Emergency Fund vs. Rainy Fund: Which is More Important?

Do you live from day to day without any thought for the future? Do you find yourself getting caught out by unexpected bills or expenses? Have you considered what will happen if you lose your job one day? Having a rainy day or an emergency fund are two ways to overcome such eventualities. If you’re wondering which one of these safety nets is the most important, here’s an introduction to them both, and an explanation of how they can benefit you and your family. The two terms are often interchanged, but they are actually very different in several ways.

A Rainy Day Fund

The typical size of a rainy day fund is between $500 and $1,500, and its purpose is to cover the cost of unforeseen onetime events. Examples of such events include a car breakdown, washing machine repair, or routine medical expenses. Many of these events are predictable, to a certain extent, but you just don’t know when they’re going to happen. Many people choose not to save for a rainy day and prefer to make use of a credit card. Experts websites, such as www.creditful.com, provide a list of credit card companies which issue card numbers as soon as an application has been approved.  

An Emergency Fund

This tends to be larger than a rainy day fund, ranging between $3,000 and $10,000. The purpose of an emergency fund is to tide you over during a major disruption. It could be a divorce, medical illness or injury, or the loss of your job. The amount of money in an emergency fund should be enough to cover living expenses for between three and six months. To work out how much you’d need to save in your fund, calculate your average monthly expenses and multiply this figure by three or six.

What are the Benefits of Having Additional Savings?

Having a rainy day fund means you’ll be able to avoid getting into debt, as well as avoid expensive forms of credit such as a payday loan. It is also a way of practicing good financial habits. You only use the funds for a real emergency, so you’re exercising self-restraint and delayed gratification. Your rainy day fund will soon run low if you’re constantly dipping into it.

Having an emergency fund provides two further benefits: personal freedom and peace of mind. If you’ve got an emergency fund, for example, you’re able to make personal choices that wouldn’t be possible if you were short of cash. These might include giving up your day job to start your own business or to go back to school. A sizeable emergency fund will also reduce the worry if you ever lose your job because you’ll have the money to cover your bills.  

How to Build a Rainy Day or Emergency Fund

There are several easy ways you can start building a rainy day or emergency fund. The best place to start is to set a monthly savings goal. To help you do this, you’ll first need to make a budget and see what money you’ve got left when all your bills are paid. If there’s no money left, you’ll have to cut your expenses. Once you’ve decided on an amount you want to save, set up a regular payment to your savings account on the days that you get paid. If you find you’ve got some funds left in your checking account at the end of the month, transfer this to your savings account as well.

If you’ve got the time, you might want to look for another way to earn an income. Have you got a skill that people will be willing to pay for? Can you make things that people would want to buy? If your home is full of clutter, you may be able to sell some items and put the money you make in your savings account.

Once a year you get the opportunity to boost your savings if you’re expecting a refund at tax time. Obviously, you don’t get a refund every year but when you do, have the funds deposited directly into your emergency savings account.

Don’t dip into your emergency or rainy day funds whenever you want. They’re not meant to be a backup for your checking account. If you do this, your savings will lose their purpose, plus when a real emergency strikes, you’ll find your accounts empty!

Separate your savings into a rainy day and an emergency fund, and you’re less likely to dip into them for reasons other than what they’re meant for. Having both types of savings means you’re better equipped to deal with the financial surprises life has a tendency to throw at you.