It may not be as common now to hear someone say “Saving for a rainy day,” or having a “Rainy Day” fund, but it’s just another way of saying an Emergency Fund. I’m a strong advocate of having an Emergency Fund and keeping that money separate from your general-purpose spending account. It’s quite a relief when your refrigerator goes out to remember that you can buy a new one without having to wait a month to be able to put anything in it. I had one friend who said that having an Emergency Fund was pretty pessimistic, but I completely disagree! However, the Rainy Day fund isn’t the topic of today’s conversation. Today I want to talk about a Sunny Day fund, which is a decidedly optimistic way of using our resources. A Sunny Day fund is money you’ve set aside to be able to seize opportunities without risking your cashflow. It reflects a mindset that is geared toward growth and progress.
WHAT ARE SOME OF THE REASONS TO HAVE A SUNNY DAY FUND?
Let’s imagine that you’ve been looking for another income stream, but you aren’t sure what that should be. A friend tells you of a foreclosure sale on a piece of property. You take a look at it and decide that it would be a good value and that you could either turn around and resell it or rent it as a short-term rental. The money for this purchase could come from a bank loan, figuring that you’ll be able to pay the loan from the sale or from the rental income. You could use your cashflow accounts or your emergency fund, but that may put you in a bind if you have an actual emergency. This is where having a Sunny Day fund could be useful. It might not pay for the entire opportunity, but it may provide a healthy down payment so that you can reduce the amount you’re borrowing.
Another example is in fortuitous purchases. If you’re careful and judicious with your spending, you probably don’t make large purchases on impulse, but you plan for them. It can be very beneficial to have a sum of money put aside each month in the event you find a good value on, say, a boat for the family, or a new piece of furniture, or maybe a home project. Having this money put away can keep you from having to finance the project or squeeze your standard spending.
These are times when you may not want to take money out of an investment account, especially if you’re seeing good returns on the investments, and you don’t want to take money out of retirement accounts if it means incurring a penalty. Similar to where you’d keep your Emergency Fund, you’ll want your Sunny Day fund in a quick-access account, maybe a high-yield savings account. You should be able to withdraw or transfer some of the money within a day or so, if not on the same day. The flexibility to take advantage of good value can be a real blessing. Additionally, having access to cash rather than having to finance something can give you a trading advantage.
STARTING AND MANAGING YOUR SUNNY DAY FUND
The first thing you want to do is to decide how much you want to end up with as a minimum. You can always change it, so you can start small if that makes you less nervous. Another way to set the number you want is to think of something you will only buy when you can good a good price on it. Figure out what that price is, and use that as your number.
Now you need to decide where you’re going to save the money. You can use the bank where you do most of your banking, if that’s most comfortable for you, but you can get a decent interest rate from some of the online banks. As long as the bank is FDIC-insured, and you keep your account under that insurance limit, you’re fine, your money is protected. The object isn’t really to grow the money, but to get it out of your hands, but still, a higher interest rate is always going to be better than a lower one, as long as you’re receiving the interest rather than paying it.
The next thing you want to do is figure out how you’re going to fund the account. Will it be a payroll deduction, if your organization offers that? Will it be an automatic transfer from your cashflow account? Will it be a manual transfer on a regular basis? Automated is better for most people, because we do two things that sabotage us: we forget, and we make excuses. Start small, because you can increase the amount over time. It’s actually easier to do that than it is to cut back, because of the psychology of cutting back; it feels like you would rather stop altogether. Once you start seeing the amount growing, you may get excited and decide that you can afford to increase your weekly deposits.
When you get a raise or a windfall, you can put some or all of that increase into the Sunny Day fund. It’s natural to want to increase your lifestyle when you get a raise, but don’t forget your long-term goals as well. Sometimes when you’re saving money to buy something, it can be helpful to put a picture of the thing you want to buy where you see it often; but we’re not actually “buying” anything right now, so that’s not going to be really helpful. You really just need to believe in the power of preparation.
This is really critical: Know the conditions for using the Sunny Day fund. If you are contributing with a partner, you both need to agree on this. For example, is it available for birthday presents? Maybe birthday presents that are large purchases like a trip, but not birthday presents like a Spa Day. Maybe a trip to Europe but not a road trip for the weekend. But maybe those are the things you use it for as well, maybe a weekend road trip is exactly your intention for it. It’s yours to do with what you will, but having an intention for it will help keep you from spending it on daily cashflow items. It’s less important what you decide to do with it than it is that you decide something.
BUDGETING FOR YOUR SUNNY DAY FUND
First, take care of your Emergency Fund. Do that before you start your Opportunity Fund. Prepare for the rain before you plan your day in the sun. If you don’t, you’ll end up raiding the fund when something unpleasant pops up. The Emergency Fund can turn the financial part of a crisis into an inconvenience and allow you to apply your brain cycles to the non-financial part of it. Whatever you decide is the size of cushion you need to be comfortable, that’s your fund number.
After you have your Emergency Fund funded, that’s the time to start your Sunny Day fund. Decide the number, then decide how much you can contribute to it each week, and by what means. If you can find a way to automate it, you’ll never have to think about it, and you’re not going to forget to do it.
YOUR TURN
I believe that if you’re prepared for things that can happen, you can eliminate a lot of worry. If you have your finances arranged so that you have a surplus available, you can avoid the regret of not being able to take advantage of an opportunity. I love automated finances, and I love having systems. I recognize that it can be challenging to put money away if your finances are strained already. I hope I’ve given you some inspiration to try to work with a Sunny Day fund. What will you use yours for?
SHAMELESS PLUG
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