Understand how a rainy day fund can help you build financial resilience.
➜ Why a rainy day fund is important
➜ How much you should have in a rainy day fund
➜ Where to keep a rainy day fund
A rainy day fund is money set aside for small financial shocks – like a larger than expected electricity bill, parking fine or replacing something like your fridge.
It’s similar to an emergency fund in the sense that it’s money set aside for when things go wrong. But it’s different as a rainy day fund is a smaller amount, say the cost of a new washing machine or car repair - expenses that can derail your budget.
Having money set aside means you can bounce back from the unexpected. Research from EY found that when a financial shortfall occurs, 7 in 10 people resort to borrowing money and paying interest for an extended period of time. So instead of having to borrow and potentially paying interest, if you have a rainy day fund you can dip into that and then build it back up.
Sometimes it can be tempting to think that we don’t need a rainy day fund because we don’t want to imagine things going wrong.
But if you look back at your transactions over the last six months, you’ll probably notice a couple of times that you had to spend money you hadn’t planned on.
Even if you can’t spot any ad-hoc costs that have thrown your budget off, there’s still a chance something could happen in the future. Preparing ahead of time will mean you’re in the best position if it does.
It might feel a bit steep to aim for the cost of a washing machine or a large vet bill straight away. So if it helps, start small and build up. Even having a small amount is going to mean you’re more likely to be able to cover a cost and at the very least will reduce how much you have to borrow.
What can you reasonably save in the next 3 months? Use your budget to figure this out and start with that amount as your goal. Once that is saved set yourself another goal. It may be to increase your rainy day fund or it could be to start building an emergency fund.
To start, you might want your rainy day fund to be separate from your spending money. This will stop you from accidentally spending it and give you a clearer picture of how much exactly you have saved.
That's why you could think about putting the money into a savings account. Because you don’t know when you’ll need to use the money, it’s ideal that the savings account is easily accessed. You don’t want to have it locked away or be penalised for accessing the money on short notice.
An emergency fund is another key tool in building financial resilience – find out why.