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How Much Should Your Rainy-Day Fund Increase When You Have Kids?

Unexpected expenses will arise. Here's what you need to know about building a cash reserve that will keep you afloat.

One of the main cornerstones of a sturdy financial life is understanding and preparing for the fact that, at any second, life could grab you by the boxers and give you an atomic wedgie. Your car’s timing belt could crap out. Your basement might flood. Unexpected medical bills may arise. That’s why having a rainy day fund — or a “cash reserve” as it’s called in the financial planning world — is so important (It can also be put to good use when something positive, like a can’t-pass-up investment comes your way). It’s money you squirrel away and don’t touch until something unexpected arises. When it does, you won’t find yourself stuck wearing your underwear as a headband.

Now, saving for some vague event where you’ll need money can be difficult. And it becomes especially so when you have kids. How much should be in there already, and how much should it increase because of their presence? Well, dear reader, here are some simple guidelines to keep in mind for those moments we all hope never happen.

What, Exactly, is a Cash Reserve? 

For those who don’t know, a cash reserve is defined as having three-to-six months of living expenses saved for both emergencies and opportunities. The ultimate point of having a reserve is that you don’t need touch other earmarked savings (like retirement or the college funds) or, god forbid, take on debt should an unexpected expense pop up in your life.

What Kind of Account is Best For A Cash Reserve?

The money you put aside should be stored in checking or savings accounts, money market funds, or, in some cases, certificates of deposits (CDs). All of these are liquid, accessible, and generally principal protected. A bit annoying, but anything outside of these criteria won’t work. This money needs to be there when you need it and a boringly low yield is the result.

How Do I Define How Much Is In This Account?

The first thing you need to do is to know how much your living expenses are each month. We call this cash flow and, becoming a master of it is one of the most important things you can do for yourself financially. When it comes to cash management, I prefer you put in the work and manually look at your expense data. That means reviewing your credit card statements and checking accounts and organizing them in a spreadsheet. Many of my clients like using apps like Mint, PocketGuard, and GoodBudget to help them organize their budget and compile their spending data.

Basically, you need to track your expenses for the next three to six months in order to come up with a solid understanding of your spending habits in each expense category. Do your best to not game this exercise. (That is, don’t purposely cut back on spending because you’re now tracking things. This will surely lead to inaccuracies and poor planning overall.) Get a feel for this and you should know precisely how much it takes to get all the bills paid and cover essential variable costs, such as food and clothing). Then, you can now start to determine how much, exactly, makes up your rainy day fund.

Three to Six Months Is Vague. What’s the Rule of Thumb Here?

We have our guidelines, but much of determining your reserve amount comes down to what’s going on in your life and the world around you. Are you comfortable in your job? How’s the overall economy doing? Is a child on the way? Will the world implode? Depending on how optimistic or pes simistic you are about things in your life can have an impact on how many months of expenses you’re going to sock away in your reserve. If things are uncertain and anxiety is running high, you’re going to want to increase your reserve (closer to six months). On the other hand, if things couldn’t be better (i.e. your job is secure, you’re able to save money each month and everyone is happy and healthy), you can afford to be aggressive and hold less cash (closer to threemonths).

Okay, How Does This Change When Kids Come Into The Picture?

When it comes to adding kids to the equation, you should absolutely consider significantly increasing your cash reserve no matter how good or bad you feel. (And if you don’t have one, start one). If this is your first kid, I strongly recommend adding two to three months to what you already have. For each additional child, consider adding an extra month to that amount. With multiple kids comes some economies of scale.

Consider this: Let’s say work sends you across the country for a week-long training conference and you need extra childcare. Well, that’s easily hundreds of dollars. And don’t even get me started on trips to the doctor’s office. Even with decent health insurance, all those ear infections start to add up.

Where Should A Rainy Day Fund Fall In Terms of My Financial Priorities? 

While financial advice isn’t one size fits all tank top, I strongly recommend that you to start building a reserve before focusing on long-term goals like retirement (unless there’s free money in the form of matching contributions) and other investments. However, if you have credit card debt with some outrageous interest rate, attack that above all else. It’s toxic and it has to go.

Kids are the ultimate game changer but they don’t need to radically change your financial situation should they send inevitable unexpected expenses your way and having an adequate cash reserve can help you do just that.

Douglas A. Boneparth is NYC’s Financial Advisor for Millennials. He’s the co-author of The Millennial Money Fix and the CFP Board Ambassador for New York.