What’s the Difference Between a Rainy Day Fund and an Emergency Fund?

July 7, 2020

You’ve likely heard of the importance of “saving for a rainy day,” but what does that mean, exactly? Well, like the weather, life can be hard to predict. Even the most experienced meteorologists get it wrong from time to time. That’s why you need to be prepared for anything — a light sprinkle, a torrential downpour, even a hail storm. A rainy day fund will keep you covered when unexpected expenses seemingly fall from the sky. But how is that different from an emergency fund? Below we’ll dive into the differences between an emergency fund and a rainy day fund, and discuss the importance of having both.

What Is an Emergency Fund For?

An emergency fund is intended as a safety net — money you can fall back on in case your income is cut off unexpectedly, like in cases of job loss or major illness or injury. Financial experts recommend saving in your emergency fund at least three to six months of living expenses for things like bills and debt payments, and everyday purchases like groceries and childcare costs. An emergency fund is not to be used for emergency spending, but rather for everyday spending in the event of an emergency.

What Is a Rainy Day Fund For?

A rainy day fund, on the other hand, is intended to be used on emergency purchases — one time, somewhat small payments. For instance, you would dip into your rainy day fund if your dog needed to visit the emergency vet or if your car broke down. After all, a recent survey revealed that an estimated 77% of vehicles on the road were in need of repairs, so it’s smart to have some cash tucked away to address emergency vehicle maintenance. Essentially, this fund is an account that can help you cover any short-term problems that arise. You don’t have to keep as much in your rainy day fund as you do in an emergency fund. Since it’s intended for one-time expenses rather than keeping up with living expenses during a period of little-to-no income, a rainy day fund could cap out between $500 and $1,000.

Do I Need an Emergency Fund and a Rainy Day Fund?

Let’s be honest — life will always through unexpected curve balls your way. Whether it’s an emergency expense or a loss of income, you can’t plan your future perfectly. But you can set up safeguards against financial disaster. It’s ideal to separate your safety funds into two accounts, both easily accessible. Focus on your emergency fund first; this one may take longer to grow as you’ll want to invest more into it. Accumulate your rainy day fund separately, and only put into it what you can, keeping in mind some of your expected expenditures: Do you have an aging or sick pet? Will your children need braces? Is inclement weather like tornados or hurricanes common in your area? In a consumer survey, 65% of homeowners said their main motivation to get their roof repaired is weather damage. Roof repair is the perfect example of a short-term expense for which you’ll want to use your rainy day fund. In fact, if you own a home, you’ll want to consider all sorts of maintenance when deciding how much to put in your rainy day fund. After all, a lot of things can go wrong, and if they’re not fixed fast, you’ll end up spending way more in the long run. For instance, if a plumbing pipe cracks just one-eighth of an inch, and you can’t staunch the flow quickly, expect about 250 gallons of water to leak out each day. Next, you’ll be paying for water damage and mold remediation.

In short, while both funds are intended as safety nets against financial disaster, a rainy day fund and an emergency fund have two different functions: the former covers one-time, unexpected purchases while the latter keeps your bills paid during a period of unexpected income loss. Budgeting for emergencies and spontaneous expenses is an important part of maintaining your financial health.

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