Some people refer to the term Rainy Day Fund as being the same thing as an emergency fund. Personally, that’s not at all how I view my rainy day fund and I think that there is actually a pretty significant difference between the two. It is imperative that all people have an emergency fund and unfortunately, many people do not.
In fact, Statista did a study in this year showing that 33.88% of Americans have less than $1K in their savings account:
In 2019, this number was 69% so people are saving a lot more money (along with some stimulus savings from COVID), but this is still way too low of a number for 1/3 of the U.S. population.
Now, this doesn’t mean that these people don’t have any savings at all, because there are other ways to have your money saved; such as being invested in stocks or bonds, real estate, etc.
My emergency fund is in my high-yield savings account because when I think of an “emergency”, I think of something that I need prompt access to. I don’t want to have that money tied up into stocks or bonds and have to deal with selling them and then withdrawing the funds maybe a week later.
I am literally thinking of a situation occurring where a car is impounded and I need cash to get it out of the lot ASAP.
Sound unrealistic? Let me tell you a real story that happened to me.
When I was in Chicago, I had a car that I didn’t really have to drive much because I would just use public transportation. It wasn’t uncommon for me to go over a week without being in my car.
Well, one day I went to go find my car and it was just gone. I googled, “where is my car” and the Chicago impound lot came up. I searched by license plate and sure enough, it was impounded. I called the lot and asked why and they said that I had parked in an illegal spot.
When I asked what the illegal spot was, they said that there had been a temporary “No Parking” sign posted and my car was there, so they impounded it. So, this is the timeline of events:
- I parked my car in a legal spot
- They posted a “No Parking” sign
- They impounded my car
- I went to use my car and it was gone
“Andy, why didn’t you move your car?” I didn’t know they posted the sign! They didn’t communicate it and I didn’t walk by my car that week so I had no idea the sign had been posted at any point in time.
But guess what – I paid a hefty fine for it. It was $175 for towing the car and then $50/day. Well, turns out that the second the car is in the lot, that counts as Day 1. So, despite me going on the fourth day, I had to pay $425 to get my car back.
And they don’t accept credit card. It’s cash only. So, if my money was tied up in stocks, I would be in a really bad spot. Chances are, I would’ve had to wait for maybe a week, therefore paying another $50/day, or $350 more.
So, my point being, your emergency fund needs to be in cash or in a savings account, such as a high-yield savings account like what I use.
To me, this situation is more of a hurricane than just a rainy day. A hurricane is something that is crushing and needs to be fixed ASAP.
But if that’s an emergency fund, what is a rainy day fund? A rainy day is something that’s just more mildly inconvenient, but you know that it’s not going to go on forever. There won’t be devastation. In fact, there’s optimism that things will get better!
I like to think of a rainy day fund as being an opportunity fund. It can be used for many things that you would view as an opportunity!
The biggest example that I can think of is if there is a certain company that takes a massive dip in share price and you view it as more of a buying opportunity. As long as nothing has fundamentally changed in the company, a massive decrease in share price would just make the company look even more appealing than they looked previously!
Maybe they missed their earnings due to unrealistic expectations! Quarterly earnings are something that us long-term investors shouldn’t even be looking at but let’s be real – we all do. Now, I won’t make a decision to buy or sell a company because of their quarterly earnings results, but I do like to see how they do.
If you’re investing in a company like Apple, a great dividend payer, and they miss their earnings because of something like the trade war in 2018 or COVID, do you view these things as temporary or permanent impacts to their business?
Personally, I viewed them as temporary, and both provided great buying opportunities with Apple. In fact, that leads me to my next point – COVID.
I emptied out my rainy day fund in early 2020 because when COVID hit hard and everyone started to freak out, I thought that the panic was a bit overblown. I really had two trains of thought:
1 – If COVID is a pandemic, even if for a couple years, then by the market crashing by 30% I am getting a heck of a bargain since I hopefully have another 50+ years of investing.
2 – If COVID turns out to be the end of the world as some predict, I won’t need my rainy fund anyways.
Now I know that number 1 sure seems like I am timing the market, and in a way, I was, but I felt comfortable with what I was doing. Normally mine and my wife’s IRAs are setup to contribute exactly 1/26 of $6K every time were paid, biweekly. Because I felt like this was a buying opportunity, I significantly stepped up the contributions and added in much more in March and April.
I told myself that if the market continued to drop then so be it. I was confident knowing that I may be incorrectly timing it. I knew that if I invested it right now then I was going to be doing so at a 20-30% discount than I could a few months before, so I was ok with my decision regardless of how it turned out.
So, like I mentioned, I emptied out that rainy day fund and put it into our IRAs. Then, over the remainder of the year, I used that extra money from every paycheck that was no longer going into an IRA to replenish my rainy day fund.
I identified what I felt like was an opportunity and I pounced on it.
But a rainy day fund doesn’t have to be used only for investing opportunities.
You can use it with something as simple as buying goods. For instance, think about this – if you have been planning to go through a major expense and then a really good deal comes up, if you have a rainy day fund, you can take advantage of that deal.
For instance, imagine this situation – maybe you love to workout but have been thinking about putting in a home gym. Home gyms are not cheap, but they are something that you can do for well under $2K depending on your needs.
I know this because we just put a home gym in earlier in 2020 and we followed a strict budget that you can view here.
Fortunately for us, we had been planning to put this home gym in before our son was born, so we had been utilizing a short-term saving strategy for quite some time.
But what if you hadn’t been doing this and then wham, all gyms are shut down now because of COVID. You can’t workout except for running outside and maybe some bodyweight exercises.
If you have a rainy day fund set aside then you can choose to pull out some of those funds to pay for your home gym so that you can continue to work out. It might not seem like this is a true “need” and it’s not really, but that’s exactly what differentiates the rainy day fund from the emergency fund.
You are taking advantage of a situation that has arisen and because you have planned in the past and been proactive, you now can afford to pay for the gym equipment.
Then you can just cancel your gym membership and replenish your rainy day fund with that money that would be going to the home gym. Genius, right?
It might seem like you would want to hold onto the rainy day fund for something that might be more of a real “opportunity” for financial freedom, and I don’t blame you, but if you’re like myself then you need to have some sort of physical activity to maintain a good headspace.
Especially for myself – when things were shutdown and we couldn’t go anywhere, and the weather still was cold, and we had a very young newborn that we didn’t want help with because of the fear of COVID, that hour of working out was literally essential for me in staying a sane human being.
You can argue that if I was in this situation and I had to use my rainy day fund for a home gym then I couldn’t have used it for investing in the market (as I actually did), therefore missing out on some great gains, and you would be right.
But I also could say that if I had chosen to use the rainy day fund on a home gym, then the benefit of my mental state would be more important than making a few extra percentage points on a couple extra thousand bucks.
But guess what – neither is right and neither is wrong. Personal finance is personal, so you can use your rainy day fund in whatever way that you think is going to be the best possible way for you to get the most benefit.
A rainy day fund is not a “one size fits all” type of approach in that each person will have a different amount that they want to have and a different reason for deploying that capital when they actually use it – and that’s the point. You use it when YOU see fit for a purpose that benefits YOU!
The point is that you’re being prepared for something that is unknown and when the opportunity arises, you are ready to pounce.
Similar to an emergency fund, I think that the easiest way to build up your rainy day fund is to simply add it as a line item to your budget and plan it out monthly. If you’re at $0 currently, then maybe you want to have an aggressive timeline initially such as “get to $1000 in 4 months”, meaning you would simply “budget” $250 for rainy day fund in Doctor Budget each month for the next four months.
Then, maybe you just want to slowly grow it so you make it a steady contribution of $50 each month. It’s all your call, but that’s exactly what we do with ours. Then, even if you get 6 months in and you have $1100 saved ($250 for months 1-4; $50 for months 5 & 6) and you want a $2K home gym, you only have to come up with $900.
Maybe you can’t get there. Maybe you just buy $1100 of the home gym and start there. Maybe rather than the entire home gym it’s just a treadmill and dumbbells. Or you hold off on the treadmill and choose to run outside, even if the weather stinks.
Or, if you want to invest, maybe you only put $1100 into the market instead of maxing out your IRA at $6K. Sure, $1100 is well short of maxing out, but it’s a heck of a lot closer than $0!
Regardless of what you want to do, Doctor Budget will help you easily plan it out into your monthly spending to make sure you’re on track. As soon as that’s built up and you have a sufficient fund, it comes down to one question;
And yes, I know, there are a billion other options – but that’s for you to debate on your own time 😊