Rainy Day Fund: How Much to Save and Where to Keep it

How often have you had to shell out cash for unforeseen dental work, plumbing issues, storm damage, vehicle repairs, travel costs, school supplies, travel, or other untimely and completely unplanned expenses? If you’re like most Americans, the answer is probably “plenty.”

As a general rule of thumb, many Financial Advisors recommend a minimum of three-to-six months of your fixed living expenses be set aside in a separate account and earmarked towards unanticipated cash outlays. At Birchwood, we agree with this recommendation but often find that the threshold may end up being higher for most people.

Cash reserves may not be generating much (or any) interest these days, but keeping a healthy balance in your emergency savings or rainy day account is critical to your long-term financial health. These reserves are in place as a measure of safety and security, not wealth accumulation. Therefore, managing adequate reserves and staying within applicable FDIC limits is imperative to hedging against the possible risks of unanticipated cash needs.

Defining fixed vs. discretionary living needs

How you define fixed vs. discretionary will vary from person to person, but I recommend you consider the fixed living needs as those that will undoubtedly continue into the future, whether or not you “want them to.” On the other hand, discretionary expenses include those that consist of “wants” as opposed to “needs.”

• Fixed Living Needs: Can include mortgage and rent payments, car payments, daycare costs, utilities, etc. 
• Discretionary Living Needs: Can include cell phone and data plans, cable or television subscriptions, gym and social memberships, etc.
  
  

What to set aside for unplanned expenses?

Once you analyze your cash flow situation and determine your fixed living needs on an ongoing basis, consider setting aside at least three to six months in a separate account. Don’t think about touching this account unless it’s for unplanned expenses that your ongoing cash flow can’t cover.

Where to keep your reserves?

So now that we’ve identified how to calculate your fixed living needs and how many months’ worth you may want to set aside as your emergency fund, the next question is where to keep it.

Traditional bank and credit union checking accounts generally don’t offer very competitive interest rates. With that said, given today’s low-interest-rate environment, it’s become increasingly difficult to search for yield. As a saver, you may find that you need to venture into unchartered or uncomfortable territory to gain access to a higher-yielding account for your emergency savings and rainy day reserves.

For those savers that are comfortable with the technological aspects of online banking, consider a High Yield Savings Account. Numerous banks offer these high-yield accounts, and the reason they are generally able to do so is because, in most cases, the operation is entirely digital. That is, there is no physical brick-and-mortar facility. Therefore, when the physical location and office expenses are factored out of the equation, these banks are generally able to offer higher interest rates on their deposit accounts since their operating expenses are considerably lower than organizations operating in the traditional banking space.

High Yield Savings Considerations

Some of the more important variables to consider when selecting a High Yield Savings Account for your emergency savings and rainy day reserves are:

1.  FDIC insurance – In the event of a bank failure, FDIC insurance helps to protect depositor accounts. The standard insurance is about $250,000 per depositor, per insured bank for each account ownership category. Be sure to conduct your due diligence to ensure that your bank deposits are FDIC insured and that the account balance doesn’t exceed current limits. If so, consider setting up multiple savings accounts at different institutions so that you stay within the FDIC limits at each organization.
2. Fees – Don’t be tricked into paying a fee for an online High Yield Savings account. There are plenty of options to choose from, and these accounts shouldn’t cost you anything. If you are paying a fee, consider looking for a new bank.
3. Minimums – Be aware of minimum balance requirements with different High Yield Savings Accounts. For example, some banks will require a specific dollar amount on a deposit to receive the highest yield. Be aware of what these minimum deposit amounts are and whether or not this impacts where you keep your emergency savings and rainy day reserves.
4. Customer Service – Perhaps I’m old-fashioned, but client satisfaction, positivity, and a general willingness to help and provide customer support are all essential characteristics I look for in a banking or advisory relationship. 
5. Access to Funds – Be aware of how long it will take to access the funds in your new High Yield Savings Account. In many cases, online transfers can be completed in as little as 24-48 hours. If your bank is telling you that it will take longer than that, consider asking why.

At Birchwood Financial Partners, we work with our clients to help them feel empowered and knowledgeable about the financial decisions they are making every day. Learn more about our firm, our team, our processes and services, and the clients we currently serve.

Investment Advisory services offered through Birchwood Financial Partners, Inc. an SEC Registered Investment Advisor.

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