Rainy day funds, also known as emergency funds or contingency savings, refer to a pool of money set aside for unexpected or unforeseen financial needs or emergencies. These funds act as a safety net to help individuals or organizations cover expenses during difficult times or when faced with unexpected circumstances or emergencies.
Rainy day funds are typically saved over a period of time and often recommended as a financial planning strategy to cushion against economic downturns, unexpected job losses, medical emergencies, major repairs, or any other situations that may require significant financial resources. The purpose of these funds is to provide individuals or organizations with financial security and peace of mind, allowing them to handle unexpected expenses without having to rely on credit cards, loans, or depleting other savings or investments.
The size of a rainy day fund generally varies depending on individual preferences, financial goals, and personal income or expenses. Financial experts generally advise keeping three to six months' worth of living expenses in a rainy day fund as a general guideline, although this may vary based on individual circumstances.
Rainy day funds are intended to be easily accessible, liquid assets that can be quickly accessed without penalties or tax implications. Most commonly, these funds are held in a savings account, money market account, or certificate of deposit, where they can earn some interest while remaining readily available for use in emergencies.
