The phrase “saving for a rainy day” often refers to weathering a financial storm or circumstances that cause you to spend money rather than save or earn it. Everyone encounters these scenarios in life, but it pays to be prepared. The actions you take today to prepare for the unexpected can benefit you financially and offer peace of mind. 

The guide below outlines four deposit accounts that can help you strengthen your rainy day fund. Each account offers advantages and disadvantages that may or may not align with your goals. Discover how you can turn unplanned financial expenses into a problem you can solve. 

What is the purpose of a rainy day fund?

One common question people have about rainy day funds is how they differ from emergency funds. The answer is that it’s all a matter of perspective. They both address a similar set of circumstances, just with different intensities. A rainy day fund typically covers smaller unexpected expenses that arise, while an emergency fund is meant for larger financial dilemmas.

For example, if you lose your job, or a loved one has a medical emergency, or something happens to your home, you’ll likely need to tap into your reserves to cover expenses. Rainy day funds cover more incidental expenses, like purchasing a wedding present, covering a minor vet bill, or paying for a school field trip.

The common rule of thumb is to have three to six months’ worth of income in your emergency fund to cover the large, unexpected expenses. A rainy day fund can be in a separate account, or it can be built into your emergency savings as a flexible, expendable amount. Having these types of funds can help you avoid overdrafting your account or going into debt to cover these unexpected expenses.

Benefits of having a rainy day savings fund.

Having a financial cushion can make it easier to respond to any unforeseen expenses that pop up. However, setting aside money can feel like a challenge, especially if you struggle with savings. Explore the benefits of rainy day funds below for a glimpse at how you can regain confidence in your finances: 

Budget clarity

Budget clarityBudgeting can help you discover what expenses you can cut so that you can set more aside for your savings. There’s an achievable balance between working within your means and still preparing for future uncertainties. 

Financial stability and security

Having extra savings gives you peace of mind and helps keep your budget intact, so you don’t have to scramble for funds. 

Debt avoidance

Using your savings instead of borrowing helps you avoid high-interest debt, which can be harder to overcome financially. 

Automation breeds consistency

Automating your savings helps you build a habit of saving regularly, which you can then use to achieve other financial goals. 

Many of the accounts you can open to establish a rainy day fund are also insured. The Federal Deposit Insurance Corporation (FDIC) insures deposits in individual accounts for up to $250,000 per depositor, per insured bank. 

4 accounts vital to saving for a rainy day.

The following accounts can help you save for a rainy day. Review these accounts to determine which is right for you. Keep in mind that you don’t have to choose just one; you can open several accounts depending on your savings goals. 

1. Savings account

A savings account is good option if you’re just getting started with saving. It’s a low-risk account that provides account holders with easy access to their funds, although there are usually limitations as to how often you can withdraw funds per statement cycle.

Often, these accounts have low or no minimum opening deposit and minimum balance requirements. Many savings accounts can connect to your checking account. Linking the two enables you to use your savings account as overdraft protection and automate your savings. 

Savings accounts typically have lower interest rates than other accounts on this list. While you may not be able to earn as much interest as other accounts, a traditional savings account can still help you keep your rainy day fund separate from your everyday spending.

2. High-yield savings account

A high-yield savings account offers a significant advantage over a traditional savings account by providing higher interest rates. This allows you to grow your savings faster. If you’ve already started your rainy day fund, a high-yield savings account can help your money earn more interest than in a standard savings account. 

However, most high-yield savings accounts lack check-writing capabilities and ATM card privileges. You’ll need to transfer your funds to a more accessible account when you’re ready to use these funds. 

3. Money market account

A money market account can offer a middle ground for your savings, offering both higher interest rates and flexible access to your funds. Like high-yield savings accounts, money market accounts tend to offer higher interest rates than your standard savings account. To earn these higher interest rates and avoid fees, money market accounts often require you to maintain a higher minimum balance. Banks also typically offer tiered interest rates for money market accounts, enabling you to earn a higher rate the more you deposit.

Many money market accounts offer check-writing capabilities and ATM card privileges. However, like a traditional savings account, there are usually limitations as to how often you can withdraw funds per statement cycle.

4. Certificate of deposit (CD)

A CD account is a good option for planned rainy day expenses that are a few months out (like a car replacement or big vacation). CDs offer fixed interest rates over a set term, meaning you’ll lock in a rate for a period of time. You can choose from a range of CD terms to suit your financial goals. For example, you may want a shorter-term CD (like 3 months or 6 months) if you anticipate needing your money sooner for emergencies. Alternatively, you could pick a longer-term CD (like 48 or 60 months) if you have a planned expense in the future.

However, CDs do not necessarily offer the easiest access to funds compared to other account types on our list. There is usually a penalty imposed for early withdrawal. Most certificates of deposit also don’t allow you to add funds once they’re established, but there are exceptions.

Tips on saving for a rainy day.

Starting a rainy day fund can be challenging yet rewarding. If you’re unsure where to start, use the tips below for motivation and guidance. Before you know it, you’ll have a rainy day fund all your own. 

Set a goal amount.

Set a rainy day fund goal based on your biggest expense. For example, if replacing your water heater costs $2,000, figure out how much you need to save monthly to achieve this goal. However, your goal should be attainable, so you don’t lose steam. 

Charge expenses wisely.

Keep room available on one or more credit cards to charge your unexpected expenses and then immediately pay them off with your rainy day fund. If you have a rewards credit card, this method of covering unforeseen expenses can work in your favor by earning points, cashback, or other rewards. Just be sure to post your payment before your next statement cycle to avoid interest. 

Budget for rainy days.

Add to your rainy day fund by incorporating it into your budget. Plan to add a set amount to your rainy day savings each month, if it’s $25 or even $10. Automate your savings so you don’t forget. 

Replenish your savings.

Once you’ve used your rainy day funds, you’ll need to devise a plan to replenish them. For example, you may want to double your automated monthly deposit to save twice as fast. Although it may be challenging, avoiding the urge to splurge for the next few weeks or months can also help put you back on track. 

Begin your financial preparations with a rainy day fund.

Financial circumstances often change as a part of life, but rainy day funds can help you lessen the burden of unforeseen expenses and reduce the stress associated with these life events. Explore savings, high-yield savings, and money market accounts, along with CDs, to determine which financial vehicle is right for your goals.

For more information about Popular Savings, certificates of deposit, or any other products and services Popular Bank offers, stop by one of our convenient branch locations or contact our Customer Care Center. You can also explore our online-only high yield savings and CD products from Popular Direct.