How to Save for a Rainy Day and Emergencies

First, create a rainy day fund for small financial shocks such as a car or appliance repair, then save other money in a separate emergency fund for a bigger emergency such as losing a job, Madrian says.

Saving isn't easy, especially for those who live paycheck to paycheck. Madrian says, “These systems help people create self-discipline.”

A rainy day fund is typically smaller — up to $2,500 — than an emergency fund, which can have as much as nine months of living expenses — $10,000 to $50,000 or more. The rainy day fund is to be used for situations like Shaffer's initial payment to the tree removal company. An emergency fund typically would cover more, including the monthly rent or mortgage payment, phone bill, vehicle payment, insurance, real estate taxes, water and energy bills.

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Creating a rainy day fund and an emergency fund:

The best way is to start small, for example, by moving $20 a week to a separate checking account for your rainy day fund, Bogosian says. If you can save $50 per paycheck or week, even better. If you're living paycheck to paycheck, here are some tips:

• Adjust your withholding with the Internal Revenue Service (IRS) so you get more money in your paycheck each month. Use it for your rainy day fund.
• Alternatively, if you do get an income tax refund — two-thirds of people do — or a bonus, earmark it for your rainy day fund. The average tax refund is $3,000. The IRS allows you to split your refund among two or three different accounts.
• If you get a pay raise, use some or all of it for your rainy day fund.
• Set up automatic payroll deductions into your rainy day fund; contact your employer's human resources department.
• If you pay off your vehicle loan or student loan, divert the amount you had been paying each month into your rainy day fund.
• Once you accumulate $1,000 to $2,500 in your rainy day fund, (for example, saving $20 each week for a year is $1,040, and $50 each week gets you to $2,600), move on to your emergency fund, Bogosian says.

Even economists consider creating an emergency fund that covers six to nine months of household expenses a challenge. “That's daunting,” says Catherine Eckel, who directs the Behavioral Economics and Policy Program at Texas A&M University. Start with a target of two months’ salary, she says.

Says Gary Shaffer of his tree-on-house emergency, “The fund was not three to six months’ living expenses. I'm keeping track of the costs.”