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I've just started working and I'm building up several of my investments (mortgage preparation fund, general savings fund, rainy day fund, wedding fund).

As for the mortgage, wedding fund, and general savings fund, I plan to put a fixed amount of my salary to each account every month.

But for the rainy day fund, I'm planning to get it to a safe $3000-4000, but what I was wondering is what would happen afterwards.

Should I keep it at that amount or should I continually put a little more each month there?

  • 2
    Commenting as this is not a complete answer. I push all of my savings into my "rainy day account". When it exceeds my goals for the rainy day by a few thousand I pull the excess off into other investments or accounts. This is separate from retirement investments. This helped me get in the budget habit of contributing to the same account the same amount every pay period. – Freiheit Oct 13 '14 at 16:44
  • Curious where your target of $3-$4K came from. How many months' spending does that equate to? – JoeTaxpayer Oct 13 '14 at 19:47
  • I'm sitting on a full year, and my investment interest coming in would make it run a couple of months longer. – Joshua Oct 13 '14 at 20:29
  • wow 4k / year, i need those kinds of expenses :) – im so confused Oct 13 '14 at 21:19
  • @JoeTaxpayer, in Australia, rent alone is generally in the $250-350/week range (for a small-decent apartment). That equates to $3300 for 3 months. Now that I think about it, I should probably make my rainy day fund in the $4000-5000 range. – Mark Gabriel Oct 14 '14 at 0:06
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The usual advice is that an emergency fund should aim to cover something in the region of 3 to 6 months living expenses. The exact amount is obviously a judgement for you to make based on your own circumstances.

Once you have a comfortable safety net there is little point in padding it further unless your circumstances change significantly, and you would probably be better off diverting your savings into longer term (and hopefully better performing) investments.

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How to determine how much to have in a rainy day fund?

Should I keep it at that amount or should I continually put a little more each month there?

You first need to figure out how much you want in it, which varies based on a few factors. There's no right answer but generally people recommend 3-6 months living expenses.

  1. Risk tolerance. Some people are much more ok with less in savings. Some might be comfortable with 3 months living expenses, some might prefer 6 or even 12. Some might only want 1.
  2. Your expenses. If you only are spending $1000 a month you will not need as much as someone spending $5000 a month will
  3. Your income risk/variability. Income risk affects this. If you are a sales manager with income fluctuating greatly you might need a higher savings than someone who has a much more stable income. Likewise, your job security can increase/decrease the amount. If you work for a startup vs the government, etc. How marketable are your skills? Could you get a job quickly?
  4. Your lifestyle risk. Do you have kids? A family? Multiple old cars? A mortgage? A home which is falling apart? A multi-unit rental empire depending on your income? Consider the impact potential problems have and the risk associated with them.
  5. What's included? Do you budget for auto replacement? Do you have savings for large home repairs? The more "budgeted unexpected" savings you have the less you need as rainy-day.

So what?

You will quickly notice the amount you will want has a large number of factors affecting it. This means over time the amount you want will change.

Because it's likely an approximation in the first place you don't need to continually adjust it. Once you get to the amount, it's "good enough" for quite some time.

I recommend revisiting the amount in your savings once a year or whenever you have large life events (family, job, living arrangement) changes. It's not worth it to adjust this on a monthly basis because frankly no one can ever have a perfect guesstimate.

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It is hard to put an upper limit on how much money it is worth putting in an unemployment fund, the more you have, the better you can live, and the longer you can wait for a good offer. Your own estimate assumes both that you can spend very little money and find a new job relatively quickly, that seems quite optimistic.

You might not require a luxury lifestyle, and you might think that you will at least be able to find some job. But if you at least extend the fund in order to make it last longer you are in a much better position to search for the right job, both in terms of pay and personal preferences. Also note that some hiring processes are rather slow, this may effectively cut down the amount of time you have to find a job by a month or two.

Of course, there are also other reasons for saving, I assume you have some form of pension plan, but you might also at some point want to have kids. Then you probably also want to buy a house, and suddenly your fixed expenses have grown quite a bit. If you have the economic headroom now it might be a good idea to save some money for relieving your future self. Incidentally such a saving would also double as a rainy day fund.

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If you have enough to increase your rainy day fund periodically (not necessarily each month), an indirect but prudent way of increasing your rainy day fund is to put that extra money toward paying down your debt. Identify which of your loans is the one you will pay off the soonest at the regular monthly payment rate, and put an extra $50 - $100 toward that principal. This will drive down interest and reduce the amount of time it takes you to fully pay it off. Then take that same rainy day amount (which should now be considerably higher, since you have a lot more to spare each month) and put it toward the next-soonest payoff loan.

This produces a multiplier effect and you'll find yourself paying off all your loans much more quickly than if you had stayed with the regular monthly payment. Having less debt is an excellent way of guarding against rainy days because instead of building up a bigger umbrella, you are essentially making it rain less.

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