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Why have a rainy day fund?

Say your washing machine decides to suddenly quit on you and needs replacing. You’re now looking at an extra expense that can run anywhere from $350-$850 (or more). Where are you going to get that kind of money in a pinch?

According to a Federal Reserve Board report, if you’re like 44% of Americans, you’ll need to sell something you own or borrow money to fund such an unexpected expense. Or, you might choose to charge the purchase of a new washing machine to a credit card, which means you’ll pay extra in interest and the cost of the new machine will be haunting you for months — or even years — to come. Either way, a surprise expense of a few hundred dollars can be enough to send you into a tailspin of debt.

Is there a solution?

Here’s where your rainy day fund comes in. It’s a small savings account created just for these types of small, unfixed expenses that you know will crop up on occasion. You’ll tap into your rainy day fund to pay for minor household and car repairs, to cover the cost of summer camp for your child, or to replace your broken kitchen table. When you have a way to fund these small financial hiccups, they won’t have as much of a chance to disrupt your financial health.

Why have an emergency fund?

In contrast to your rainy day fund, an emergency fund is for much larger expenses. It should have enough padding to keep you afloat even if you experience a major disruption in your life, like job loss or illness. Without an emergency fund, an event can leave you scrambling to pay your bills and quickly send you into a debt trap that can last years.

How much money should be in each fund?

Your rainy day fund, created for minor expenses, only needs to hold $500-$1,000. That should be enough to tide you over in the event of a small, unfixed expense.

Sometimes, you may be able to anticipate these expenses and save up for them accordingly. For example, if you know your child will need braces next year or that your HVAC system will need replacing in a year or two, you can build up your rainy day fund over the next several months until it has enough to fund these anticipated expenses.

Your emergency fund, however, should be positioned to pull you through major financial crises. Ideally, it should hold 3-6 months’ worth of your living expenses. This value will vary according to circumstance. Find your own magic number by tracking all your fixed and discretionary expenses for a month and multiplying that amount by 3 or 6.

How can I build my funds?

You’re convinced: You need an emergency fund and a rainy day fund. But how are you going to get the money for both? If you’ve never saved up for unexpected expenses before, the prospect of doing so can be daunting.

No worries, though. With a bit of discipline and hard work it can be done! Use these tips to build your funds:

• Enroll in our Debit Card Round Up Savings Club! This program is an extension of our debit cards, and you can enroll at any time. Every eligible purchase will be rounded up to the nearest dollar. The difference will be deposited in to your Round Up Savings Club the next business day. You can find more information here: https://www.fairmontfcu.com/accounts/personal-savings/savings-club-account.html
• Trim your budget. Take a long hard look at where your money goes each month and choose your biggest money-gobbler to be pruned. Use the money you save for your funds.
• Make it automatic. Set up an automatic transfer from your checking account to your savings accounts when you receive a paycheck, so your funds grow on autopilot and are less tempting to use for fun.

It may be some time before your funds are fully padded, but that’s okay. It takes time to save up money, and hopefully you won’t need to tap into your savings until you’ve successfully built your funds.

Start setting up your rainy day and emergency funds today!