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Rainy Day and Emergency Funds: What, Why and How Much?

Clock5 min. read
byVexxit Staff onMarch 04, 2021

Life doesn’t always go as planned. Maybe it’s a suspicious clunking sound coming from your vehicle that leads to a costly repair. Or a visit to the vet that ends in a bill with a few more zeros than you were expecting. Or a global pandemic that causes you to deal with unexpected illness or job loss.

Not all surprises are bad ones, but it’s important to prepare for those inevitable things that can and will go wrong. That’s where rainy day and emergency funds come in. 

Let’s take a look at what these funds are and why you should have them.

What’s a rainy day fund?

If you own a home or a car, chances are something is going to break at some point and you’re going to need money to fix it. Unless you have thousands of dollars in your back pocket (which probably isn’t the best idea anyway), planning ahead for those unfortunate moments can prevent you from taking on debt you really don’t want to take on. A rainy day fund covers those mishaps you can somewhat anticipate ahead of time. 

What would it cost to replace your furnace in the middle of winter? What about a major appliance in your home? These are things to look at when determining how to start a rainy day fund. 

You can find a rainy day fund calculator online to give you a general idea of what you might need. Talking to a financial planner can help too, by providing a more accurate suggestion based on your personal situation. If you’re based in Canada, you can find a financial advisor that aligns with your specific needs, free on Vexxit.

What’s an emergency fund?

An emergency fund is for those things you can’t predict. Getting laid off due to the COVID-19 pandemic is one emergency fund example. You or a partner getting sick and being unable to work is another. Even if you have mortgage insurance, bills need to be paid and groceries need to be bought. 

In any case, loss of income means you should prepare for at least three to six months without a paycheque—and in light of current times, you might need to budget for up to a year of joblessness.

To narrow it down further, consider everything that goes into your monthly budget—mortgage or rent, utility bills, food, clothing and so on. 

There are also emergency fund calculators online to help you determine what you might need should you or your partner lose your income.

How to start a rainy day or emergency fund

You know the ideal amount to save for a rainy day or emergency fund, but where should that money come from?  

Some choose to invest any sizable chunk of money they receive—such as from a tax return or company bonus—into their rainy day or emergency fund (you’ll thank yourself later for not splurging on those shoes or golf clubs). 

If that’s not an option for you, or even if it is but it doesn’t cover what you’re aiming to save, then monthly budgeting can help you get there. Your financial planner can look at what you have versus what you need and figure out a realistic way to meet your goals. 

Where to put a rainy day or emergency fund

There is the good old rainy day fund jar—just like your grandparents might have kept on the shelf. Okay, so this might not be the ideal place to stash your life’s savings, but your grandparents were right that spare change can add up. At the very least, you’ll have it on hand when the ice cream truck drives by, and that’s guaranteed to brighten any rainy day. 

A more practical idea for a rainy day or emergency fund is to keep the money in a savings account, where it can grow interest but remain easily accessible. The easy access is key, should you have a sudden emergency where you need to draw on the money quickly. 

Alternatives would be a high-interest savings account or a guaranteed investment certificate (GIC), which earns more interest but comes with different stipulations. For instance, most GIC terms are between six months and five years, so you might have to forego some interest and pay a fee to withdraw from it before the end of your term. 

Your best bet when coming up with a rainy day or emergency fund is to call on a financial planner who can find a solution that works for you. Having someone who can look at your personal finances, explain your options and customize a plan to get you through an unexpected tough time is more than worthwhile. Match with a financial advisor that’s a perfect fit for your needs, free on Vexxit.

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