What’s a rainy day fund, and why does every family need one?

The way we manage our household finances can significantly affect our feelings around financial security and financial stress. Even small changes, like setting aside some funds for unexpected expenses, can make a big difference.

You’ve likely heard of an emergency fund, but have you heard of the term “rainy day fund”? This chunk of change is set aside to cover expected expenses, and it can really help with maintaining financial stability and avoiding debt.

But what is a rainy day fund, exactly — and how should you go about starting one?

What is a rainy day fund?

A rainy day fund is an amount of money set aside for expected but irregular expenses — like car repairs, doctor bills, or veterinary bills.

Most of us have a set of routine bills each month: Rent, utilities, groceries, etc. These costs stay relatively similar over time, so they’re easy to plan for.

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Then, we have expenses that we know will come around but that aren’t necessarily consistent or predictable. As you advance in your budgeting skills, you'll be able to plan ahead for these expenditures. Still, a rainy day fund is great for gap coverage.

Ideally, a rainy day fund should be kept in a separate savings account, outside of your normal bank account. That way, you can rest easy knowing it’s there when you need it — and that you won’t need to dip into your emergency fund or other savings. 

What are rainy day funds used for?

Some examples of things that rainy day funds might be used to pay for include:

• Car maintenance (oil changes, flat tire repairs, minor repairs, etc.)

• Veterinary care for your furry friends

• Doctor visits, dentist visits, etc.

• Home maintenance

• Replacing broken items

• Fees for kids’ activities, sports, etc.

• Other unexpected, minor expenses

Basically, any expense that pops up that’s not within your standard monthly budget could be covered by your rainy day fund. You might choose to transfer some money from your fund to your main checking account to cover these expenses.

There’s no hard-and-fast rules, of course: A rainy day fund is what you make it. But ideally, the money in this account should be used to cover those irregular expenses with cash, so that you don’t have to put things on a credit card. Think of it like a financial cushion for all those little expenses that come up.

What’s the difference between a rainy day fund and emergency fund?

Keep in mind that a rainy day fund is different from an emergency fund, although they are similar.

An emergency fund is generally used for financial emergencies. When life throws something unexpected your way, that’s when you lean on the emergency fund. For example, emergency funds might be used to repair or replace a vehicle that is significantly damaged or to pay for major unexpected medical expenses.

Emergency funds are also often used to replace lost income in the case of a job loss or other reduction of income. Because of this, it’s typically recommended that families save a significant amount in their emergency fund. Experts often recommend having three to six months’ worth of living expenses saved in your emergency fund. While that’s not possible for some families, saving as much as you can is still beneficial.

On the other hand, a rainy day fund is usually much smaller. How much should you save in a rainy day fund? As little as $500 and perhaps up to $5,000 or so is perfect.

Then, you can use the rainy day fund to pay for assorted expenses outside of your normal routine and to cover minor shortfalls in your budget.

Of course, there can be some overlap. Your rainy day fund could certainly also be used as a safety net should you lose your job or wind up facing significant unexpected expenses. But if you can, it’s best to have both a general fund for rainy days and an emergency fund.

Why does your family need a rainy day fund?

Rainy day savings can help protect your finances. In a recent Federal Reserve survey, 32% of Americans said that they would have to go into debt or sell something to pay for a $400 unexpected expense. By being prepared with a small stabilization fund, you can avoid going into debt and have more financial peace of mind.

How to start a rainy day fund for your family

Starting a rainy day fund involves two main steps: opening an account to stash your money and funding the account.

Open an account

It’s best to have your rainy day fund outside of your standard checking account. You could use a money-market account, a separate savings account, or a high-yield savings account. This keeps the money separate from your regular spending money and ensures it’s accessible if you need to make a withdrawal.

With rising interest rates and compound interest, you can actually earn a bit of extra money on your savings. Look for accounts that pay a high annual percentage yield (APY) to help you reach your financial goals.

Also, make sure any account you open is FDIC-insured. This means that the government insures the bank account from any losses up to $250,000.

If you want to get your kids involved and teach them about saving, you can set them up on the Greenlight app. Not only can they set savings goals, but they can also earn up to 5% Savings Rewards and watch their money grow.

Fund the account

Once you’ve opened an account, set up some savings goals. Maybe you set a short-term goal of establishing a $500 rainy day fund and a long-term goal of building that up to $2,000. 

Then, work backward from your goal and to decide how much you will contribute to the account and how often. For example, if you want to reach your $500 goal in one year, you can divide $500 by 52 to determine that you need to deposit around $10 per week into your rainy day fund.

If you keep saving $10 per week for four years, you’ll have $2,000 in your rainy day fund.

A rainy day fund is a key account to improve your personal finances

Having a rainy day fund with enough money to pay for those uncommon expenses can be a huge relief. It can take financial stress off your plate and protect your family’s finances from debt.

And remember, even a small amount of savings is better than having no savings at all. Whatever you can afford to set aside, start today to work toward a brighter financial future.

Want to instill good personal finance habits in your kids? The Greenlight debit card and app for kids and teens can be a great tool to use. Greenlight lets kids and teens manage their own money, earn rewards on their savings, learn how to invest for their futures, and play interactive financial literacy games.

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