Five simple steps in creating your "Rainy day Fund"

As the saying goes, "When it rains, it pours." For many people, an unexpected expense of more than PHP 20,000 can cause a major crisis. There’s no way to know when emergencies will occur, which is why it’s important to have a rainy day fund.

Having a rainy day fund in your pocket will keep you from having to take out a loan or fall into debt. Let’s talk about the meaning of a rainy day fund, how it differs from an emergency fund, and how you can start one.

What is a rainy day fund?

A rainy day fund is a source of money to cover small, unplanned expenses or financial emergencies. Think of it as a financial safety net that can help you prepare for life’s unexpected events that could otherwise be costly and inconvenient.

A rainy day fund is not to be confused with an emergency fund. Although they have similar concepts, there are major differences between a rainy day fund versus an emergency fund.

An emergency fund is a larger pool of money, typically covering up to six months up to one year of your monthly expenses. An emergency fund is important for covering major financial emergencies, such as hospitalization, job loss, and car or home repairs.

A rainy day fund is a smaller fund meant for minor, unexpected expenses. Here are examples of expenses or events that a rainy day fund may cover:

• Personal crises: Expenses outside your usual budget, such as unexpected medical and dental bills, gadget or appliance replacements, car repairs, and home maintenance costs.
  
• Family crises: These refer to huge expenses that can result in lower income for the household. This may include temporary loss of income, for example, if you lose your part-time job or experience a slowdown in your business venture. Health issues or the death of a family member may also be covered.
  
• Natural disasters: Basic needs and home repairs caused by uncontrollable events such as fire, flood, seasonal typhoons, earthquakes, and the spread of infectious diseases.
  All of the situations above can put a strain on your finances but saving for a rainy day allows you to plan ahead and be prepared should they occur. A rainy day fund serves as a financial cushion, protecting you from debt and helping you stay on track with your financial goals.

How Much Money Should You Have in Your Rainy Day Fund?

A rainy day fund is a smaller financial cushion than an emergency fund. An emergency fund is important for getting you through major financial crises, while a rainy day fund will help you through a minor setback.

So, how much do you need for rainy days?

Since an emergency fund typically should cover six months to one year's worth of monthly expenses, a rainy day fund should cover only one to three month's worth of expenses.

There is no exact amount for how much you should have in your rainy day fund, but it’s good to remember that this fund is smaller than your emergency fund. So, if your emergency fund covers six months’ worth of your monthly expenses, your rainy day fund may be less.

The amount is completely up to you. The rainy day fund’s importance is ensuring you have extra money to cover minor expenses so you can keep your emergency fund and savings intact.

Once you reach the minimum amount you need for your rainy day fund, you have the option to pour a portion of your income into high-yield savings accounts or money market accounts that let you earn interest on your deposits.

Five Steps to Saving for a Rainy Day

Saving money for your rainy day budget can seem like a daunting task, especially when it feels like all of your available income is accounted for each month. But it's not impossible. It just needs effort and discipline on your part.

Following these five steps will help you get started on budgeting for a rainy day and achieve greater financial security.

1. Assess your personal needs

   How much money should you put in your rainy day fund? When working towards that goal, it's good to assess your personal needs and financial situation first. For instance, if you work as a freelancer and own a car, you might consider setting aside more in your emergency fund than someone who has a regular nine-to-five and commutes to work.

   Take into consideration your total cash flow, debt, financial goals, and the people you are currently supporting financially. Once you have a better picture of your financial standing, you can start budgeting for a rainy day.

2. Make a budget

   Many people get carried away with unnecessary purchases and forget to create a proper budget. In order to save for a rainy day, you'll need to create a budget. You might think that you don't have enough money to put some towards your rainy day fund, but you might be surprised when you sit down and analyze your cash flow.

   Many financial experts recommend the 50-30-20 rule when it comes to budgeting for a rainy day, or just budgeting finances in general. The 50-30-20 rule breakdown is as follows:

   • 50% of your income: This covers costs such as housing, food, utilities, clothes, and other things that you won't be able to live without.
     
   • 30% of your income: This is your discretionary spending, which will involve you distinguishing between needs and wants. These include monthly subscriptions, meals out, entertainment, and travel.
     
   • 20% of your income: This is the portion that should go to your savings. How you use this part of your budget depends on you. You can either put all of the money towards your rainy day fund until you reach the minimum amount before moving on to bigger savings goals, or you can divide the 20% into several portions. What matters is that you're putting away money each month for your future.
     

   By creating and sticking to a budget, you can help limit unnecessary purchases and reach your goal much sooner.

3. Set up a separate savings account

   A time-tested good money habit is to keep your funds accessible but away from temptation. This means setting up a separate savings account that you won't be tempted to tap for everyday expenses. You can even schedule automatic transfers from your main account to your savings account each month so that there's a set amount that you won't be able to touch from your income.

   If you think you have more than enough money in your rainy day fund for emergencies, you can then move on to other savings goals and benefits – such as earning modest returns while still having the ability to get your money in times of crisis. Money market funds and time deposits in the Philippines are ideal for this purpose as you can earn a bit of extra cash while you let your money sit in the bank.

4. Save raises or bonuses

   We’re sure you want to know where to invest your year-end bonus, tax returns, or cash convertibles from work so you don’t spend them all. No matter how much you receive from this extra income, it’s smart to use some of it to start your rainy day fund.

   Since your bonuses are larger than the usual amount you can put aside from your regular paycheck, saving them will help you reach your target savings faster.

   So, when you do come across more money, factor a significant portion of it into your rainy day budget. The faster you achieve your rainy day fund goal, the faster you can move on to saving for retirement or even for something fun, like a well-deserved vacation.

5. Continuously and consistently save

   A rainy day fund should always be replenished. Just because you made it through a costly situation doesn't mean another one won't pop up in the future. Ensure that you always have something put away until you reach the minimum requirement in your rainy day fund. Doing so will give you the peace of mind you need for your other financial obligations.

Don’t wait for a rainy day, save now!

Saving money is never easy but a rainy day fund gives you a sense of security from any unexpected events. With cash set aside, you'll be at ease knowing that an untimely accident or home repairs won't push you into debt.

Start building your rainy day fund today. You can follow the 50-30-20 rule or start smaller and then build it over time. Once you have enough to cover for emergencies, then you can begin letting your money work for you through investments.

Learn more about the different types of savings accounts at Metrobank. Tell us how you want to start saving and we’ll keep your funds safe and secure. With an interest-bearing account, the longer you keep your money, the more you let it earn. Save each pay period with Metrobank Online’s scheduled automatic transfers.