Guide to Rainy Day Funds

Q: How does a rainy day fund work?

A rainy day fund is a pre-set amount of savings set aside to cover extra, one-off expenses that may crop up throughout the year. Unlike an emergency fund, which is designed to cover a major expense or job loss, a rainy day fund is meant to cover midsize expenses that are outside of your typical monthly spending. Ideally, you want to keep a rainy day fund in a separate savings account so you don’t accidentally spend it on something else.

Q: What is the rainy day fund and how is it funded?

A rainy day fund is like a mini emergency fund. You're not saving up for a worst-case scenario (like a major home repair or long period of unemployment). It involves setting aside a smaller amount of money to cover unusual midsize expenses that may crop up during the year. To create a rainy day fund, you can simply open a separate savings account, then set up a recurring monthly transfer from your checking account into this new account. Once you reach your rainy day fund goal, you can stop funding the account. However, once you use the fund, you’ll want to fund it again, so it’s there when you need it in the future.

Q: What are common places to put a rainy day fund?

Common places to keep a rainy day fund include a traditional savings account, high-yield savings account, or money market account.

Lauren WardUpdated March 20, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

A rainy day fund is money that’s set aside to cover lower cost expenses that invariably come up but you weren’t necessarily planning on having to cover, such as your microwave breaking or needing new tires.A rainy day fund is not the same thing as an emergency fund. The main differences are the size of the funds and what they are intended for. A rainy day fund is meant for extra midsize expenses that often come up, whereas an emergency fund is earmarked for major, unexpected expenses and events (like needing a new roof or losing your job) that can have a lasting negative impact on your finances. It’s wise to have both a rainy day fund and an emergency fund. Read on for a closer look at how rainy day funds work, how to set up your rainy day fund, and how much you should keep in the account.

What Is a Rainy Day Fund?

A rainy day fund is a relatively small amount of savings that is earmarked for occasional expenses that may come up but aren’t part of your regular budget, such as car maintenance or taking your pet to the vet. Having money for a so-called “rainy day” can help keep you from running up expensive credit card debt to cover a cost that is outside of your usual monthly spending.

How Does a Rainy Day Fund Work?

A rainy day fund is usually kept in a liquid account (meaning the money is accessible), such as a savings account. That way, if the fridge goes on the fritz or you need to come up with an annual insurance premium, you have a safety net that is quick and easy to access. You won’t have to deplete your checking account or run up credit card debt to cover the bill. You can simply take the money from your rainy day fund.Once you deplete your rainy day fund, you’ll want to fund it again, so it’s there when you (inevitably) need it again.Recommended: 10 Key Benefits of a Savings Account

What Can a Rainy Day Fund Be Used For?

A rainy day fund can be used to cover any extra expenses that come up throughout the year, whether expected or unexpected. Some examples include:

Doctor visits
Vet visits
Dental procedures
Fixing or replacing a broken appliance
Car maintenance
Fixing a broken window
Home gutter cleanings
School shopping
Annual subscriptions
Emergency childcare
Emergency room visits
Parking tickets
Accountant/tax bills

Rainy Day Fund vs Emergency Fund

A rainy day fund is separate from your emergency fund. An emergency fund is designed to cover a significant financial setback. This might include a major home repair, a large medical expense, or income replacement if you lose your job.Financial experts often recommend setting aside at least three to six months' worth of living expenses in your emergency fund. If you are a single-income family or self-employed, however, you may want to put aside nine to 12 months’ worth of living expenses in your emergency fund.By contrast, a rainy day fund is designed to cover a one-time, smaller expenditure. This might be paying for summer camp for your child, replacing a broken home or car window, or any other short-term, out-of-the-ordinary expenses. While these expenses might not seem like a big deal, they could throw your budget off kilter and possibly put you into debt if you’re not prepared.

What Amount to Have in Your Rainy Day Fund

You don't need to worry about keeping multiple months of expenses in your rainy day fund. It's meant to be easy to achieve. The right amount is highly individual but, if you're just getting started, you might consider setting a goal of $500 for your rainy day fund. As time progresses, you could try saving up to $1,000 or maybe even $2,000.Something in that range gives you a good amount of cash to work with in case you need new tires or need to have an unexpected dental expense. It's not meant to cover nonessential expenses like a weekend getaway. Instead, you want to reserve your rainy day funds for true necessities that you don't have to cover on a regular basis. Recommended: How Much Does the Average American Have in Savings?

Starting Your Rainy Day Fund

Once you determine how much you want to have in your rainy day fund, you’ll want to consider how much cash you can afford to put into the fund each month. Ideally, you want to keep a rainy day fund in a savings account that pays a competitive annual percentage yield (APY) to help it to grow over time, such as a high-yield savings account or money market account. When considering where to put your fund, keep in mind that you don’t have to keep your rainy day fund at the same bank where you have your checking account. It’s generally easy to transfer funds from a savings account to a checking account online, even if the accounts are at two different banks.

Saving Money For a Rainy Day Fund

Once you decide how much you want to keep in your rainy day fund and have a designated account, it’s time to start saving. Here are some strategies that can help you reach your rain day savings goal quickly and painlessly.Automate your savings. Establishing an automatic transfer from your checking account into your rainy day savings account on a set day each month (perhaps on the day your paycheck clears) can be one of the most effective ways to grow this fund. Even if the amount is small, it will add up quickly because the transfer will happen every month no matter what. Take advantage of windfalls. Consider using a windfall, such as a bonus at work, tax return, or cash gift, to fund some or all of your rainy day fund in one fell swoop.Temporarily tighten your budget. Consider making some spending cuts for a few months and diverting that extra savings into your rainy day fund. To get some savings inspiration, consider doing a 52-week savings challenge or using these 7 proven ways to save.Recommended: What to Know About Loan Protection Insurance Before Purchasing a Policy

The Takeaway

Having a rainy day savings account can help you manage those annoying extra expenses that can crop up throughout the year that might otherwise throw you off balance. Unlike an emergency fund, which is designed to help you through a significant financial upheaval, a rainy day fund can help you handle midsize expenses when they crop up without having to turn to costly ways of borrowing money, such as high-interest credit cards.If you’re interested in finding a top rate for your rainy day fund, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

How does a rainy day fund work?

What is the rainy day fund and how is it funded?

What are common places to put a rainy day fund?

Photo credit: iStock/CatLane

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About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

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