Why you need to set aside cash for a rainy day

A pot of rainy day funds held in a cash account could serve as a crucial buffer from life’s unforeseen challenges. But why is it necessary to keep rainy day cash separate from investments, and how much should you set aside?

Rainy day cash is a dedicated pool of money specifically earmarked to handle emergencies or unexpected expenses. Investments are typically intended for long-term growth and may fluctuate with market conditions. In contrast, rainy day cash won’t provide investment growth, but it should remain stable and easily accessible, safeguarded from market turbulence.

Unexpected financial challenges come in many forms, from unforeseen medical expenses to urgent home or vehicle repairs. It’s particularly important to consider emergencies that aren’t covered by insurance or may require an initial payment that would later be reimbursed. In such cases, having cash readily available could help you to address your immediate financial needs without affecting your long-term goals.

How much rainy day cash do you need?

Rainy day cash requirements vary considerably from person to person, but a good rule of thumb is to hold at least three months’ worth of expenses, and preferably six months’ worth. Even so, holding excessively large amounts of rainy day cash will mean missing out on the potential for long-term growth offered by investments, although such growth is not guaranteed.

It’s important to consider factors such as your lifestyle, family situation and tolerance of risk. Wealthier individuals are likely to opt for larger contingency funds, to maintain their accustomed standard of living through times of adversity. But those with more modest means may allocate a smaller portion of their assets to rainy day cash, so they can prioritise other financial goals.

Moreover, you may face unique financial challenges. For example, if you have dependents or loved ones with additional needs, you could require a larger emergency fund to account for their care in case of unforeseen circumstances. Similarly, if you live in an area prone to natural disasters, you may need to set aside additional funds to cover evacuation expenses, temporary housing or property repairs.

It may be helpful to consult with a financial adviser, who can assist you in navigating these considerations and tailor an appropriate rainy day cash strategy. A knowledgeable adviser will assess your unique circumstances, identify potential risks and suggest a suitable allocation for your rainy day cash pot. At Schroders Personal Wealth, one of our key principles is to have regular reviews with an adviser.

Immediate availability of cash

Rainy day cash plays a crucial role in financial planning. Long-term investments may not be readily accessible during times of need, but rainy day cash should provide immediate availability and security.

Consider facing an unexpected financial demand during a market downturn. Someone without a rainy day fund may be under pressure to sell investments at an unfavourable time. This may result in permanent losses or undermine their long-term financial goals.

Moreover, if you have to sell investments to meet unexpected needs, then you may become liable for capital gains tax. The likelihood of this happening has increased in recent years, due to the reduction in capital gains tax allowances.

Maintaining a separate rainy day cash pot could provide the necessary funds to address emergencies without jeopardising your other investments and assets. Keeping the cash separate could help safeguard your overall financial stability and hopefully ensure you weather any storm with confidence.