Rainy Day Fund: Steps to Starting One
A Rainy Day Fund and How to Start One
A Rainy Day Fund and How to Use It
Everybody should have funds available when the unexpected comes up, maybe because stuff happens, and it’s always nice to say you’re prepared. That’s where a rainy day fund comes in handy. It’s a way to pay routine expenses when income is disrupted, such as losing a job or a significant cost that you didn’t anticipate.
Rainy Day Funds usually are typical savings accounts, nothing special. Who doesn’t believe that everybody should start a savings account? The average person should put away around 20 to 25-percent of their income for future use (funds for consumerism, investment, retirement, education). At the outset, a savings account serves at least two functions:
- As a place to stash money away for future investment
- As a way to start a rainy day fund
How Much Should You Have in a Rainy Day Fund?
A rainy day fund then, represented by personal savings account that you can open at your bank, starts at the amount necessary to open a savings account and goes up to thousands of dollars. That sounds a little vague, but the truth is, everybody has to start somewhere when it comes to rainy day funds, and the initial amount in your savings account is where you start.
Dedicate your savings account’s growth to reaching a healthy rainy day fund amount, and then keep that dedication going. After all, the first thing you need in personal savings/investment accounts is a rainy day fund. You should pick a figure that will cover whatever expenses you believe will be required if an emergency arises.
The biggest problem a rainy day fund is designed to solve is an employment crisis. What if the bottom falls out at the office and I’m on the street looking for work. This is the consideration most people have to make. So, how much and for how long do you want to have funds available to tide you over until you find a new job?
If you work in a career, you’ll need:
- at least ten weeks to find another job
- Maybe, as long as 20 weeks.
- If you decide to look for a low-skill job, the average search time is around two months.
- Your hustle may speed things up.
- Whatever, that’s the time frame you need to fund your existence.
Why is it Dubbed “Rainy Day?”
These factors determine how much you need. It’s called a rainy day fund because not every day is sunny and bright, financially speaking anyway.
The average person is often only a paycheck away from financial instability, so most people don’t have a substantial fund to help out. Perhaps they use relatives or credit devices like personal loans to keep treading water. Sources say that most Americans couldn’t pay their bills without a regular paycheck after only two weeks without income.
How Do You Create a Rainy Day Fund?
While experts advise people to start a separate rainy day fund savings account, you can simplify things by creating a slush fund. While it’s nice to save up for a new car or a new home, you must start somewhere, so a slush fund covers all your savings goals.
Contribute 20%-25% of your take-home pay to a new slush savings account. Calculate how big an emergency account you need, and start saving. After you’ve reached a comfortable rainy day fund amount, set it in a separate account, then turn your attention to other savings goals like a retirement fund, or an education fund.
You might consider putting your funds into a CD so it earns a little interest. In fact, if you believe you won’t need a rainy day fund for 12 to 24 months, a CD is the perfect place for it. if something unexpected comes up, just take the funds out.
Do not invest your funds in the stock market, real estate, or a risky investment scheme. It’s not a fund to blow on Powerball. Those funds come from some other source like your entertainment fund.
What Does it Address?
As the title suggests, it addresses difficult situations. You could either have a wide or a narrow strike zone. A broad strike zone includes things like disability situations that might be better addressed by long-term insurance, but what are you going to do if you don’t have long-term disability insurance? Using the comprehensive model, you might handle a disability with a rainy day fund.
A narrow strike zone would use the fund to address primarily employment disruptions when your cash flow from a regular income is interrupted, usually through no fault of your own.
How Do You Know that You Need a Rainy Day Fund?
An excellent way to know that you need this fund?
- You have no savings at all
- You live hand to mouth or from paycheck to paycheck.
- Your savings strategy doesn’t anticipate employment disruptions.
In truth, ordinary people need a rainy day fund, suggesting that everybody should have one.
How Does the Fund Differ from Emergency Funds?
As previously discussed, emergency funds address physical disability, first and foremost. It’s good to have an emergency disability fund, or long-term disability insurance. If you’re laid up and can’t work for a few months, you’ll have savings you can use to solve your cash crunch problem. In most cases, a rainy day fund exists next door to an emergency fund, and it addresses employment disruptions.
Rainy Day Fund Jar
One way to fund the account is to put your spare change in a jar at the end of the day, a jar you entitle the “Rainy Day Funds.” Keep the jar in the back of your cupboard. You never touch this jar until it’s full, and at that time, you ascertain what your fund is worth. If you fill it up within a year, get a bigger jar or a second jar.
Rainy Day Fund App
Numerous apps address savings problems. The apps you don’t want are the ones that offer you cash forward against your paycheck. Finding a savings app sounds benign enough, but it can be an absolute nightmare. The most popular is Digit and Qapital. Digit starts out free, then charges $5 a month. Qapital offers a 30-day trial, and charges a nominal set by the plan chosen.
This article was published in 2021 and is slightly edited.
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