What Are the Differences Between Rainy Day Fund and Emergency Fund?

What Is an Emergency Fund?

What Is a Rainy Day Fund?

Difference Between Rainy Day Fund and Emergency Fund

Several notable differences exist between a rainy day fund and an emergency fund:

Rainy Day Fund

Emergency Fund

Size of Fund

These are usually smaller than emergency funds.

They contain money equivalent to at least three or six months’ living expenses.

Duration

These have sufficient money to serve as a one-time expense.

These can help you to maintain your lifestyle for three to six months.

Requirement

You can need it to meet sudden unplanned expenses.

These usually serve a goal-oriented financial requirement.

Pros

This can help you build a savings habit and instil financial discipline.

You can get substantial returns on putting your emergency fund money in investment plans.

Cons

They cannot be used for covering lifestyle for two to three months.

You are not allowed to use them for purposes other than to serve the goal for which you started them.

Are you looking forward to starting either of them? Here are some simple steps that you can follow to start building an emergency fund.

How to Start an Emergency Fund?

Why Start an Emergency Fund?

How to Start a Rainy Day Fund?

Why Start a Rainy Day Fund?

FAQs About Rainy Day Fund and Emergency Fund

Do you need both a rainy day and an emergency account? up-arrow

Yes, you must have both rainy day funds and emergency funds. This makes it easier for you to separate your savings based on your goals. It also gives you a better understanding of withdrawing money from your bank account based on necessity.

How to boost your savings every month to contribute efficiently to an emergency and rainy day account? up-arrow

You can boost your savings by putting your emergency fund money in high-yielding investment options. Also, you can start a side hustle to increase your monthly income. Apart from this, you can make a monthly budget and cut down unnecessary expenses for maximum savings.

How much money should you keep in a rainy day fund? up-arrow

The main purpose of a rainy day fund is to supply cash during financial emergencies. So you can decide the amount based on your lifestyle expenses and anticipated financial urgencies. This will allow you to stay worry-free and build financial discipline.

What are the benefits of building an emergency and a rainy day fund? up-arrow

Investing in these funds reduces financial stress when you are going through a financial crisis. Also, you will not have to opt for credit or compromise on your lifestyle when immediate monetary needs crop up. Also, you can put a bar on unnecessary expenses, ensuring judicious use of money.

Which fund should you save for first, an emergency fund or a rainy day fund? up-arrow

It would be prudent to start saving for a rainy day fund before the emergency fund. This is so because the need for rainy-day funds can crop up anytime. Also, it is easier to save for a rainy day fund when compared to a contingency fund.