Why You Should Start a Rainy-Day Fund
While having an emergency fund is awesome, for students, it's both easier and more practical to have a rainy-day fund.
By Paul Merimee — January 23, 2023
While there are many aspects to obtaining and maintaining financial literacy throughout school, one important tool is what's known as a "rainy day" fund. A rainy-day fund differs from an emergency account insofar as it is set aside for unexpected expenses that fall under $1000-$1500, like a broken alternator or an insurance deductible. These funds should be kept in an account that can be withdrawn quickly, like a checking or savings account that doesn't have withdrawal fees. An emergency fund is usually a much larger amount to take care of 3-6 months' worth of expenses. This fund can be kept in bonds, the stock market, or some other investment fund that appreciates with time. While having an emergency fund is awesome, for students, it's both easier and more practical to have a rainy-day fund as it can still provide a safety net in case of financial hardship.
Unexpected Expenses
One of the main reasons why students should start a rainy-day fund is to prepare for unexpected expenses. College students are often on a tight budget, and a busted-up car repair or broken arm can be financially devastating, especially if those students don't have social and financial safety nets like family or friends. A rainy-day fund can provide a source of money to pay for these unexpected expenses so students can avoid debt.
Furthermore, emergencies such as natural disasters or job loss (perhaps due to a worldwide pandemic) can be financially devastating. Students without a rainy-day fund may need to rely on credit cards or short-term loans with high-interest rates to survive. A rainy-day fund can provide time for students to cope with the emergency and reorient themselves to the future. Even if the fund doesn't take care of them for 3-6 months, like an emergency fund, it can sustain them for a week or two. This is critical when the world's turned upside down.
Non-Routine Expenses
In college, it can be difficult for students to plan out every aspect of their lives, particularly concerning social lives. Whether it's a last-minute dinner outing with some friends, a surprise date, or an apartment secret Santa, students sometimes forget to budget for these types of expenses. The rainy-day fund can either be a source to draw from if a student is strapped for cash but doesn't want to miss out on these important events, or it can simply alleviate guilt or anxiety about spending money on "frivolous" activities. If the fund is full, taking $50-$100 from it should be perfectly fine as long as that money is replaced as soon as possible. The fund shouldn't become a secondary source for discretionary spending. As it is a backup fund, it can supplement when needed.
Financial Stability
A rainy-day fund can also help students to achieve financial stability. When students have money set aside, it provides them with a comfortable base. This planning can reduce stress and anxiety, which is important for financial and emotional stability. The last thing students should worry about in college is their next meal. As anyone who's heard about Maslow's hierarchy of needs knows, unless basic necessities are taken care of, it is difficult to focus on the higher faculties that are required in college (Maslow proposed five needs in a pyramid structure). The higher needs are difficult to achieve until the lower needs are met. These needs are, from the bottom up: physiological (food/clothing), safety/security, love and belonging (friendship), esteem, and self-actualization). The financial stability from a rainy-day fund allows students to focus on what's important in college: learning.
How to Start the Fund
Starting a rainy-day fund is easy. All you need to do is open a checking or savings account and set aside a small amount each month. If you don't have a budgeting app or sheet, that's fine. I'd recommend starting to budget at some point. For now, all you need to do is decide on the amount you're setting aside and either move it into another account or take it out of your account. If you move it into a different account, you might be able to reap interest. Having it in cash can increase accessibility and make it easier to transfer it to the rest of your money (primarily if you work a job with cash tips). An important caveat is never to keep all your money in cash. Besides the obvious reasons (like theft or just losing it), cash does not appreciate with time. This means, in a year, the $20 bill tucked in your shoebox will be worth less than it is now. The key to putting money into your fund is to make it a consistent practice so that it grows over time.
Starting to save early is also important. If you begin to save in high school, you may have enough money to keep a rainy-day fund and an emergency fund!
Paul Merimee
Paul Merimee grew up in sunny and vibrant Cleveland, Ohio with his eight siblings. In his early years Paul loved to read, voraciously consuming anything that had an engaging front cover at the library. Paul wanted to be a software engineer, not an author. He somehow ended up going to a small, liberal arts college in the middle of Wyoming. It was there that he was introduced to the great writers like Homer, Dostoevsky, Aristotle, and more.
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