend thinking through a few emergency scenarios. What would you need to have saved if you lost your job? If a close family member got sick?
In your emergency situations, how many months of expenses in savings will give you peace of mind?
You’ll commonly hear 3-6 months as a ballpark recommendation from financial experts.
Given that the majority of Americans have less than $400 in savings, saving up three to six months of expenses (or whatever you decide) can sound really daunting. If you haven’t started saving, start with a goal of one month. If that still feels daunting, start with a goal of saving $500 or $1,000. You can work your way up from there.
We often feel more motivated with small, attainable wins than lofty goals that feel out of reach.
Step 3: Calculate your rainy day fund number.
To calculate how much you’d like to have in your rainy day fund, multiply your total monthly emergency expenses (from step 1) by how many months of expenses you’d like saved (from step 2).
For example, if you’d like to have 3 months of expenses and you’d spend $5,000 per month, you’d want to have $15,000 (3 x $5,000) in your rainy day fund.
Step 4: Create the space.
Where will you keep your rainy day savings? Most commonly, we keep it in our general savings account. This doesn’t work for a few reasons.
When all of our hard-earned savings are saved collectively, it’s unclear which money is allocated toward each goal. This makes it very easy to overspend on one goal and short change the other. Since our rainy day funds are often static, they tend to get depleted to pay for travel, home repairs, or a large credit card bill.
To avoid this, I recommend keeping your rainy day fund out of sight and out of mind in a separate online savings account.
Although you’ll still have access to the liquid funds, you don’t see the money every time you look at your checking account.
By separating our goals into different accounts, each dollar we have gets a specific job.
Step 5: How much will I contribute?
The budgeting spreadsheet will really come in handy for helping you decide how much you can contribute to your rainy day fund each paycheck.
If you are living paycheck to paycheck, you might worry that you can’t contribute anything. In that case, start small. You can start with as little as $5 per paycheck and work your way up from there.
During this reassessment, you might also decide to make a lifestyle change or to let go of an expense in order to put more money towards your rainy day fund. If you do that, step 6 will become incredibly important.
Step 6: Make it automatic.
Once we determine how often and how much we’ll set aside to our rainy day fund, we want to set it up to be automatic. We often imagine and hope that there will be money to save at the end of each month but unless we plan for it, there won’t be.
This has happened to me countless times! The trick is that we need to pay ourselves first by prioritizing saving for our goals before we pay others, live our lives, and or purchase gifts.
You can do this by setting up an automatic transfer. If your goal is to allocate $200 per paycheck towards your rainy day fund, schedule an automatic transfer on the date your paycheck clears.
This also takes willpower out of the equation and makes your life easier because you don’t have to remember to do anything. And it makes it a lot more likely that you’ll see your rainy day fund build over time.
Step 7: When and how will I use it?
One of the most challenging aspects of the rainy day fund is actually using it. Once you’ve built the habit of saving every paycheck, it can feel painful and even unnatural to use the money set aside.
People who’ve retired report a similar feeling depleting rather than building their retirement money.
But that’s what it’s here for!
To make this easier on ourselves, we should be very clear from the start what the money is going to be used for. What are some cases where you’d use the money (probably scenarios that were brought up in Step 2)?
If a scenario arises where it makes sense to use the rainy day fund, make the conscious choice to use it. Then transfer a month’s worth of expenses to your checking account. This feels a lot more powerful and less painful than having to transfer money over slowly every time you need it.