What is a Rainy Day Fund: Saving for Emergencies

Quick! Your car just broke down and you need $1,000 to fix it RIGHT NOW.

Do you have it?

Chances are, you don’t. 49% of Canadians say they’re ill-prepared for an emergency. I get it, it’s hard enough paying your regular expenses let alone actually SAVING some of that money.

BUT, it’s INCREDIBLY important to have an emergency fund AND rainy day funds. Going into debt should be a planned decision; not something you’re forced into because you have no other option.

Today, I’m going to give you all the things you need to know about saving for emergencies. The different types of emergency funds, how to figure out how much you need, what you should consider saving for, and some tips for (realistically) saving that money!

Before we get started, I just want to put a quick little note up top: today I’ve made some additional material for this post! Head over to the Ready Set Life Resources page to find a worksheet that will walk you through this entire process. Feel free to download it before we start so you can follow along, or just wait until the end and I’ll remind you to go grab it!

How Much Do You Need in an Emergency Fund?

Emergency funds are confusing. If you look up anything about them on the internet you’ll get a million different results, all telling you different things.

Some people say you need $1,000. Some people say you need 3 or 6 months of living expenses, some say however much it will take you to replace your income if you lose your job, and some even tell you to just go with the flow and keep ‘whatever you feel comfortable with’.

I say it’s a bit of a mix. I’m more inclined to treat it like a job loss fund, but that’s because I think you should be smart about your other savings and already prepared for the ‘emergencies’ you can be reasonably sure will happen.

What is a Rainy Day Fund?

This is where ‘rainy day funds’ come in. It’s a bit confusing, because a lot of people think ‘emergency funds’ and ‘rainy day funds’ are the same thing. (I even got super confused when I was making this video!) But here’s my definition and hopefully this will help you out.

What is an Emergency Fund?

A true ‘emergency’ is something you can’t predict or plan. You can’t predict that your company will go under or have to downsize and your boss will lay you off. You can’t prepare for a flood disaster that forces you to redo your entire basement. Your ‘emergency fund’ is going to be a larger, general sum of money, saving for that type of expense. Your ‘rainy day funds’ are going to be for those ‘emergencies’ that you can actually predict.

For example:

If you own a car, it’s going to break down at some point. You can’t predict the TIMING of that expense, but you can predict that it will happen.

Similarly, if you own a home, something will go wrong with it. Even if it’s a new build, and you don’t think things will need to be replaced. Eventually, something will break.

That being said, there isn’t really a ‘standard’ when it comes to how much ‘savings’ to keep on hand. Everyone’s life is different, and therefore the ‘emergencies’ everyone is going to want to prepare for are different.

So, if it’s all completely different, how do you figure out for yourself how much you’re going to need?

How to Calculate Your Emergency Fund:

First, we’re going to separate your savings into 2 different categories: Job Loss, and Rainy Day.

How to Calculate a Job Loss Fund:

Job Loss, is pretty self-explanatory. You’ll want to have enough money in your accounts to get you through a job search period. If you get laid off, or fired, you want to be able to job search in peace knowing that you have enough money to get you through the tough spots.

Calculating this, depends on your industry. Think about how long it took you to get your current job. Was it super easy and took you like a month? Was it more difficult and you were waiting maybe 3-5 months for that ‘perfect’ position in your field? How often do positions in your field open up? Do a quick job search right now, see how many you think you could apply for.

That will give you a good idea of how long you think it would take to get a new position. Of course, you could always get a quick minimum wage gig if you’re really in trouble, but the point of this is to give you a safety net so you feel comfortable enough to dedicate your full time to actually getting a job that will cover your current lifestyle. So that job loss doesn’t completely turn your world upside down.

How to Calculate a Rainy Day Fund:

The next part of this is to figure out our rainy days; and this is where it gets a bit complicated:

Your lifestyle and specifications are going to be different than someone else’s, and your comfortability or what I’ll call ‘risk tolerance’ is going to be different as well. If you go through all these ‘calculations’ of what you should have, but something just feels ‘off’ and you don’t feel right about it, that’s an important thing to acknowledge. Money isn’t just logic, there’s a behavioural and mental aspect too so we have to keep that in mind.

To give you a baseline, let’s figure out what we want to save for first.

What should you save for?

I suggest doing a big brainstorm. Think about all the things that could possibly go wrong, break, or otherwise mess up your financial plan. Do you have a house or a car? How old are they? When were the last major repairs or replacements? What big ticket items do you own? How much would it be to replace your cell phone? Or maybe you’ve got a really souped up desktop you need for work, how much would it take to replace that? Think about all those things in your life that you use on a day-to-day basis that would turn your life upside down if you didn’t have them. (Again, going to plug that emergency fund worksheet because that has a big list of stuff to think about that might jog your memory on a few things!)

How much should you save?

The next thing we want to do is take that list, and try to calculate what a reasonable amount would be for each of those expenses. As examples:

How much to save for housing:

For housing costs, there’s a general rule that something like ‘1% of it’s purchase price’ or ‘$1 per square foot’ would be a good ballpark to aim for. But, think about things like how old the house is, or the appliances. 1% might be the average, but if you bought a fixer upper with 20 year old washer and dryers that might look pretty different than saving for a brand new home with top of the line equipment. (This article from The Balance about home maintenance budgets is really great at explaining what to look for!)

Apart from maintenance issues, preparing for the worst case scenario of losing a job should be considered as well. It's scary, but in this instance you may want to consider saving upwards of 3% of your total home value. This will help to cover the many necessities like loans, mortgage payments, insurance, utilities, and groceries. (This article on ‘How Much House Can You Afford’ from Money.com has a great explanation on what sorts of things to include in that calculation!)

How much to save for a car:

Generally, a good average for a car is around $1,200 - $2,000. but again, you need to factor in previous repairs, the age of the car, how much you drive it, that’s all going to affect that number. Canada Drives has a really great article that explains how to calculate your car maintenance budget!

For the rest, just googling ‘______ average repair cost’ or ‘_____ yearly maintenance cost’ should give you some great starting points on this. Once you’ve got some reasonable numbers, we’re going to figure out how realistic they’re actually going to be for your life.

Remember when I talked about behaviour and the mental aspect of money? This is where that comes in.

The Emotional Side of Rainy Day Funds:

Take a look at the numbers you came up with. How does it feel? Are there too many different savings buckets and it seems overwhelming to you? Do you feel like it’s overkill and you really don’t need to be saving that much? Do you feel a lot more comfortable now that things are visually in front of you and ‘prepared for’? Ask yourself ‘why’ to figure out what’s going on behind the scenes. If there’s something that’s bothering you about it, you probably won’t follow through with actually saving in these funds. So get to the bottom of those feelings, and either tweak things to make it easier on your brain, or decide to stay with the system you came up with but keep those feelings in mind when you start having those doubting thoughts later on in the process.

For example, I like to be super organized and prepared. I have about 7 different rainy day accounts I’m contributing to each month. Having that many accounts, organized in that way, makes me feel confident and comfortable that I’ve covered most of the possible expenses that could arise.

My partner on the other hand? Thinks I’m a bit nuts.

He thinks separating everything out in multiple savings accounts is super weird. If you’ve gone through this process, and you find you’re more on that side of things, that it makes you overwhelmed to look at that many different savings funds or it just doesn’t give you that ‘comfortable feeling’ you should be having? Don’t do it. Find a different way to make it work for you.

Maybe instead of saving for it all separately, you use those numbers you came up with to find a magic ‘comfortable number’ that you can keep on hand that you feel totally confident with because you know you calculated it personally for your lifestyle. Or maybe you feel like it’s too much or too little to keep on hand, so adjust it as you see fit. There is no instruction manual for this and no ‘right way’ to do it.

This process should at least give you a good idea of things you should think about, or an outline of how to structure your emergency funding process, but you don’t have to follow it exactly. As long as you’re comfortable with what you’ve come up with, you can personalize it as much as you want!

How to Fund your Emergency Fund or Rainy Day Funds:

Once you’ve sort of, sat with it for a while, and determined your comfortability with everything, then it’s time to put it into practice.

Now, I bet THIS is the section you were waiting for. It’s one thing to calculate this big huge number that contains all the things you could possibly be prepared for, but it’s another thing altogether to actually HAVE that money sitting in your account.

If you’re like me, those numbers you came up with can seem a bit impossible at first. It might even be more than you’ve ever saved in your life, and that can be pretty daunting.

Do yourself a favour, and break it all down. Figure out what it takes every month, to fund each of those accounts in the next year. Once you’ve got that figured out, you can start trying to build that into your existing money plan, and see how it works. (If you don’t have a money plan, I’ll link my ‘how to make a budget’ video up in the cards so you can go over and make one after this video)

This is where it gets a little tricky. The whole point of these funds is that they’re predictable but untimed. So, if you’re 3 months into your 12 month plan when your car breaks down and you’ve only funded a quarter of your account? That’s going to suck. BUT, having those 3 months of savings is going to be better than having nothing. We can’t expect these funds to be linear, so when we’re calculating our ‘monthly’ amounts, we’re compromising between what we can actually afford to put in the account every month, and ‘guestimating’ the scheduling by saying ‘I want X amount within the next year’ even though we have no guarantee that will be the right timeline.

It’s going to take a lot of playing around. If you can’t fund them all at their top amount right away, figure out what priority each of these funds have in your life. You can try funding the 1-2 top accounts first, or putting the majority of money towards your top priority, and then funding the rest of your accounts all in much smaller amounts divided between them.

Or, again, if you’re the type of person that just wants to fund one thing. Figure out what section of your ‘savings’ you want to dedicate to these ‘emergency’ situations, and throw that bulk amount at one big fund.

Hopefully that gives you a much better idea of what you should actually be saving for, and how to calculate the amounts. Again, I have made a worksheet to go along with today’s post so make sure you head over to my resources page so you can download it. (It will definitely help you out a TON when you’re calculating all this for yourself!)

Let me know in the comments down below if you have any additional questions about emergency funds. I’d love to hear if you’re saving for anything unique, or what your top priority is with regards to rainy day funds!