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How to Set up a Rainy-Day Fund

EPF Last Update: May 14, 2020

Financial emergencies can strike at any moment.

Whether it’s an unexpected job loss or an illness that takes your family by surprise, having a rainy-day fund ensures you’re covered financially when times get tough.

A study by the U.S. Federal Reserve found that 41% of adults couldn’t come up with $400 if an unexpected emergency hit. To avoid joining the group, it’s important to develop a plan that increases your savings balance and keeps you from needing loans to make up the shortfall.

How Do I Build My Balance?

The first step in building a rainy-day fund is to make the process a priority. You need to be disciplined and avoid making withdrawals for non-necessities like vacations or eating out at restaurants.

To start, subtract your monthly income from your monthly expenses. As you crunch the numbers, make sure to separate necessities – like your rent, car and utility bills – from leisure spending. Once you tally all of your core expenses, you’ll know what leisure activities you need to eliminate or scale back in order to grow your savings.

If you have trouble sticking to the plan, we recommend you set up automatic deductions from your checking account. When the money is transferred automatically, you can grow your savings balance without having to think about it.

Also consider your tax refund. It’s a great way to strengthen your rainy-day fund. Often times, people end up spending their refund on unnecessary items or impulse buys. And while the practice is gratifying in the short-term, saving the money will ensure you’re better off in the long-term.

How Much Do I Need to Save?

You should aim to accumulate 3 to 6 month’s salary. One year is optimal, however, the goal isn’t realistic for everyone. If you can’t meet either, remember, every little bit counts. Saving something each month is always better than nothing.

Keep in mind though, your fund won’t grow overnight. Say your earn $3,000 a month and decide to save 5% of your income – you’ll end up with $150 in savings each month. To accumulate one-month’s salary – assuming zero interest – it will take 20 months. That’s almost two years. To accumulate six month’s salary, it will take 120 months or 10 years.

The point is: you need to be patient and understand it takes time to build your fund. However, if you can increase the percentage of income you save each month and add your tax refund on top of that, your balance will start to rise rather quickly.

Where Should I Keep My Money?

The best place to house a rainy-day fund is in an online savings account. Remember, the proceeds should not be invested in long-term assets – like stocks – because you never know when you’ll need the money. And because you can make six withdrawals per month with an online savings account, you always have access to your cash.

A second benefit is higher interest rates. While the national average savings rate currently sits at 0.10%, online banks like Marcus: By Goldman Sachs offer 2.15% interest in its savings accounts. There are also no minimum deposit requirements and no fees.

As well, all deposits up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC). Because of this, you know your money is always safe.

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