• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
My Money Design

My Money Design

Designing Financial Freedom

  • Start Here
    • Start a Blog
    • What Is Passive Income?
    • Passive Income Ideas
    • My eBooks
  • Categories
    • Retirement
    • Savings & Budgeting
    • Stocks & Investing
    • Philosophy & Motivation
    • Travel Rewards
    • Money Books
    • Mortgage & Refinance
    • Insurance & Estate Planning
    • Credit
    • Taxes
    • Career
    • Blogging
  • About
    • Contact Us
    • Advertise
    • Privacy Policy

Should I Build My Rainy Day Savings Account or Save More for Retirement?

October 12, 2015 by MMD 12 Comments
Some of the links included in this article are from our advertisers. Please read our Disclosure for more info.



rainy day savings accountEvery day, good intentioned couples are faced with a practical financial decision: Should we build back up our rainy day savings account or continue to save more for retirement?

We just had this same dilemma in my own household.  After having tapped our emergency fund for immediate cash to use a down payment on our new house, we’ve now got a big hole to fill.

But that poses a financial problem.  Every penny we earn that exceeds our budget is supposed to go towards our early retirement by age 45 plan.

Plus, as we’ve demonstrated before here, saving your money in tax-sheltered accounts can compound into huge financial benefits later on.

So then, why am I choosing to build back up my rainy day fund and put my extra retirement savings efforts on pause for a moment?

For a very good reason!  But first, let’s weigh out the two choices to better understand how one may be more advantageous than the other.

 

Saving More for Retirement

Just to be clear, it’s not like I’m not saving “nothing” for retirement anymore.  We’re still saving a boat-load of money in our Roth IRA’s and 403(b).  I’m also saving way more than I need to in my new 401(k) in order to meet the full employer match at my new job.

My attitude towards trying to achieve financial freedom has always been to save all the way up to the IRS limit for each our tax-sheltered retirement accounts.  That’s exactly how Robert and Robin Charlton from the book How to Retire Early were able to pull off retirement by their early 40’s.

Also by maxing out the IRS limits, you not only build up a tremendous amount of capital very quickly, you also save yourself thousands of dollars in tax payments every year.

Think about it: Who would you rather pay – yourself or the tax man?

That’s what I thought!

 

Rainy Day Savings Don’t Really Generate Money

One of the biggest criticisms I’ve always heard from people AGAINST having too much in rainy day savings account is that they don’t make you any money.

Why in the word would I want to park +$10,000 in a savings account that earns less than 1% interest?

What does that work out to in earnings? … $100 in interest for the year?  (Sarcastic) Oh, Boy!

Invest that money into a stock market index fund and you could be potentially earning an average of 8 to 10% interest annually.

While one year might not be a big deal, what about 3 to 10 years?  You could be missing out on a lot of potential earnings!

Even on this site here I posed the same sort of question when I was trying to decide if I should invest a portion of my emergency savings in a semi-stable mutual fund.  My logic – why not invest a small portion in a fund that is made of semi-stable assets like bonds and money market funds.  (By the way – I lost about $100 on that decision when I finally cashed it out.  I guess that wimpy 1% savings account was the better choice after all!)

So while you may not be exactly killing it in earnings by keeping a sizeable rainy day savings fund, does that really make it the better decision … financially?

How about we look at the bigger picture and look at things from a different angle.

 

Avoiding Credit Card Debt

Dollar Banknotes On Bear TrapLet’s say for example you didn’t have a good-sized emergency fund (or any at all) …

What happens when trouble arrives?

Unfortunately for a lot of people, the first place they look to for relief is a credit card.  Why?  Because it’s a very quick and easy solution to get cash in a flash.

Oh, no!  Your car broke down?  You’re not going to have time to go get a few extra thousand dollars to get it fixed.  You’re going to NEED a solution fast!  That’s where you get into the credit card trap.  You just swipe that card and the car shop goes to work making everything better.

But then after a month, the trouble begins.  You’re stuck trying to figure out how you’re going to come up with enough money to cover this mess.  And unfortunately if you don’t have enough to pay for it all at once, then you’ll be looking at being charged anywhere from 15 to 30% interest ON TOP of the balance you weren’t able to afford.

Hello and welcome to DEBT city!

So, if we think about it in that way, there is an opportunity cost involved by not having a rainy day fund ready to go.  Your emergency fund is potentially saving you 15 to 30% in future interest penalties; interest you would have to otherwise pay off if you weren’t ready for it.

So in a sense, 15 to 30% is actually what your emergency cash is really worth to you!

 

Conclusions

While there may not be direct earnings to be made on a rainy day savings account, there is certainly an opportunity cost … and it can cost you BIG if you’re not prepared.  That’s why I’m going to focus to building back up our emergency fund before I worry about trying to save above and beyond for retirement.  Once things get back up to a sustainable level, then we can start applying the extra earnings towards my extreme saving goal.  But until then, building up those emergency savings for anything that might or might not happen will be what we focus on.  Even though the savings may not be earning me 10%, stock-market-style returns, the fact that it could potentially rescue me from 15 to 30% credit card debt is enough to capture my vote.

Readers – What motivates you to build up your emergency fund; despite knowing that you won’t be making millions of dollars in earnings from it?

 

Images courtesy of Chris Goldberg | Flickr and FreeDigitalPhotos.net

Filed Under: Savings & Budgeting Tagged With: Emergency fund

Reader Interactions

Comments

  1. Jayson @ Monster Piggy Bank says

    October 12, 2015 at 5:50 am

    I have my emergency fund because I expect the unexpected. I think MMD your decision is the ideal and I agree with you. And, we don’t want to be forced to rely on credit cards or a loan, which could simply compound some problems.

    Reply
    • MMD says

      October 12, 2015 at 6:32 pm

      Exactly. It’s bad enough to deal with the problem at hand. But then financially it could snow ball into something a lot worse.

      Reply
  2. John @ Frugal Rules says

    October 12, 2015 at 8:17 am

    We tend to take the same approach when in this situation. There’s a certain level I like to be at with our main EF and a couple of our smaller, yet still emergency related funds. If we have to tap one of those significantly we’ll pull back some on our retirement funds to get the EF back to that minimum level. Thankfully, at least in recent memory, that doesn’t mean we’re unable to get to where we want in the year retirement savings wise. Like you said, the EF does little for the long-term earnings, but having that ability to be prepared for more short term or medium term goals are important.

    Reply
    • MMD says

      October 12, 2015 at 6:34 pm

      Precisely. Even though there’s not much to gain in earnings from having an emergency fund, there is certainly a lot to be lost.

      Reply
  3. EL @ Moneywatch101 says

    October 14, 2015 at 10:48 am

    That is the main point of having an EF fund, to avoid adding new debt and to live at peace. Granted we might not know the amount needed in an emergency, but just having 3-6 months of expenses is good enough for most situations. I also like to consider a portion of my Roth IRA as part of my overall emergency funds, because contributions can be taken out penalty free after some years. That’s why I have both the ROTH and the EF fund.

    Reply
    • MMD says

      October 21, 2015 at 6:46 am

      I’ve given the Roth concept a lot of thought over the years. As long as you’re past the five year mark, then you should be good. The thing people have to remember, though, if they do use their Roth as an emergency fund is that the situation then truly has to be “an emergency”. It would be a shame to sabotage your retirement account because you forgot to pay a bill or weren’t prepared to handle a random car repair.

      Reply
  4. ARB says

    October 16, 2015 at 9:27 pm

    MMD, it’s like we had the same thought at once from two different angles.

    I just wrote a whole article on no credit check loans. Both the good and the bad. One reason to live below your means and have an emergency fund is to avoid these types of loans. The APR can go above 700%!

    If THAT doesn’t motivate someone to have an emergency fund, then I don’t know what will. These loans were built with emergencies in mind. I’d rather have an emergency fund than get an emergency loan. One pays me a small APY. The other charges me a huge APR.

    Sincerely,
    ARB–Angry Retail Banker

    Reply
    • MMD says

      October 21, 2015 at 6:49 am

      Wow! It’s insane that products like that can exist in our market. Its like legal extortion. When you don’t have enough money to bail yourself out, the sharks really do smell blood and come looking for you.

      Reply
  5. Jack says

    October 20, 2015 at 5:53 pm

    Having been well and thoroughly burnt by failing to have an emergency fund in my 20s, I have no problems keeping a significant amount of money in cash. Since I remember what a real economy looks like which doesn’t punish savers like today’s ZIRP world, it annoys me to no end to have so little income from that cash.

    But I’d rather have the cash than the pain that comes when you don’t and the unexpected strikes.

    Reply
    • MMD says

      October 22, 2015 at 6:41 am

      I hear you on being punished for saving. I can’t wait until interest rates go back up again and we can park our money safely in a place that at least keeps up with the rate of inflation.

      Reply
  6. Jenn says

    November 17, 2015 at 2:14 pm

    It’s really good to at least keep some of your savings in a bank account for quick access. I liked having some of my money in stocks, but cashing out takes a few days to get that money back. We had to bail my brother-in-law out of jail and it would have taken 5 days for that money to be deposited in my bank account.

    Reply
  7. Laurie says

    February 11, 2016 at 12:28 pm

    Emergency funds are there to protect you, I personally think that it is a smart decision to build it back up.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

  • Email
  • Facebook
  • Pinterest
  • Twitter

More Great Posts!

Footer

Recent Posts

  • How to Manage Your Debt and Reduce Financial Stress
  • How to Invest During a Recession and Actually Make More Money
  • What’s the Best Way to Retire Early? By Doing This One Important Thing
  • How to Stop Worrying About Money – 5 Effective Strategies for Better Money Habits
  • How to Turn Cloudy Pool Water From Green to Blue

Search

Archives

My Money Design is for entertainment and reference purposes only. The information presented is the opinion of the author only and should not be interpreted as specific advice or recommendations towards your financial situation. Always consult with a true professional before making any financial decisions.

Affiliate Disclaimer: My Money Design may be compensated for our personal opinions, reviews, and affiliate relationships with some of the featured products and services. Google Adsense and Amazon Associates are examples of such relationships. Such content, advertising space or posts may not always be identified as paid or sponsored content. All offers or claims are subject to change without notice and should be verified with the manufacturer, provider or party in question.

Copyright © 2011–2025 MyMoneyDesign.com · All Rights Reserved · Powered by WordPress

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Cookie settingsACCEPT
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.