Fine Tuning the Rainy-Day Fund
4. Do you have a backup for your rainy-day fund?
Your official rainy-day fund might be in easily accessible and stable holdings like bank savings and money markets. If you have sizable holdings in short-term bond funds with stable prices they could provide better returns than your rainy day fund and be tapped easily if the emergency fund fell short. But if your other investments are concentrated in stocks or other holdings that can have big price swings, they do not provide a good backup. You donât want to have to sell stocks in a downturn just to buy groceries. The more stable and liquid your backup, the less you need in the rainy-day fund.
Keep in mind that the rainy-day fund should not become a tail wagging the dog. Investment accounts should be divided between stocks, bonds and other holdings in the way that best suits long-term needs like retirement and college expenses. Skimping on stocks to boost the rainy-day fund could undermine your long-term gains, leaving you short later on.
If, after weighing all these considerations, you decide your rainy-day fund should be bigger, the best approach is to trim expenses. That will reduce the size of the fund you need and give you spare cash to build it up faster.
--By Jeff Brown
For more on rainy-day finances: