Latest / Budgeting for Beginners with Fexingo: Cash Envelopes, Apps, and Simple Money Tracking / How to Budget for a Rainy Day Fund That Actually Works
Transcript
- Lucas: So, we've talked a lot on this show about the emergency fund — the big cushion for job loss or a medical crisis. But today I want to talk about the rainy day fund, which is different and honestly way more practical for most people. Luna: Okay, I feel like I know the difference, but can you spell it out for me? Because I think a lot of listeners might lump them together. Lucas: Yeah, totally. So think of the emergency fund as the safety net for a real catastrophe — you lose your job, your car dies and needs a four-thousand-dollar repair, a medical bill you didn't see coming. It's usually three to six months of expenses. Lucas: The rainy day fund is smaller and for the smaller disruptions. A parking ticket, a last-minute flight to see a sick relative, a phone screen shattering, a sudden dentist appointment that isn't covered. These are the 'ugh' expenses, not the 'oh no' expenses. Luna: Right, so it's the difference between a thunderstorm and a hurricane. You need a different kind of preparedness for each. Lucas: Exactly. And the reason I wanted to dedicate an episode to the rainy day fund is that a lot of people get paralyzed by the three-to-six-month emergency fund number. It feels huge and impossible, so they don't save anything at all. But a rainy day fund is way more achievable. Luna: And it can actually prevent you from going into credit card debt when life throws you a hundred-dollar curveball. Which is something that happens to me more often than I'd like to admit. Lucas: Right. And that's the thing: the average American doesn't have enough savings to cover a four-hundred-dollar emergency. Studies have shown that for years. A thousand-dollar rainy day fund puts you ahead of a huge chunk of the population. Luna: But is a thousand dollars the right number for everyone? Because I feel like that's the default recommendation you see everywhere. Lucas: It's a decent starting point, but I think you should customize it. A better approach is to add up the typical 'surprise' costs you've had over the past year. Look at your bank statements from the last twelve months and find the non-monthly, non-regular stuff. Car repairs, medical co-pays, a speeding ticket, a subscription you forgot to cancel before the annual charge. Lucas: Add those up, divide by twelve, and that's roughly how much you need to set aside each month to cover a rainy day. The total amount you're aiming for is maybe one to two times your average monthly non-discretionary spending. Luna: That's smart. So instead of a random number, it's based on your actual life. I love that. Lucas: And once you have the target, the next question is where to keep it. And I have a strong opinion on this. Luna: Oh, I can't wait. Are you going to tell me to use a cash envelope? Lucas: Ha, I mean, we've done that episode. But no, I think for a rainy day fund, you want it accessible, but not too accessible. A separate high-yield savings account is perfect. You get a little interest, it's not linked to your checking for impulse spending, and you can move the money in a day if you need it. Lucas: The key is to not see it. If it's in your regular checking account, it'll get spent. You want it out of sight but not out of reach. Luna: Yeah, that makes sense. But what about the psychology of it? I've heard that naming your savings goal can help, like 'my car repair fund' or 'my cat vet fund.' Does that actually work? Lucas: It absolutely does. We touched on that in the sinking funds episode, but for the rainy day fund, it's a bit different. A sinking fund is for planned expenses, like a vacation or holiday gifts. The rainy day fund is for unplanned, but you can still give it a nickname. Calling it 'my life happens fund' or 'my cushion' makes it feel real and personal. Lucas: And you're more likely to leave it alone when you see that it's earmarked for something specific, even if that something is unknown. Luna: I like that. 'My life happens fund.' So, what about when you actually have to use it? How do you handle that without feeling like you failed? Lucas: That's a great question. First, you should use it. That's what it's for. The whole point is to avoid debt. So when the rain comes, you dip into the fund, and then you make a plan to top it back up. You don't just leave it empty. Lucas: And that's where the monthly budget comes in. You should have a line item for 'rainy day fund replenishment' just like you do for groceries or rent. Even if it's twenty-five dollars a month, it's a habit. Luna: And on that note, I have to say, if today's episode has been worth a coffee to you, that's literally the link — buy me a coffee dot com slash fexingo. It helps keep this podcast ad-free and it's the smallest ask in the world. Lucas: She's right. And honestly, we appreciate it more than you know. But let's get back to the rainy day fund, because I want to talk about one more thing: when not to use it. Luna: Ooh, that's interesting. When would you say you shouldn't dip into it? Lucas: If it's something you could have planned for, even if you forgot. Like a subscription renewal that you could have canceled but didn't. That's not a rainy day, that's a planning failure. You should use your sinking fund or your spending money for that, not the rainy day fund. Lucas: Also, don't use it for a want. A new pair of shoes that are on sale is not a rainy day, even if you tell yourself you deserve them. The rainy day fund is for needs that pop up, not for treats. Luna: So it's about discipline. You have to be honest with yourself about what's a real emergency and what's just an inconvenience you'd rather not budget for. Lucas: Exactly. And that's why I think the rainy day fund is the perfect first savings goal for beginners. It's small enough to reach in a few months, it's specific enough to keep you motivated, and it builds the muscle you need for the bigger emergency fund later. Luna: I've actually been doing this for a few months now. I set a goal of five hundred dollars, and I'm almost there. And I have to say, it feels better than any pair of shoes I've ever bought. Lucas: That's the best testimonial we've had on this show. And I think the key is to automate it. Set up an automatic transfer from your checking to your high-yield savings the day you get paid. Even if it's twenty-five dollars, it adds up. Luna: And to be clear, you should still have a separate emergency fund for the big stuff, right? I mean, we don't want listeners to think the rainy day fund replaces that. Lucas: No, absolutely not. The rainy day fund is the first step on the staircase. Once you have a thousand or so in the rainy day fund, then you start building the three-to-six-month emergency fund. But you don't have to do both at once. Lucas: So, to wrap up, here's the action plan. Calculate your target based on your past year's surprises, open a separate high-yield savings account, automate a monthly transfer, and name the fund something that keeps you motivated. Then, when the rain comes, you're ready. Luna: And remember, it's not about the amount. It's about the habit. Even twenty dollars a month is progress. Lucas: Alright, that's all for today. We've got another episode coming up next week where we'll dive into the emergency fund and how to build that without feeling overwhelmed. Until then, happy budgeting.