Rainy Day Funds: How to Build One and How Much You Should Have

Rainy Day Funds: How to Build One and How Much You Should Have

Sooner or later, we’re all bound to face a financial setback: a job loss, a medical emergency or car problems can each force us to reach into our personal savings, or, worse, go into debt just so we can keep going about our daily business. But when that rainy day does finally roll around, an emergency fund can provide the cushion you need to soften the blow and take your time getting back onto your feet. Here’s a list of steps you can take to build an account that’s available in case the unexpected does strike:

Know How Much You Need

You should aim to have enough in your emergency fund to support yourself for three to six months with no income–if you assume the worst, you’ll be prepared for anything. Take a look at your monthly expenses and come up with a rough estimate of how much you spend each month, then multiply that figure by anything between three and six, and make that the amount you hope to have in your emergency fund. It’s a lot easier to start setting money aside if you have a target number in mind. Nerdwallet’s emergency fund calculator can help you figure out how much to save.

Create an Account

If you’re setting aside money for an emergency, you should make sure that your rainy day funds go into an account that you’re not reaching into every day. That way, you’ll know how much, exactly, you’ve already set aside, and you’ll protect yourself from the temptation of using your savings for frivolous expenses. A high-interest savings account is probably your best option: your stash can mature as long as you’re not touching it, but it will still be easily accessible when it becomes necessary. Check out our article on types of savings accounts to learn more on where, exactly, you should put your money.

Start Setting Funds Aside

There are many creative ways to set money aside for your emergency fund. First, by devoting a certain portion of your monthly budget to your savings, you can set your sights on a specific date by which you’ll have enough money to rest easy. Other ideas, like keeping a jar in your house for small bills that will eventually be put into your emergency fund, can go a long way towards building savings quickly. We’ve made a list of small, everyday financial habits that can save you money–implement one or two of those habits, and devote the money you save to your rainy day fund.

Remember What It’s For

It will be hard to cultivate your emergency funds if your definition of “emergency” is too lenient. Anticipated funds, like auto insurance and holiday gifts, should not qualify as rainy days, nor should a flash sale on that laptop you’ve been lusting after for the past few months. If you don’t have enough money in your checking account to afford an arbitrary expense, then turn the other way–your financial security is far more important.

Establishing an emergency fund is a necessary step in the pursuit of financial freedom. Take a moment to figure out how you can build a rainy day fund without compromising your immediate financial stability, and put your plan into action.

You might also want to grant Power of Attorney to one or two loved ones, so that you can be confident that someone will be able to tend to your financial affairs, even if you’re not. Both of these steps will give you plenty of peace of mind, and you’ll be able to focus on the things that truly matter.

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