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.
What Are the Differences Between Rainy Day Fund and Emergency Fund?
Parking a portion of your income in a savings account can provide financial security during contingencies. Two such funds are rainy day and emergency funds. Although the purpose of depositing money in these two funds is almost the same, there are some marked differences between them.
This guide offers a detailed distinction between rainy-day funds vs emergency funds so that you can make the best financial decisions.
What Is an Emergency Fund?
What Is a Rainy Day Fund?
A rainy day fund is built with the purpose of paying for an occasional smaller expense. For example, you can pay for a summer camp for your kid, repair broken electronic devices or vehicles, etc. These are usually one-time expense funds and do not require substantial savings.
Although they might sound similar, several minor differences between them make them distinct from one another.
Difference Between Rainy Day Fund and Emergency Fund
Several notable differences exist between a rainy day fund and an emergency fund:
Rainy Day Fund
Size of Fund
These are usually smaller than emergency funds.
They contain money equivalent to at least three or six months’ living expenses.
These have sufficient money to serve as a one-time expense.
These can help you to maintain your lifestyle for three to six months.
You can need it to meet sudden unplanned expenses.
These usually serve a goal-oriented financial requirement.
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.
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.
How to Start an Emergency Fund?
Wondering how to begin the process of building an emergency fund? Here are some simple steps that you can follow to start building your emergency fund immediately:
Step 1: First, determine the goal of your building the emergency fund. This allows you to save sufficient money that would be essential to serving your goal.
Step 2: Next, frame a budget to save the required money easily. This will help you maintain your current lifestyle requirements.
Step 3: Automate your contingency fund contributions so that you do not miss out on putting money in your fund every month.
Step 4: Put your emergency fund contributions in a high-interest-yielding investment option to ensure stable returns.
Why Start an Emergency Fund?
A contingency fund can be immensely beneficial if you are anticipating a recession or looking forward to changing your job or taking a break. So, you can stay worry-free about meeting your lifestyle needs, enjoy your break, or look for better job opportunities.
You can also build an emergency fund to meet other life goals to have enough funds when you meet lifestyle requirements. This can include unforeseen medical expenses, major home repairs, sumptuous vehicle repair costs, etc.
How to Start a Rainy Day Fund?
Building a rainy day fund is somewhat similar to an emergency fund, with minor differences. So, if you are planning to start one, you can follow the steps below:
Step 1: Make a list of all the possible unexpected expenses that you might encounter. This can give you an idea of how much to contribute to your emergency fund.
Step 2: Keep your rainy day fund money in a separate account. While doing so, make sure that it provides sufficient returns.
Step 3: Try to automate your contributions to this account so that you do not have to take the additional burden of transferring money every month.
Step 4: If you feel that it is becoming difficult to contribute to the rainy day fund every month, you can look for ways to increase your savings and earn extra.
Why Start a Rainy Day Fund?
A rainy day fund helps you to cover one-time immediate small-scale monetary expenses. You can use this money to cover the costs of routine medical check-ups, small-scale car repairs, home repairs, and so on.
There is no fixed goal for which you will need to build your funds. This allows you the flexibility to use this money for any other purpose. So, you can start building this fund today to meet your immediate small-scale monetary needs.
This guide on rainy day funds vs emergency funds and how to build the two helps you to get a comprehensive idea about them. Accordingly, you can plan your savings and contributions to stay worry-free about encountering a sudden financial crisis. This notably improves your financial health and minimises the wastage of money.
FAQs About Rainy Day Fund and Emergency Fund
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.
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.
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.
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.
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