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Who Needs a Rainy Day Fund?
Jesse Will is an Austin, Texas-based journalist and dad who has contributed to The New Yorker, Rolling Stone, The Wall Street Journal, Men's Journal, Pitchfork, Popular Science, Road & Track, and others. He’s not a financial genius, but like so many parents, he’s here to learn.
This spring my income took a hit. My family was financially fine — surviving in a pandemic — but during the uncertainty of March, April, and May, I racked up some credit card debt. Rather than let that debt amass interest and become a bigger problem, I winced and went to my rainy day fund, held in a savings account I hadn’t touched in years, to pay it off. To be fair, seeing the account diminished was less painful than the process of figuring out my login information.
In breaking into my emergency account I was surely not alone. In fact, I’m lucky to have one. Just a year ago, the old “rainy day fund” or RDF — an amount of money squirreled away somewhere in a savings account, reserved for urgent and unexpected needs — might have seemed to you like something of a relic. The American economy had been relatively strong for years. Funneling your family’s money into a savings account might not have seemed like a top priority.
Your thinking might have gone like this: Should an emergency pop up, couldn’t I just run up a few charges on a credit card and remedy the damage later? If the stock market’s continued rise is inevitable, shouldn’t I just invest that money and watch it grow, rather than let it accumulate very little interest in a savings account?
Then, of course, the unexpected happened: a pandemic to an economic shutdown (you can always expect a recession, but one caused by an illness? That’s unexpected!). Income streams shut off for a diverse spectrum of workers, from servers to sound engineers to airline pilots. You can bet that many of them wished, after the fact, that they had stored away some emergency savings — if not to put food on the family table, at least to fend off the 4 a.m. thoughts of looming financial distress.
That’s where I was at — the 4 a.m. stuff. I made the decision, moved some money, and “solved” the problem. But was it idiotic to dip into savings while I was still a freelancer working at a pretty good clip, just to fend off debt, and just to assuage my fears? Was my situation truly a rainy day? Or was this some shade of overcast? I had no idea. So I took the question to a few experts.
“You access the rainy day fund in true emergencies: a disability, a big and unexpected car repair. Maybe your refrigerator, stove, and microwave all go at the same time. It happens. And of course, the loss of a job. It’s the reason you maintain cash assets that are readily available to pay for food, rent, the mortgage for at least three months,” says Amy Irvine, a Certified Financial Planner based in Corning, NY.
Obviously, if you are losing income, and need to dip into your savings to survive, you will. But what about the big gray area of wants? It turns out that some advisors might be OK with you tapping into your emergency savings right now for reasons other than, well, emergencies.
“With the coronavirus, maybe a vacation, or a staycation, or change of scenery for the family is worthy of tapping into that account right now because when you're cooped up in the same place for four or five months, you may not be able to perform as well as a father,” says CFP Ted Jenkin, an Atlanta-based advisor.
This is an interesting point: as much as we try, there’s no real black line. Life planning is imprecise. In some cases it might be worth cracking into savings for some family fun, rather than accrue “dad debt.”
And if you are using this moment to reconfigure your financial life, or just need somewhere to put all that going-out money that’s been piling up, where should you start a rainy day fund?
Most financial advisors recommend keeping your emergency funds at an online bank in a “high” yield savings account: Ally, Goldman Sachs Marcus, Vio Bank are just a few. Yes — with current rates of .80% to about 1%, you won’t be raking in tons of interest, but the online banks are offering a much better rate than your brick-and-mortar bank likely is (many are offering a laughable .01% return at the moment.)
“What I like about those online banks is that because most of them don’t have a minimum, should you need to deplete that account, you can access it without a penalty,” says CFT Sophia Bera. The Austin-based advisor says that there’s another reason to love online savings accounts:
“Since it takes a couple days for the money to travel, it makes you really kind of pause and think — Do I really want to use this money?”
If it turns out you do, I hope you have that password written down somewhere.