Do you have a rainy day fund? Some people might have one without realising and others may have the intention of building one to improve their financial security. Either way, there are plenty of reasons why you should consider having one ready to go. Here’s what you need to know.
What is a rainy day fund?
A rainy day fund is there to protect you from unforeseen costs.
It differs slightly from an emergency fund, in that it’s used to cover unexpected costs such as a car-related issue, fines such as parking tickets or a broken appliance. The idea is that it’s there to protect you against what might otherwise be a financial burden. Rainy day funds can be anywhere between a few hundred pounds to a few thousand pounds.
Meanwhile, emergency funds are a little larger. They should be used for drastic life changes, such as losing your job. The goal here is to have a buffer that means you can go without a source of income for a little while. Experts suggest that the size of an emergency fund should be around three to six months’ worth of living expenses – though of course the more savings you have, the more secure you’ll feel.
In terms of knowing how to save money for your rainy day fund, it’s worth refining a budgeting plan so that you can save effectively and build your pot of savings. There are plenty of online budget planners you can use as a tool to help with this.
Some will build a rainy day fund through savings however others might opt for fixed-rate bonds, where you’re guaranteed a fixed rate on your savings. So long as you don’t mind putting your money away for a while, this is a useful method.
It can help to reduce stress
A rainy day fund can provide individuals with peace of mind – and especially during times when the economy is struggling. Having this type of back-up can be hugely comforting. It puts you back in control and allows you to have financial security and independence, where you aren’t reliant on having to raise funds elsewhere.
It can reduce your reliance on having to raise financial funds
Knowing that you have money in the bank can mean you feel less inclined to take out a loan or put money on a credit card and complicating your financial situation further. Having to rely on finance that incurs interest that needs paying back is less than ideal when you could cover the costs upfront with a fund you’ve been saving up. High-interest debt related to larger loans to cover unforeseen costs is something you’ll want to avoid where possible.
