Americans don’t seem particularly eager to boost contributions to their emergency funds. More than 4 in 5 say they did not increase emergency savings this year, according to a recent survey from Bankrate, and 60% say they feel behind when it comes to saving for a rainy day.
Can you blame them?
After all, it’s hard to be pumped about putting money away for a situation you hope will never actually arise. That’s why, for people looking to bump up their savings, a change in mental accounting might be in order.
“Everyone has their own version of what a rainy day means to them, but it always has that negative connotation,” says Spenser Liszt, a certified financial planner and founder of Motif Planning. “With a topic that’s so vulnerable, like money, it’s important to encourage positive language so people can have positive experiences with their money.”
That’s why, in addition to your traditional emergency fund, some financial pros recommend building a so-called sunny day fund of money you can spend guilt-free or put toward exciting opportunities.
Here’s how they say it could work.
Yes, you still need an emergency fund
On your list of financial priorities, which may include goals such as saving for retirement and paying down debt, building an emergency fund should likely occupy the top spot, financial pros say.
Without savings in place, a financial emergency, such as a job loss or a surprise medical bill, could force you to sell your investments or delve deeper into debt to make up the difference, essentially derailing your financial plan.
Traditionally, financial planners recommend stashing three to six months’ worth of living expenses in a safe, cash vehicle, such as a high-yield savings account, in case of emergencies. (Check out this list of the best high-yield savings accounts from CNBC Select.)
But that’s easier said than done. Less than half — 48% — of U.S. adults say they could cover three months’ worth of expenses, according to Bankrate.
If you’re having trouble getting up to that number, don’t beat yourself up. Instead, “celebrate milestones along the way,” says Andy Baxley, a CFP and senior planner at The Planning Center. “If you’re aiming for six months and you don’t have anything, you should be celebrating when you get to one month of savings.”
What’s more, consider the sorts of expenses your emergency fund could potentially cover to give yourself some piece of mind. “If you have insurance deductibles, it can be good to have those ready in cash for auto, home or any other insurance policies you might have,” says Liszt. “Another would be cash to cover living expenses during the disability waiting period, or elimination period.”
Ideally, you’d have enough cash to cover every contingency, but the little wins you can give yourself on the way matter, too.
How a ‘sunny day’ fund can help you reach your goals
Much of financial planning is about setting money aside for defined goals, such as retirement. But other opportunities for your money will inevitably arise. And when they do, a sunny day fund could come in handy.
What that looks like is up to you. Perhaps you want money on hand for short-term things that come up — say, an impromptu vacation with friends or a fun business opportunity. In that case, keep your sunny day fund in an income-producing cash account, the same way you would an emergency fund.
If you want to save for something bigger and more amorphous — say you want a lavish anniversary celebration or plan to eventually take a yearlong sabbatical from work to write a novel — favor a taxable brokerage account. That will allow you to invest the money in assets that will ostensibly grow, but also withdraw funds whenever you need them without penalty.
Setting up such a fund serves a twofold purpose. Not only are you saving for something you actually want, but you’re also keeping yourself from tapping into your emergency fund for non-emergencies.
“People put their nose to the grindstone and save in their emergency fund, but then the opportunity to go to your best friend’s wedding in Greece comes up, and it’s like, ‘Well, maybe I’ll do that,’” says Baxley.
He recommends earmarking a certain percentage of your emergency savings each month toward your sunny day fund. And in the event that the rainy day comes sooner than you think, you can always tap your sunny day fund now and rebuild it later.
“That money is fungible,” Baxley says. “You can move money over from your sunny day fund to your emergency fund instantaneously these days.”
