Building a savings buffer for life’s unexpected expenses.

How much should I have saved for a rainy day?

Life is unpredictable, and having a financial buffer can help you weather unexpected expenses without derailing your long-term financial goals. A rainy day fund, also known as an emergency fund, is essential for financial stability. Here are some tips about how much you should have saved for a rainy day and how to go about it.

The purpose of a rainy day fund.

A rainy day fund is money you’ve set aside to cover unexpected expenses, such as car repairs, medical bills and home repairs. It should be easily accessible without any penalties or delays.

How much should I have in my rainy day fund?

The exact amount you should have in your rainy day fund depends on your personal circumstances and what makes you feel comfortable, but a common rule of thumb is to save between three and six months worth of living expenses.

Three months of expenses will be enough to cover most short-term unexpected issues and disruptions. It’s a great starting point if you have stable employment and lower financial obligations.

Six months of expenses will provide a more substantial safety net and will cover larger and longer-term disruptions like job loss. It will also provide better financial security if you have less stable employment, higher financial obligations and dependants. 

Calculating how much you need to save.

To calculate how much you need to save, follow these steps:

1. Calculate your monthly expenses. You can do this with a pen and paper or a spreadsheet and your bank statements. An even easier option is to use the Beyond Bank Internet Banking or Mobile Banking Apps or the Beyond Bank+ App. List all your essential spending items like rent, mortgage, groceries, utilities and transport. Exclude lifestyle or discretionary spending like eating out and entertainment. The rationale is that in an emergency, you could live without this spending. The key thing is using your actual spending and transactions to get an accurate estimate. Relying on memory or guessing what you spend will almost always result in an underestimate of what you spend.
2. Multiply the answer from point one by three to give you the lower estimate of what you should save and by six to give you the higher estimate.

For example, if the sum of your essential spending was $2,000 a month, you’d have a lower estimate of $6,000 (three x $2,000) and a higher estimate of $12,000 (six x $2,000) for your Rainy Day fund. 

Things to consider.

While three to six months of living expenses is a good rule of thumb, you should consider these factors to decide how much you have in your rainy day fund:

• Job stability – If you have stable employment with a good steady income, a smaller amount (three months of living expenses) might be enough. If your job is less secure or your income is variable, it’s advisable to have a larger fund (more likely to be six months living expenses).
• Dependents – If you have dependents such as children or elderly parents, your financial obligations will be more significant and a larger fund will provide more security.
• Insurance – If you are well insured and especially if you have income protection insurance, you may be able to have a smaller fund. Check your insurance policies to see what’s covered. Your home and contents policy might cover things like accidental breakages, motor burnouts on appliances and other similar events. Check your income protection insurance to see how much it provides, what the waiting period is (this could be three months or more) and how long it covers you for.
• Health – If you have ongoing health conditions or expenses, it would be wise to have a larger fund to cover potential health care costs.
• Debt – If you have high levels of debt, it makes sense to have a larger fund to give you more flexibility when making repayments during any financial disruption.

Where to keep your rainy day fund.

There are a few good options for where to keep your rainy day fund. The key things to consider are:

1. You want it to be available when you need it – so don’t tie up your money somewhere or in something that will take time to access. When you need the money, you’ll want it quickly. On the other hand, you don’t want it so accessible and visible that you are continually tempted to use it for non-essential spending.
2. Your rainy day fund is money that you can’t really afford to lose, so don’t invest it in anything where there is a risk you’ll lose it.

Good options to consider are:

• If you have a mortgage, keep your rainy day fund in an offset account or a redraw facility. You’ll get a good return on your fund because it will be reducing the interest on your mortgage.
• If you don’t have a mortgage, keep your rainy day fund in a high-interest savings account. Consider the Beyond Bank Purple Bonus Saver account. It pays a competitive interest rate and the regular deposits you make into your rainy day fund will help satisfy the bonus interest conditions on the account.

How to build your rainy day fund.

1. Set a goal – Based on your calculations, set a specific savings goal for your rainy day fund.
2. Automate your savings – Set up an automatic transfer from your transaction account where you get paid into the account you are going to use for your rainy day fund. If you’re a Beyond bank customer, consider using round2save to roundup spending transactions and deposit the roundup amounts into your rainy day fund.
3. Reduce your spending to boost your savings – Look for ways to reduce your spending on unnecessary expenses so you can save more quickly.
4. Prioritise your rainy day fund – Think of the money you put into your rainy day fund as a non-negotiable expense and prioritise it before any non-essential spending you might have.

Building up a rainy day fund will help you build financial resilience so you can deal with life’s unexpected events. How much you need will depend on your circumstances, but anything is better than nothing, so it’s important to start. From time to time, when you need money for some kind of emergency, it will be there. After you use it, top up your rainy day fund again as soon as you can.

Remember, we are here to help. If you need any guidance about rainy day funds please contact the Beyond Bank team.