Rainy day fund: Definition, purpose, how much to save, where to keep it

A rainy day fund is money that’s set aside for unexpected and lower-cost expenses, like home maintenance or parking tickets.

A rainy day fund is slightly different from an emergency fund. The main differences are the size of the fund and what they’re used for. A rainy day fund is for smaller unanticipated expenses, such as buying new tires or paying to repair a home appliance. An emergency fund is reserved for unexpected events or major life changes, such as a job loss or divorce, that can have severe consequences on your finances.

Both are critical for preparing for the unexpected, especially at a time when the percentage of consumers who’d cover an emergency with their credit card rather than savings is the highest since 2014. According to Bankrate’s latest annual emergency fund report, 25 percent would pay for a $1,000 sudden expense with a credit card; less than half (43 percent) would pay for it with savings. A rainy day fund, paired with an emergency fund, can help to navigate unexpected challenges and avoid accumulating debt as a result of them.

Expenses your rainy day fund should cover

Use your rainy day fund to cover smaller expenses — like car repairs or fixing a furnace — that could force you to open your wallet when you least expect to. Other examples include:

• Medical procedures
• Doctor or vet visits
• Replacing a broken windshield
• Fixing a broken appliance
• Vehicle maintenance
• School supplies and fees
• Moving costs.

Where to keep your rainy day fund

Keep your-rainy day fund in an account that’s easily accessible, such as a high-yield savings account. In an FDIC-insured high-yield savings account, you’ll get federal coverage while earning interest on your money at a rate much higher than what typical deposit accounts offer. These savings accounts typically allow for quick and fee-free withdrawals (up to a certain limit per month). Many also allow you to set up savings “pockets” or separate funds within a single account, making it easy to distinguish between your rainy day fund and your vacation fund, for example.

An alternative option could be to keep your rainy day fund in a money market account, where you may get the added benefit of check-writing capabilities. Just note that many money market accounts have high minimum deposit requirements, and, like savings accounts, usually limit how many withdrawals you can make per month.

How much money to put in your rainy day fund

The recommended amount to keep in a rainy day fund is $500-$2,000. However, it will vary based on your individual circumstances. And remember: This account does not need to be as big as your emergency fund.

To figure out how much to put in your rainy day fund, do an assessment of what might go wrong in your life and how much it will cost to fix it.

Michael Kelly, CFA, CFP, president and founder of Switchback Financial in Madison, Connecticut, says much depends on your own personal financial situation.

“For example, if you own a house, there is a lot more that you will need to replace if broken or worn down (such as) appliances, a boiler, an A/C unit or a driveway, whereas renting this is covered. Additionally, it depends on the amount of insurance coverage you currently have. Having high deductibles on your car insurance, for instance, means you would need cash to cover that deductible and would require more on the rainy day fund.”

When forecasting for rainy days, consider the rest of your family, too. If you have children, a rainy day fund may help pick up the bill for a doctor’s visit that isn’t totally covered by insurance. It may also be used to cover the cost of a medical procedure for your pet.

What experts say about rainy day funds

Greg McBride, CFA, Bankrate chief financial analyst: “Consistent contributions to savings are essential to being prepared for all life throws at us. Because savings may fluctuate due to one-off, even relatively minor, expenses, it is important to replenish this so you’re adequately saved for unplanned expenses large or small, or even opportunities that present themselves.”

Chloe Moore, CFP, founder of Financial Staples: “If you’re unsure of what costs could be covered by a rainy day fund, make note of overlooked expenses as they occur. You can also look back at your expenses over the last year to see what costs could fall into this category. Be sure to replenish the funds after you use them so you have cash for the next time.”

Kenneth Chavis IV, CFP, senior wealth advisor at Versant Capital Management: “A rainy day fund is essential for everyone — no matter what life stage you are in or how big your net worth. A rainy day fund, like an umbrella, provides cover for life’s inevitable rainy day. Whether it’s tomorrow or a year from now, a rainy day is bound to come, so it’s best to properly prepare for this with an adequate amount of cash in a highly liquid account.”

Malik S. Lee, CFP, managing principal and founder of Felton & Peel Wealth Management: “I am a big fan of rainy day funds because they add just another layer of protection to your nest egg. Subliminally, most Americans might already have some funds set aside for those rainy days. But in most cases, those funds are sitting in a checking account, earning nothing. By taking advantage of the higher rates inside a high-yield savings account, even your rainy day fund can see some sunshine!”

Bottom line

It’s not about if the rain will come, but when — unpredictable financial hiccups are inevitable, and with a rainy day fund, you’ll have the umbrella you need to stay financially dry. It can prepare you for navigating unexpected expenses without derailing broader financial goals. Furthermore, by placing this fund in a high-yield savings account, you can ensure that your money works for you even as it stands by, accumulating returns over time.

— Bankrate’s René Bennett contributed to an update of this story.