In most parts of the country, summer is slowly meandering its way into fall, which officially started a couple of days ago. Temps are cooling, people are getting excited about pumpkin-spice everything, and Halloween and Thanksgiving feel like they’re just around the corner. Here in Florida, some of that is true. The biggest change for us, is that rainy season is coming to an end, but we are now at greater risk for hurricanes through the end of November.
Being relatively recent transplants to the state of Florida, this summer rainy season was new to us but serves as a perfect example of the need for both a rainy day fund and an emergency fund. These accounts (yes, I recommend having a separate bank account for each) will help you weather financial storms in a manner that should not be disruptive to your overall monthly cash flow.
Rainy day funds and emergency funds go hand-in-hand, and each household should strive to build-up both as they are intended to serve different purposes.
Rainy day and emergency funds allow you to withstand financial surprises, small or large, that you may have expected, but often times did not see coming.
The Economic Principle:
Reserve accounts, such as rainy day and emergency funds provide the user with access to capital (money) that has been previously set aside for situations in which normal income is disrupted or decreased for some reason. Companies use this so there is no disruption to expected cash flow.
Rainy Day Fund vs Emergency Fund – What’s the Difference?
During our limited time in Florida thus far, I’ve noticed that there are typically two types of rain: the short-lived rainstorm and the tropical storm/hurricane type weather event. As you can probably infer, the rainstorm is minor, usually a small burst that lasts no more than an hour (though it comes with its fair share of thunder and lightning), whereas the hurricane comes with at least a week’s warning and can be quite scary.
Rainy Day Fund
In the typical summer rainstorm, all of a sudden, it goes dark and seemingly out of nowhere the skies open up with loud cracks of thunder and lightning crashing down. Then, almost as quickly, the storm is over and the sun comes out again. Rainy day funds are intended to handle those suddenly dark times when you get unexpectedly caught in a minor financial situation you weren’t expecting. These are typically lower-cost, one-time expenses that are not budgeted for, but need to be paid immediately. Examples include: needing a new tire for your car or your child hitting a sudden and unexpected growth spurt and needing all new clothes – both of which just recently happened to me! While somewhat predictable, these expenses are not usually accounted for in your day-to-day budget.
I liken the need for this type of fund to prepping for a hurricane because hurricanes are big, bad, and scary. This fund is meant to cover those times when you find yourself in what could be a daunting and unexpected financial situation. With hurricanes, we’ll get about a week’s notice to start prepping, which is plenty of time to get affairs in order and get yourself ready. Similarly, an emergency fund (built up over time, of course), is there to protect you in the worst of situations. Typically, it is recommended to have a 3-6 month cushion to cover expenses, which you should be able to calculate by putting together a budget. These types of situations are infrequent and far less predictable, such as the loss of a job, divorce, or a significant medical event.
Creating Personal Reserve Funds:
Knowing what needs to be done and actually doing it are two different things. Here are some suggestions for how to implement rainy day and emergency funds:
- Make a Physical Separation: Create a separate bank account for each of your reserve funds, and do not mingle funds between the accounts or with other monies.
- Divert Income: If you can swing it, ask your employer to automatically split your paycheck between your accounts. For example, you can ask your company to put 5% of your paycheck into one account, 2% into another account, and the remainder into your main bank account.
- Make a Monthly Transfer: If you prefer to handle the money yourself, treat your rainy day and emergency funds as you would any other bills you pay on a monthly basis. Determine an amount you want to contribute to each, and then set up an automatic transfer from your account so you don’t forget to fund the accounts.
- Start with Cash: If you’re finding it hard to do the steps above, start by setting aside cash every month. You can forgo a trip to the coffee shop or a round of drinks and, instead, put the cash into an envelope. Once you build up enough, deposit the cash into its own bank account and continue this practice. I promise you won’t miss the money that you set aside and before you know it, you will build up a lot more than you expected.
Sometimes you may feel like you’re being pummeled by the unexpected expenses. Much like Florida’s daily summer rainstorms, you just can’t catch a break. Being able to weather the storm, will leave you comforted and without worry, ready for the sun to shine again. As you add to your reserve accounts every month, your balance will build back up and you’ll be ready for the next unexpected expense that comes your way.