Rainy Day Fund vs. Emergency Fund Money- Do You Really Need Both?

Emergency Fund

Saving money for most people seems to be of less priority. Most people are tuned into instant spending once they get paid. They are always like; I need this and that I want to travel next month or want a new car. But, do you take time to think about what might happen tomorrow when you have nothing in your pocket? Imagine yourself in a desperate situation that requires instant financial aid. Yet, you have no emergency fund in your saving pot. This is a clear indication that everyone needs savings and emergency funds, whether you live on a six-figure salary on daily wages.

Most people are familiar with an emergency fund, experts suggesting that you should save at least three to six months of living expenses for future uncertainties. Rainy day funds are also growing in popularity and are intended for smaller occasional expenses. According to financial experts, you should not stack your savings in one giant account. That is why you have to open at least three saving accounts to cater to different needs and financial commitments. For you to understand the importance of each account, let us dig deeper into two types of emergency accounts and see if you really need both.

What Is an Emergency Fund?

Obviously, you understand what an emergency fund is. If you are unsure, maybe you should think about a scenario when you have lost your job. Your family has a huge medical bill, your car has broken down, or a huge maintenance cost in your home. You probably need enough cash to fish out of the mess without landing in huge debt or using your credit card.

Therefore, an emergency fund is a type of savings intended for true emergencies soon. It is recommended that you should keep at least six to nine months of living expenses. This is a saving account that will help you during unexpected situations like sickness and a lost job.

An emergency fund is closely related to long-term savings. Long-term savings are intended for income-generating projects such as investments and retirement funds. Since you may not want to use emergency funds unless in an extreme financial need, you can put it somewhere to earn interest. It will take years to earn a tangible interest, but it is worth it if you see no need to touch it. Therefore, in simple terms, an emergency fund is not;

  • A small cash buffer in your checking account, so you cannot pay an overdraft.
  • A separate account with money for your first home, your next months’ vacation, or your monthly team drinking.
  • The amount you have on your credit card.

How Much Do You Need for An Emergency Fund?

To determine how much you should have as an emergency fund, you have to understand your average daily expenditure. Remember, experts, suggest that you save enough to pay at least six to nine months of your living expenses. This number means what is enough to keep your lights on and fridge stocked with food if you lose your job, and you have to survive on savings. Of course, it is not limited to staying six or nine months without a job, but having enough cash for this long is a great idea. Therefore, for you to get the right estimation of what you need in your emergency fund, you may apply the 50-30-20 rule in your finance.

You don’t understand the 50-30-20 budgeting rule? Well, you can visit your monthly budget or app if you have. For instance, assuming you spend $1,000 monthly on groceries, car repair, rents, and house utilities, your emergency fund should be around $6,000 and $9,000. However, the value is likely to change for those folks with growing kids and pending mortgages. This means to be on the safer side, target something above $9,000 in your emergency fund.

What Is A Rainy-Day Fund?

Rain doesn’t fall every day, right? Even if it does, there are no great effects realized. This translates to what is a rainy-day fund. A Rainy-day fund is a type of savings intended for short-term expenses. Some people call this type of savings “money under the bed” or “a regular savings account.” They might be right, but it all comes to how you want to spend it. Remember, a rainy-day fund is characterized as an emergency fund. It is kept in the house in liquid form for easy access. Here are some of the ways to use a rainy-day fund;

  • On a fun-filled weekend with your buddies without compromising your budget.
  • On a higher-than-average utility bill, that seems to leave you struggling to balance the account.
  • Saving up for an average purchase like a new couch or vacation.
  • When repairing your broken car.
  • Unexpected visitor or a sudden trip.

A rainy-day fund is also used for fun things like entertainment for your family or night eat outs. It should be kept around to push you to the next paycheck. However, if you have a budget spending habit, you can keep your rainy-day fund in the following areas;

  • High-yields saving accounts and not your checking account.
  • Link it with your overdraft bank account for the primary spending account, but don’t overdraft every month.
  • An automatic saving app that saves on your behalf.

How Do You Save For Rainy Day Fund?

There is no ultimate guide on how to save for your rainy-day fund. Since the rainy-day fund is intended for smaller expenses, there is no suggestion on how much you need to save. You should rather make the account your best friend where you can throw your cash windfalls, such as birthday cash gifts or bonus work. You can also save the old fashioned after paying yourself as little as $20. You might be surprised how the fund grows really fast if you are not going to use it anytime soon.

Remember, rainy day funds should only be used when a tight budget needs an outside cushion. Therefore, if you don’t use it, you can transfer it to an emergency fund after some time. Learn More on how to save for a rainy day, especially in Singapore.

Final Words

Do you need both funds? The ultimate answer is yes. You need a rainy-day fund for daily expenses and an emergency fund for true future emergencies. Since an emergency fund is intended for long-term emergencies, you can use a rainy-day fund for daily or monthly expenses as you grow your emergency fund. A rainy-day fund can also be used for larger expenses like utility bills and repairing a broken car without using your credit card or touching your emergency fund. Therefore, building both saving accounts is vital to cushion you in any financial situation.

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