What Is A Rainy Day Fund & How Much Should Be In It?

By this point in life, you’ve probably been dealt at least a few curve balls financially. Maybe you’ve had to unexpectedly make a car repair after your insurance failed to cover your claim, or perhaps you’ve signed up for a class without realizing the additional associated fees. Whatever the case, life’s curve balls are often scary at the time simply because we fail to plan for them. Sure, planning for something that may or may not happen may seem like a waste now, but you can remove a lot of the stress associated with these unforeseen issues by creating a “rainy day fund,” or a fund designed to help you deal with anything unplanned that life may throw at you. Unfortunately, there’s no exact science to determining exactly how much money you should have saved for a potential downpour, and in fact, if you check different sources you’re likely to get different answers ranging from a month’s living expenses to three month’s living expenses, to the more conservative three month’s salary. The right answer for you will depend on your specific situation, but I’ll guide you to what I think is the right amount in a few scenarios.

Recent Graduate

Graduation thrusts us into a new reality. Whether we’re ready for it or not, we are dealt a new set of exciting challenges. Our minds switch from finding our homework to finding a job, from stressing over report cards to anxiously awaiting performance reviews. We become preoccupied with a host of other things as well, like finding a new apartment, paying off credit cards that floated us through college, and other pressing matters. With all of the changes taking place it’s natural that you may not be able to focus your attention on saving right away, but once you get all your ducks in a row, it’s important that you start building up your cash reserves. See below for my recommendation on how much you should have saved after various years of work.

As I pointed out above, the first half-year of work or so can be difficult with all of the distractions begging for your attention, so if you aren’t able to save much, don’t stress. I also want to point out some of the assumptions that were used to generate the graphic so that readers can adjust the chart to work for them. First, in my opinion, the proper way to determine the amount that you should have saved for emergencies should be based on your living expenses rather than your income. Increasing the amount that you have in your reserves merely because your income increases, reduces the amount that you can invest in riskier assets that have the potential to yield high returns since your salary will always exceed your expenses. In a true emergency, you would be less concerned with how much money you were making before, and more concerned with whether your savings were strong enough to cover your expenses until you could find another job, cover a medical bill, or repair a vehicle. Next, I assumed a starting salary of $50,000 that increased moderately over the 5.5 years to $58,000 by the end of the period, but more importantly I also assumed that you don’t increase your living expenses either. These were estimated to be $1,500/mo. It may seem natural to increase your living standards as your income increases, but remember that the higher your rent, car note, and insurance payments are, the more you will need to have saved to cover these expenses should you find yourself a little down on your luck. Finally, under the conservative scenario, I recommend stashing away 6 months worth of living expenses, 4.5 months worth of living expenses under the moderate scenario, and a minimum of 3 months under the aggressive scenario – more on this later.

Experienced Professional

At this point in your career, you have arrived. You have a grasp of what you’re doing in your career, you have a few projects under your belt, and you have possibly begun building some industry expertise. Your skills are beginning to speak for themselves, you’ve likely been promoted at least once, and most importantly, you’re commanding a higher salary. At this point, it can be difficult to keep your living expenses as low as they were initially, after all, you’ve been living below your means for quite some time. Just keep in mind, that as your expenses increase, so should your emergency fund. I assumed expenses of $2,000/mo, but you should scale this up as needed.


Key Takeaways

Hopefully, in the event that you fall ill or lose a job, you’ll be able to recover or find another within 6 months time. That said, there’s no guarantee that within 6 months you’ll find a role that pays similar to your previous one, but if needed you should be able to take a lesser paying job that still allows you to cover your expenses in the short run, while you continue to look for that perfect opportunity. If you are very risk-averse, and want to be prepared for a worst-case scenario, then the conservative approach is for you. On the other end of the spectrum is the aggressive option, which is essentially betting that should you find yourself unemployed, you would be able to find a similar level of employment within 3 months. If you are leaning towards this approach, consider that job loss can result from a number of things, including an industry-wide downturn, which can result in massive layoffs across entire industries. Should this happen, it may take longer than three months for economic factors to turn around and spark a new round of hiring. I would only recommend this option if you have parents or some other support that you can reasonably rely on if needed. Just keep in mind that parents aren’t immune from these factors either. The moderate plan is a good option that is somewhere in between the two ends of the spectrum. It’s a good starting point if you’re having trouble deciding where to begin, or if you just feel this is the best option for you. Everyone will have their own situation with unique circumstances to consider, thus there isn’t a universal “right” amount that we all should have put aside. Consider your situation, and find the amount that allows you to achieve your goals and that you would feel comfortable having should you stumble on hard times.

Need more guidance? Leave a comment below and we’ll help you find the amount that’s best for you.