Busting 5 Myths About Rainy Day Funds

A rainy day fund is an important safety net. But you may be getting mixed messages on how to build and use one effectively. To help clarify fact from fiction, we’re busting some long-held thinking. Don’t let these five common beliefs stand in your way of confidently and productively making rainy day savings work for you.

Myth #1: A rainy day fund is primarily meant to cover a job loss. 

Reality: A rainy day fund is for anything that would disrupt your monthly finances.

Losing a job is definitely one reason to have a rainy day fund. And it’s traditionally been a top goal of emergency savings. After all, it may take a while to find another position that suits you.

But a job change shouldn’t be the only reason. If you limit the potential of a rainy day fund in this way, you’re automatically curbing its use to just one unexpected situation. And that could make you feel like the only choice is to dip into other savings, max out a credit card or take on debt to take care of other unexpected expenses. Instead, think of emergency funds broadly, not narrowly.

Let go of the ‘baggage’

What’s a good way to do this? Don’t get bogged down by the “baggage” that tends to come with the words “emergency” and “rainy day.” Expand the capabilities of a “just in case” fund so that it can better serve any unplanned need you might have. Give your rainy day fund definition some flexibility to cover whatever would upset your everyday finances.

Myth #2: I should only tap a rainy day fund for serious emergencies. 

Reality: Having an emergency fund that you don’t use because your threshold for “emergency” is too high defeats the purpose.

It’s natural to feel like the money we’ve specifically set aside for emergencies shouldn’t be touched — unless we experience a true disaster. In fact, some people tend to feel guilty if they tap a rainy day fund for anything other than the rarest of situations.

One recent survey, for example, found that 54% of people with emergency funds took on debt rather than tap the fund. When asked why, nearly 30% said they were reluctant to use the rainy day money because of the time and effort it took to save it.

But it’s important to realize that setting the bar too high could be counterproductive. Predetermined limits aren’t always helpful nor practical. They can make us think we should find other ways to handle an expense — even when there’s savings available.

The fact is: Rainy day funds exist to be used. Don’t be afraid to use them if a need arises.

Define your needs

To create your rainy day strategy, define your own “unexpected situations.” Give them a name and a purpose based on your priorities. The takeaway? You can feel comfortable using your rainy day fund for non-emergency but still unexpected situations that are meaningful for you, too.

Here’s a perspective that you should take to heart: Dipping into your rainy day fund isn’t a failure. It’s a sign of success because you planned, saved for and covered an unanticipated expense. Congratulate yourself! Your rainy day fund did its job.

Myth #3: A rainy day fund must hold three to six months’ worth of living expenses. 

Reality: There’s no magic number or hard-and-fast rule that applies to everyone.

While this amount is a popular guideline, it can too easily lead to feelings of failure for those of us who don’t have that much or doubt that we’ll ever reach that level. That’s why this widely held recommendation shouldn’t be thought of as a starting point or an ending point. It’s simply a turning point. Remember, everyone starts at zero when they begin to save. And your first goal should be whatever you decide is best for you. After you meet the first goal, set a new one.

Set your own objectives

Instead, establish your own personally meaningful targets, like one month’s rent, two car payments, a new air conditioner or a costly vet bill. You decide what your ideal target is. Once you reach, say, two or more months of income, then you can take steps to grow those savings with other investments.

The takeaway: When it comes to rainy day savings, one size doesn’t fit all. There are no quotas: The most important thing is to get started and then continue to build on your success.

Here’s one data point to think about: Research by Elevate’s Center for the New Middle Class found that 47% of people with credit scores below 700 say they experience less than three unexpected expenses a year; 53% encounter more.

So, look back for a year or more and identify what unanticipated expenses disrupted your finances. How much did they cost? This exercise will help give you a baseline for the types of situations and costs that put you in a tight spot. For instance, say you got charged $175 in bank overdraft fees last year — and you never want that to happen again. Determine the total amount of charges that caused you to overdraft, if you keep a cash cushion of that amount, you could use it anytime you’re close to being overdrawn.

Myth #4: It’s fine to keep your rainy day fund in your regular bank account. 

Reality: It’s better to keep rainy day money separate from your checking account and savings account that you use for routine money management.

Why? There are a few good reasons to keep savings earmarked for rainy day money apart from your everyday accounts.

First off, having a separate account means that money won’t get mixed in with other funds meant for different needs. This way, you’ll have an easier time preserving it for when you need it.

What’s more, having a standalone account can help motivate saving for your goal amount by giving it a specific purpose. And if you earmark it for a specific purpose, you’ll be less tempted to use the money for something else.

And lastly, separating rainy day money allows you to take advantage of types of savings accounts with potentially higher interest rates to grow your savings. Check out high-yield savings accounts or money market accounts with no fees and low or no minimums as potential options.

Myth #5: I can’t afford to save for a rainy day fund. 

Reality: Don’t panic. Saving for the unexpected could be easier than you think.

Meeting current expenses can be hard enough without the additional stress of saving for unplanned emergencies. But a quick financial checkup may help discover opportunities for savings that you may not have realized were there.

Identify easy changes

Do a little homework by reviewing your living expenses. How many of them are fixed or constant? (These are costs that you have to pay each month, such as rent, utilities, car payments and insurance). How many of them are variable and could be trimmed? (These are costs that can change month-to-month or may be dropped at need, such as gas, dining out, clothing and hobbies).

For example, can you spot one or two monthly expenses that you could cut, such as an extra streaming subscription or unused gym membership fee? If so, cancel and replace it with an automatic transfer for the same amount to your savings account.

The takeaway: Combing through your expenses may uncover extra cash that you can redirect toward rainy day savings.

Starting small makes a difference

Don’t worry about meeting a lofty rainy day fund amount — you can start small and still have a real impact. For instance, say you’re able to set aside $25 a week. After just one month, you’ll have $100 saved. That may not sound like a lot, but if you use it to prevent just one bank overdraft fee, it becomes well worth it. And at the end of a year, you’d have a $1,300 rainy day fund (more, if the account earns interest). Think of what that cushion could do for your future needs.

The key is to develop a savings habit that you maintain over time.

Customize your rainy day fund to your unique needs 

Rainy day funds should be a way to ease financial stress, not cause it. Everyone’s financial life has many moving parts — and sometimes we’re hit with an unpredictable expense. So, it's important to see beyond the conventional wisdom when it comes to building a rainy day fund that fits in with your priorities. The benefits of having a financial safety net are clear, but your rainy day fund should reflect your reality and provide peace of mind — not a general set of guidelines that might not suit your needs.