Rainy day funds (RDFs) potentially are an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, states often found themselves exhausting their RDFs and having to raise tax rates or reduce expenditures while the downturn was still occurring. Thus, how much each state should save in its RDF has become an increasingly important policy question. To address this issue, this paper develops target RDF levels for each state, based on the estimated short-term revenue component associated with business cycles and also on policymakers’ preferences for stable tax rates and expenditures. It shows that at least 21 states have never saved enough in their RDFs compared with their needed RDFs in the last 25 years. The paper provides policy recommendations on reforming the RDF caps.