I have a “rainy day” fund that I don’t include in any of my normal financial calculations. It just sits there, quietly accumulating small deposits and interest. In fact, I don’t even look at the account unless I am considering a major purchase or am coming across dire straits.
How is this different from an “emergency fund”? An emergency fund exists for the sole purpose of maintaining my family’s way of life in the event of a major disaster. It contains months worth of income. My “rainy day” fund, on the other hand, is for more discretionary moments; for example, I tapped that fund in order to buy my wife a gorgeous necklace featuring her birthstone and the birthstone of our son on her first Mother’s Day. My next “rainy day” purchase will probably be a bottle of expensive champagne that my wife will find the day we move into our new house, likely this summer (no, she doesn’t read this blog; she often says she can’t imagine anything more boring … little does she know …).
How do you build a “rainy day” fund? First, decide on a regular amount small enough that it won’t bust your budget wide open if you start saving that amount. Then, open a high-interest savings account at an institution that you currently do not bank at; I use HSBC Direct for this purpose. Set up an automated deduction plan that pulls out that tiny amount every so often (for me, it’s $25 a week; it was $10 until fairly recently) and then forget about it.
Why don’t you add it to your normal financial calculations? This is more of a personal decision, but I view the “rainy day” fund as something special for special occasions. Although I am very strict about my budget, I work hard for financial freedom and I want to be able to, on occasion, splurge for a special item without wrecking my financial discipline. When I calculate my change in net worth each month, I don’t include the account because I view it as having already been spent. This forces me to be even more careful about my monthly budget.
My rainy day fund enables me to do something special every once in a while without decimating my budget, and treating it as money already spent causes me to be even more disciplined about the rest of my finances.