It’s difficult to be financially healthy if you don’t have a rainy day fund to support you in the event you are met with unexpected expenses. Having a financial safety net can help you get through serious events and small inconveniences alike without having to go into debt.
The importance of a rainy day fund
A rainy day fund, or emergency savings fund, is designed to be there for you when life surprises you with costly expenses. Whether you experience a major medical event or your water heater boils its last gallon, you can continue living life with minimal financial impact all thanks to your rainy day fund.
At the same time, a rainy day fund is also an important part of an investor’s portfolio. While you need to be selective about where you invest–such as not sticking all your money in the stock market in case of a major economic downturn–maintaining an emergencies-only savings fund shows you have the discipline to control your personal spending.
Keeping your money under lock and key is a sign of financial wellness and the desire to improve your financial future. If you create a saving plan that includes putting funds into an interest-bearing account, you can grow your net worth over time.
Americans are saving more than ever
The global pandemic brought about a lot of changes. But one of the more positive effects of the pandemic is that the average American saved more money in 2020 than any other year in history.
In fact, the average household socked away 33% of their income into a financial safety net. And even though savings rates have fallen since the 2020 peak, they still remain higher than the historical 6.8% average–ranging between 12% and 20% in 2021.
How much to set aside?
Knowing how much to set aside is the very first step in establishing a measurable goal to work with. Each person has their own set of expenses each month and unique circumstances that determine the size of the rainy day fund. Expenses each month may be fixed or variable, recurring or ad-hoc, expected or unexpected. Your unique circumstances can drive spending in many ways. A leaky roof or an auto accident or a slip-and-fall give rise to unexpected expenses that are large but infrequent. The calculator below can help you figure out how much to set aside.
Cash vs investing: where should you save?
One of the most important things to consider when you set up a rainy day fund happens before you start saving, that consideration is deciding where to save. And while savings accounts–especially high-yield accounts–have their perks, investing provides a way to capitalize on current market trends that savings accounts can’t match.
Let’s take a look at the advantages of cash and investing separately.
The pros and cons of investing
Investing is a great way to earn compound interest and capital gains, as well as take advantage of long-term market growth. Plus, it’s easier than ever to take advantage of autopilot investing, which automatically puts your money to work every month.
But when it comes to your rainy day fund, putting too much into investments can tie your hands and even cost you money. For example, if you decide to use your rainy day fund to start paying down your debt and free up your income, having to sell your stocks or bonds to make payments exposes your funds to market risk.
Not only that, but you’ll likely incur a tax bill if you sell at a profit, which eats into your savings. And if the bulk of your funds remain in stocks, any market volatility may further erode your total net worth.
The pros and cons of cash
Cash is an important part of any person’s overall financial portfolio because it provides liquidity–the ability to move your money quickly. Too little liquidity happens when your money is tied up in the stock market or certificates of deposit (CDs), meaning you may not have the money to spend should an emergency arise.
But cash also provides a bulwark against the volatility that investing can bring. Putting some of your emergency funds into investments as a way of growing your money makes sense for some people. However, this is only a good idea if you also have cash to cushion your portfolio and cover your short-term expenses.
And while investments fluctuate, cash retains its value even when prices fall. Having excess cash on hand gives you an opportunity to invest more when the market falls, and you can then take advantage of the inevitable market rise.
How to start saving for a rainy day
While the goal should be to save enough money to cover unexpected expenses in case of true emergencies, like hospitalization or tragic accidents, starting out with lofty aspirations can make saving money seem daunting.
So, instead, start smaller with a goal of $500 to $1,000 over the next year. This comes out to saving about $40 to $85 per month. While that may seem like a lot of money, once you start putting the money aside from every paycheck you earn, you won’t even notice it missing.
Of course, not everyone is comfortable enough to save this much money at once, especially if you’re just starting out in your career. In that case, the goal should be to save as much as you can afford–even if it’s just $5 per week. With compound interest on your side in an investment or high-yield account, you can turn that $5 per week into $5,000 in savings before you know it.
Tips for savings success
Now that you know how to start building your savings, let’s review some tips to ensure that your financial safety net is a success.
Make a budget
The first step in building wealth of any kind is to stop spending money and stick to your budget. And if you don’t have one, there’s no time like the present to get started and set a budget that works for you!
After all, building a budget is simply the process of tallying up your income, evaluating your expenses, and making the necessary adjustments so that you earn–and save–more than you spend.
And if you’re not sure where to turn, a budgeting template can be a big help.
Cut non-essential expenses
Speaking of necessary adjustments, no budgeting process would be complete without breaking bad habits and cutting costs to help you save more. While forgoing professional manicures or taking the bus instead of your SUV to work every day may bother you initially, your rainy day fund will thank you in the long run.
Take advantage of financial tools
Unexpected expenses are, by nature, unexpected. But you can mitigate their impact significantly by taking advantage of the financial tools at your disposal.
For instance, the MoneyLion app is full of resources to help you save money. With the Financial Heartbeat® tool, you can monitor your total financial health, set up a budget, and receive personalized advice powered by artificial intelligence.
And if you need a quick infusion of cash at no interest to get you through the week, opening a RoarMoneySMaccount automatically qualifies you for up to double the Instacash–with no credit check–for only $1 per month!
Not to mention, you can boost your savings with the contactless MoneyLion Debit Mastercard® which comes with Price Protection, Zero Liability, and the ability to earn money with cashback rewards.
Put your savings on autopilot
One of the best ways to build a financial safety net is to do it automatically. By setting your savings on autopilot–like with automatic deposits the day you receive your paycheck–you can put the money out of sight and out of mind. This gives your rainy day fund a chance to grow without interference.
Invest in your future with autopilot investing
Of course, while cash retains value, taking your chances with the stock market has the potential to increase your net worth faster. So, why not put some of your funds into an investment account monthly?
With autopilot investing, you can set your money aside just like with a normal savings account. If you’re not sure where to turn, signing up for a fully managed investment account with MoneyLion is a great place to start! With no minimum fees, a personalized approach, and regular deposits, you can maximize your rainy day fund to secure your financial future.
Start saving today with MoneyLion auto-investing
There’s no time like the present to start saving for a rainy day. With MoneyLion auto investing and a fully managed account, not to mention our SteadyIncome Portfolio for more conservative risk-takers, you can make your money work smarter–so you don’t have to work harder.