How to Build Your Rainy Day Fund

The Squeeze

• A rainy-day fund is a small amount of savings to get you through life's little surprise expenses — different from an emergency fund, which is meant to carry you through a larger life crisis (covering 3 to 6 months' expenses).

• Less than half of Americans have enough cash on hand to cover a $400 bill — which means a small emergency can turn into a big one. 

• If your cash flow is tight, start with setting aside even $10 a week, into a desk drawer or a separate account. In just a few months, that money might be enough to pay for a surprise school expense or more.

We’ve all had those surprise bills: the car needs a new air conditioner, the cat has kidney stones, the cost of heating oil skyrockets. Many of us get completely thrown off our budget by one or two of these unexpected outlays.

A few years ago, the U.S. Federal Reserve reported that less than half of Americans have the cash to cover an unexpected $400 bill. The other 55 percent would need to sell something, use a credit card, take a loan or come up with the money another way.

If you’re already stressed about living paycheck to paycheck, needing to ask friends or family to spot you a few Benjamins probably won’t make you feel better.

So then how do you prepare for a shocking expense? Start a small rainy day fund. 

A rainy day fund is similar to an emergency fund, but smaller and designed to cover one-time bills. By comparison, an emergency fund may be three and six months salary, and for use when faced with a life-changing event, like a layoff or new addition to the family. The amount of money in a rainy-day fund ranges from a few hundred to a few thousand dollars. And this pocket of set-aside money can help keep you on track when something happens in life that threatens to derail you. 

And nothing feels better than being prepared to weather a small crisis! 

Designing Your Umbrella

To figure out how big your rainy day fund needs to be, try to add up all of the unpredictable charges that may come your way. Some people create rainy day funds for specific needs, such as pets. If you have a cat or dog, it’s not unusual for a health emergency to cost a few thousand dollars. And anyone who’s ever owned a car knows that unforeseen repairs have to be expected. Spending several hundred dollars for an alternator or new brakes comes with being a car owner.

While it’s rare you’ll have a jaw-dropping bill in every potential category, sketching out the possibilities will help you get a handle on the funds you may need — and connect you with the reality that one of those event is probably just around the corner. Will you have to pay for one of your children to go on a field trip or play a sport? If those chances are relatively high, but not definite, it makes sense to add money to your fund with that expense in mind. Same goes for potential home repairs and other seasonal costs, like landscaping, that you may not always account for in your monthly tally.

Those are just a few of the scenarios when you would need to dip into a rainy day fund. Once you realize the many ways it can be utilized, you’ll see why including an extra well of savings in your monthly budget will keep you calm when faced with a confounding bill.

The Rainy-Day Plan

Of course, saving a little extra money seems like a great idea until you actually have to put together an actionable plan. For many of us, cash has been tight the last couple of years and finding ways to squeeze a few extra pennies to save can seem impossible. 

Once you focus on what’s absolutely necessary, like groceries, versus the nice-to-have — uh, takeout — you can often uncover new sources of savings. Yes, life might not seem as fun when you stop yourself from buying this season’s trendy shoes in favor of repairing your current ones. But would you rather have the latest style on your feet or the airfare to fly to Vegas when you find out your childhood bestie has suddenly decided to elope? (Or, less fun, when you find out your boiler has hit the end of its useful life.)

Go Automatic

The first step toward creating an emergency fund can be as simple as opening a rainy day savings account. Even if you can’t fill the kitty immediately, the act establishes your intent to save. Next. figure out how much you can afford to set aside each month — and push yourself, even just a little. Consider using an automatic transfer to siphon off 5 percent or more of your paycheck. If that’s too daunting, begin by matching the amount you spend on lattes and extra snacks, about $5 a day. Within a few months, you’ll have enough to cover at least one left-field bill.

If the savings you’re setting aside makes life unbearable, you can adjust. Keep saving, though, even at a lower rate.The satisfaction of building the amount in a rainy day account is important, and will inspire you to put aside more in the future.

Once your rainy day savings are a regular part of the monthly budget, you can look for new ways to grow the account. Then when life’s next little unplanned expense shows up, you’ll be prepared. And that feeling is way better than the stress and worry of having to come up with cash out of thin air.