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How Important Is It to Have a Rainy Day Fund?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

rainy day fund
Be prepared for the unexpected with a rainy day fund.

Life is unpredictable, which is why a rainy day fund is one of the most important components of a sound financial foundation. Even the most prepared, organized people can be caught off guard and put into a difficult financial situation when the unexpected arises. Because of this, it’s essential to have money tucked away in an emergency fund and a rainy day fund. While most people would agree that having easy-to-access cash is important, 29% of households have less than $1,000 in savings, according to a recent MagnifyMoney study.

In this post, we’ll explain exactly what a rainy day fund is, how much you should save and how to start one today.

What is a rainy day fund?

Rainy day fundEmergency fund
Money set aside for predictable expenses, like a roof repair or trip to the mechanic. Money set aside for unpredictable, and unplanned for expenses such as job loss, divorce or a sudden change in income.

Often, the terms rainy day fund and emergency fund are used interchangeably. While they are both savings accounts that can be used to pay for the unexpected, they differ in a few key areas. It’s important to learn the difference between the two types of savings accounts and contribute to both.

A rainy day fund is a designated amount of money that has been set aside for one-off expenses that you can typically predict the need to pay for at some point. Rainy day funds should be easily accessible and used to cover expenses that fall outside of your normal budget. This fund can be used to pay for things like car or house repairs, broken appliances, additional taxes, children’s field-trip fees, or last-minute travel expenses. While these expenses are usually not part of your monthly budget, you could likely anticipate the need to pay for them once or twice a year. So, a rainy day fund comes in handy.

“The number one reason to have a rainy day fund is peace of mind,” said Corbin T. Green a financial advisor in Salt Lake City. “People are able to go to bed knowing that if something were to happen, there are funds available to take care of that.”

This fund allows you to pay for smaller, one-off expenses without going into debt or pulling from your checking account and throwing off your well-planned budget that is used to pay for predictable monthly bills and expenses.

An emergency fund is exactly what it sounds like—a reserve of money or savings account that you can quickly access in case of an unexpected and unplanned life emergency. Typically, emergency funds are used to pay for unexpected, longer-term events such as medical bills, job loss or divorce.

“If something were to happen where you got laid off, left a job or got injured, having an emergency fund protects you and buys some time,” Green said.

Experts suggest having three to six months’ worth of money in this account that you could easily access and use to run your household and pay your monthly bills in the case of an emergency.

How to save for your rainy day fund

rainy day fund side gig
Consider taking on a side gig to bring in extra cash for your rainy day fund.

It can seem daunting to put extra money away each month, but saving money is a key part of smart financial planning. We know it’s important to save for your rainy day fund, but how do you get started? Here are some easy ways to save more money each month:

  • Create multiple savings accounts: Instead of lumping all your money into one savings account, create multiple savings accounts to help you distinguish between the emergency fund and the rainy day fund. If you ever need to access either of these accounts, you’ll know which one to pull from.
  • Automate your savings: It’s easy to say you’ll put extra money into your savings account at the end of each month once bills are paid. But, if you don’t pay yourself first, at the end of the month, you likely won’t have saved what you originally intended. By automating your savings, you’ll automatically have money set aside each month and won’t have to worry about it. Treat your savings as a bill and pay it automatically, on time, each month.
  • Reduce your spending: Money saved is money earned. If you’re looking to save for a rainy day fund, try trimming your spending and adding a little more each week or month to your fund. Cut back on eating out or your daily coffee run and put that money towards your fund.
  • Take on a side hustle: Many millennials are taking on additional work or side hustles as a way to earn more money. If your full-time salary isn’t cutting it, consider taking on a side hustle as a way to quickly boost up your rainy day fund.

Where to keep your rainy day fund

rainy day fund
The best place to stash your rainy day fund is in a savings account, where you can easily access the money in a time of need.

Now that you’ve built up some money for your rainy day fund, where should you keep that money? You want to find a safe place to store your money that gives you easy access to the funds in a pinch but can also allow you to earn interest on your funds.

The best options

Saving accounts: A savings account is a no-brainer when you’re looking for a place to stash your rainy day fund. Savings accounts are FDIC insured and offer better interest rates than checking accounts. Check out the best savings accounts here.

Money markets: Money markets are a type of account that usually offer higher interest rates than checking or savings accounts. You can access more money relatively easy, but money market accounts may limit the number of withdrawals each month. Also, most money market accounts require a minimum balance to be met.

Avoid these options

Checking accounts. Checking accounts probably aren’t the best option for your rainy day fund. They give you quick, easy access to your money, but often offer low, if any, interest. You may also be more tempted to spend the cash if it’s readily accessible in your checking account and you’ve got a linked debit card you can use.

CDs. CDs often charge early withdrawal penalties when you try to cash them out before your term is up. Since emergencies are unpredictable, avoid locking your rainy day fund up in a CD. Stick to accounts that offer easy access like a savings account.

What to spend your rainy day fund on

rainy day fund
A home repair or unexpected medical bill are two examples of a good time to dip into your rainy day fund.

Rainy day funds are usually not used to cover ongoing, long-term, emergency events. “If it’s a true emergency, it’s usually not a materialistic expense,” said Green.

Rainy day funds can be spent on things like car repairs, new tires, and emissions and inspections. Or perhaps you need a new washing machine, fridge, roof or floor? Rainy day funds are meant for such expenses. Most people wouldn’t budget for a new roof because it’s a one-off expense. However, it’s somewhat predictable that you’ll have to repair your car or home at some point, so this type of fund is the perfect financial resource for occasions like this.

However, if you lose your job, become sick or are unable to work for a sustained period of time, you would not use your rainy day fund, but instead, pull from your emergency fund.

“Use your emergency fund when something impacts your ability to earn a paycheck or you lose your income and need to use it [emergency fund] to pay your bills and live off of it,” Green said.

Why a rainy day fund is important

rainy day fund

Change is the only predictable thing in life. It’s almost inevitable that something unplanned will occur requiring additional money to pay for it. Knowing this, it’s smart to plan ahead and prepare for the unexpected. Having a rainy day fund is important because it gives you peace of mind and financial protection in case something happens. This type of fund is extra padding in your budget that can keep you out of debt and on track financially, no matter what unexpected life event unfolds.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sage Evans
Sage Evans |

Sage Evans is a writer at MagnifyMoney. You can email Sage here

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What Is a Passbook Savings Account and Can You Still Open One?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’ve never heard of a passbook savings account, you’re not alone. These banking products used to be run-of-the-mill, but today they’ve become relics that are no longer promoted much by banks.

Yet passbook savings accounts still exist, more often than not at regional banks. A passbook savings account is a type of savings account that allows you to earn a competitive interest rate and it comes with a physical notebook, called a passbook, that helps you track the flow of funds into and out of the account.

It’s undoubtedly an old-school approach, and you might even find a passbook among other paper records in the belongings of, say, an older or a late relative. But whatever your age, you may be intrigued by its unique, analog attributes. Here’s what to know if you’re thinking about getting a passbook savings account.

How does a passbook savings account work?

Passbook savings accounts work the way a lot of banking used to function. Before computers, the internet, online bank statements and text message alerts, customers had to rely on paper-based records to keep up with their finances and their bank balances. When it came to savings accounts, your passbook was a key tool. Physical checkbooks played a similar role for your checking account.

In fact, traditional savings accounts were once known as passbook accounts. Bank tellers recorded deposits along with earned interest in these paper notebooks, which you would store at home for safekeeping. While the digitization of so much personal banking has pushed passbooks to the edge of obsolescence, they’re still an enjoyable way to save for some.

Passbooks haven’t changed much with time. Banks may require you to visit a branch in person in order to use them, given the books’ analogue nature. There’s also generally no ATM access available with this type of savings account, although you may be able to look at your balance online.

As with any other type of savings account, there may be a minimum opening balance requirement, which varies based on the bank. For instance, First Republic requires $500 to open a passbook account. Meanwhile the regional Union Bank in North Dakota only requires $100, unless you’re a minor, in which case there is no minimum.

Do passbook savings accounts offer good interest rates?

The annual percentage yield (APY) on your passbook savings varies based on the bank. But you shouldn’t expect a high yield especially compared with accounts like a certificate of deposit (CD). Still, it’s important to compare the APYs among different banks to maximize your yield.

Similarly, how often interest is compounded or how often a bank pays out the interest on a passbook account can make a difference to your returns. Interest could be compounded daily or sometimes monthly. The more regularly the compounding, the better off you are.

Fees may apply, but it’s possible that they will be lower than those for regular savings accounts. For example, Investors Bank has decreased fees and balance requirements on its passbooks, charging a $3 monthly fee that can be avoided entirely if you keep a $50 minimum balance.

In any case, the Federal Deposit Insurance Corporation (FDIC) insures deposits made into a passbook savings account so you can have peace of mind about your dollars.

Who should get a passbook savings account?

These days, passbooks make sense for a very select audience. Those who insist on a paper trail for all their financial record keeping ?— or simply love the retro quality of these kinds of booklets? — are obvious candidates for a passbook savings account.

However, the main audience for these savings accounts are parents with young kids. When they advertise passbook savings accounts at all, banks like to showcase them as a way for kids to learn how to start saving.

One such company is American National Bank, based in Virginia and North Carolina, which promotes passbooks as part of its youth savings program for those 12 and younger. If you have a young child and want to instill smart financial practices early on, the old-fashioned method is ideal. Plus, kids tend to appreciate the simpler pleasures of print records. A nice perk: American National Bank gives kids a prize when they’ve filled up their passbook.

Pros and cons of passbook savings accounts

Passbooks aren’t for everyone. Here are some advantages and disadvantages to consider before jumping into this type of account.

Pros:

  • These accounts are a great way for young children to learn the habit of savings early on in their lives.
  • You get a physical notebook — the passbook — that you can easily consult. For kids, this helps make the somewhat abstract nature of savings more comprehensible.
  • There’s no need to worry about the loss of an ATM card or the possibility of young savers draining the account to buy things without oversight.
  • Fees and minimum balance requirements may be lower than those for other types of savings.
  • They offer decent interest rates.

Cons:

  • You won’t get the same amount of digital access or convenience as with a regular savings account.
  • Passbooks often require in-person visits at a bank branch for transactions.
  • Not all banks still offer passbook savings as an option.

Some advice on how to build savings

Whether you’re exploring a passbook account or some other type of savings, one rule holds: The more you save, the better.

That can be hard for anyone, especially with so many temptations to spend. But a savings account into which you deposit money without looking at it much (as you might if it’s directly tied to your checking account) can help you avoid the pitfall of transferring funds for unnecessary expenses. Of course, a higher interest rate is also always desirable.

A passbook can help in this case since it’s digitally limited and geared more toward building savings over the long haul. But other options exist to help you figure out a sensible way to build a nest egg. It’s all about finding what works with your financial habits and lifestyle.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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shivangi rao |

shivangi rao is a writer at MagnifyMoney. You can email shivangi here

Paul Schrodt
Paul Schrodt |

Paul Schrodt is a writer at MagnifyMoney. You can email Paul here

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Generational Wealth Gap Is Greater Than 20 Years Ago

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The golden years have never glittered so bright, according to a recent MagnifyMoney analysis of Federal Reserve data that revealed baby boomers possess a much higher net worth than Americans in their age group 20 years ago.

Meanwhile, today’s millennials lag a little compared with their counterparts in 1998. In short, today’s baby boomers (ages 52 to 70 in 2016) are rolling in wealth while young adults struggle to stay above debt.

Key takeaways

    • The average millennial (ages 20 to 35 in 2016) has a net worth of $100,800 in 2019. By comparison, the average Generation Xer (ages 36 to 51) has a net worth of $509,100 and the average baby boomer has an average net worth of $1,210,100. The median net worth for millennials is $13,600, compared with $94,500 for Gen X and $206,700 for baby boomers.

    • The net worth gap between older and younger Americans has widened into a chasm during the last 20 years. In 1998, the average older household amassed roughly seven times the net worth of younger households ($747,600 versus $103,400). In 2019, the average boomer household has 12 times the net worth of a millennial household ($1,210,100 vs. $100,800).

    • Similarly, the median net worth of both millennials and Gen Xers is less than their age cohorts in 1998, while today’s baby boomers are slightly wealthier than their counterparts 20 years ago.

  • Millennial households have $2,600 less in net worth than those their age in 1998, when they had an average net worth of $103,400 in inflation-adjusted dollars. Meanwhile, the average baby boomer net worth has nearly doubled from households their age in 1998, from $747,600 in 1998 to $1,210,100 in 2019.
  • Despite being the youngest, millennials have liabilities (such as debt) in far greater proportions than the other age groups studied — roughly 44% the size of their assets. The 20-to-35 age group in 1998 only had liabilities 36% the size of their assets.

What is net worth and why is it important?

A person’s net worth is all their assets minus any liabilities. Net worth paints one of the most accurate portraits of someone’s financial health since it takes into account looming obligations like student or credit card debt, as well as assets such as home equity, investments and savings.

Examples of AssetsExamples of Liabilities
Home equityMortgage
Investments in stocks and bondsCredit card debt
Car (owned, not leased)Student loan debt
Cash value of whole life insuranceMedical expenses

You’ll notice that although assets help boost your net worth, not every asset is easy to convert into cash.

For example, if you own a car (or a plane or a yacht), it counts as an asset because, in theory, you can turn it into money should the need arise by selling it. But as anyone who has ever tried to sell a used car or even a house can attest, what the market will give you for the asset may not be what you expected. Not to mention an asset such as your vehicle or house fulfills a vital need (like getting you to work or providing you shelter) that you’ll have to satisfy one way or the other. Nonetheless, experts classify the value of these not-too-liquid sources of wealth as assets.

While one’s net worth can fluctuate dramatically depending on life events (think of all the debt assumed by taking out a mortgage on your first home or from student loans), the overall trend serves as a good measure of how well someone is meeting their financial obligations. Here’s the current breakdown of assets and liabilities for each of the age groups examined:


For today’s millennials, liabilities such as debt are about 44% of their assets. While Gen Xers have a greater amount of liabilities, they also have more assets, so liabilities are only roughly 24% of their assets. Boomers have the most advantageous ratio of liabilities to assets, with liabilities at only about 8% of their assets.

To find out your net worth, you can use Charles Schwab’s worksheet or calculators from Kiplinger or CNN Money, among many other options.

Methodology

MagnifyMoney examined the most recent Federal Reserve data on household assets and liabilities and estimated the average increase in household asset and liability data based on economic data from the Federal Reserve and the Federal Deposit Insurance Corp., as of March 2019. Values for all dates are in inflation-adjusted dollars.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here