Building your rainy-day fund
You can't predict the future, but you can plan for it
Your first goal for active saving should be to set up a rainy-day fund, ensuring you’re ready for anything that life throws your way.
This fund covers things like medical emergencies or replacing a broken phone. It could also create freedom in life for things like changing jobs or exiting a bad relationship - For this reason we suggest you always maintain your own personal emergency fund even when you’re in a relationship where finances are shared.
To avoid the temptation to dip into your rainy-day fund for non-emergencies, set up a separate savings account for it and consider using a different bank than your primary accounts.
How much should you save in your rainy day fund?
This depends on your personal circumstances. If you’re single and renting, you’ll need less than someone with a mortgage or a family. Ask yourself these questions:
What are the things that you (and those that depend on you) couldn’t do without, and what could go wrong with them? For your health, you may become ill and need hospitalisation or if its your car, it might break down.
What is a reasonable amount to set aside to ease the financial consequence if something went wrong?
A common rule of thumb is to save enough for three months of expenses, however if this is unrealistic, an amount like $1,000 (around $20 per week for a year) is a good start to build upon.
You may be wondering if you still need a rainy day fund if you have insurance for your loved ones or property. Think of your rainy day fund as something that complements your insurance. It can pay for any excess (the amount you need to contribute to a claim before the insurance company pays), provide support while waiting for an insurance claim to be processed or remove/reduce the amount of insurance you require as you can self insure (use your rainy day fund instead of paying for insurance).
Balancing saving for a rainy day fund with debt repayment can be tricky, as consumer debt (credit cards, personal loans and late Buy Now Pay Later repayments) often has high interest rates. We suggest building a rainy day fund alongside debt repayment to prevent further reliance on debt when unexpected expenses arise. There are two general approaches:
Make only your minimum loan repayments while building your rainy-day fund. Once you have a built a rainy day fund of say $1,000, you can switch priority to paying off your debt faster. This builds your rainy day fund faster, but has the downside of incurring more interest on your debt while you build your fund.
Make your minimum loan repayments and split any additional amounts you can between additional debt repayment and a rainy day fund. This repays your debt faster lowering the interest expense, however your rainy day fund will build more slowly.
A rainy-day fund is crucial when you have a mortgage to help avoid missing repayments and manage unexpected maintenance costs. Build your rainy-day fund in an offset account (an account that doesn’t pay interest, but it offsets the interest you are paying on your mortgage) and aim to set aside money for a major building cost (such as a fixing a roof leak) in addition to loan repayments and living expenses.
Using your rainy day fund
When genuine emergencies arise, it’s time to use your rainy-day fund. Don’t hesitate because of the effort it took to save – the fund’s purpose is to reduce stress during challenging times. When things are back to normal, begin rebuilding your fund with a regular automated transfer. Reflect on whether the funds were used for a genuine emergency, or an unexpected expense that should be included in your spending plan in the future. For example, vet fees because your dog became ill could be something to add to your ongoing spending plan as chances are it is likely your dog may become unwell in the future, especially if it is an older dog.
By actively saving and maintaining a rainy day fund, you’re creating a solid backup plan for life’s uncertainties, helping you to manage stress and maintain financial stability.
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