A rainy day fund is used to provide coverage for unexpected expenses (when it rains it pours!), such as putting new tires on your car, replacing the fridge, or taking Fluffy to the vet, so you don’t have to rack up credit card debt or take money from your paycheck to pay for them.

 

Non-discretionary expenses are (by definition) essential expenses, occurring monthly or annually, that are required to be paid, regardless of loss of income. These items include but are not limited to:

Day-to-Day Living Expenses

• Rent
• Groceries
• Gas, Parking and Tolls
• Auto/Home Maintenance Costs
• Utility Bills
• Loan Payments (Mortgage, Car Loans, Personal Loans, etc.)
• Credit Card Payments
• Netflix, Hulu, other subscriptions

Insurance and Health Care Costs

• Insurance Premium Payments (Health, Homeowners/Renters, Life, Disability, Auto, etc.)
• Insurance Deductibles/Copayments

Other Non-Discretionary Expenses

• Alimony/Child/Parent/Dependent Support
• Tuition and Education Expenses
• Association Fees/Dues

A few notes:

1.  If you pay any of these amounts annually, you’ll need to divide that amount by 12 to get the monthly cost. For expenses occurring less frequently than annually (such as copays and deductibles), estimate how much you will spend in total over a certain number of months and divide by the number of months to get the monthly cost.
2.  For items like health insurance, which you would typically lose when you lose your job, you should research the monthly cost of a similar health insurance plan or the cost of COBRA (which your employer should be able to give you) and include that premium as your health insurance cost.
3.  If you provide any charitable or religious contributions monthly, add those into this amount as well.

 

Experts say you should have anywhere from 3 to 6 months of your non-discretionary expenses in a savings account, with some even saying (since the Great Recession) 9 months. But for the average American, even 3 months seems impossible, as a recent survey showed that most individuals can’t afford a $400 emergency. Additionally, every job is different, with some providing protection from job loss because of tenure, unions, or severance pay.

So how much should you really have in your emergency fund? Although you may not like the answer, the truth is you should save as much as you’re comfortable with, but at the very least cover 1 month of non-discretionary expenses, with a maximum coverage of 9 months. Anything above 9 months may be excessive and better put towards other goals.

 

You should set aside the money for your Rainy Day and Emergency Funds in separate savings accounts (preferably online for higher rates and hidden away from view), as putting the cash in an investment account doesn’t provide easy access when you need the money quickly.

Just remember, these funds are not meant to be saved and then later used for a vacation you’ve always wanted; That should be a separate account.

 

Depending on your financial situation, any unexpected expense or the loss of income could derail your financial plans. If you don’t have money set aside to pay for these unexpected financial events, you’ll most likely pull money from your paycheck or retirement accounts, or even take on debt.

Any of these scenarios could cause a number of financial headaches, including late payments, fees, taxes, or missed savings payments, just to name a few. Having a strong financial foundation will ensure you have the money set aside to handle these unexpected expenses and stay on track of your Financial Plan, without depleting any of your other resources.