The Difference Between Emergency and Rainy Day Funds
It’s fair to say the vast majority of Americans know they should be saving money even if many of them don’t actually do it. Although it might seem like an easy concept, saving is not always as straightforward as you might think. For example, while you may have heard you should always have an emergency fund on hand, you might not know exactly what that means.
Typically when people think of an emergency fund they might assume it’s synonymous with terms like “rainy day,”, “just in case,” or a “life happens” fund. However a recent article by Michelle Singletary in The Washington Post explains the difference between a true emergency fund and other savings.
One primary distinction between them is that an emergency fund is one that should never be touched except in a few very specific instances. This money is meant to be stashed away in case you or your spouses loses a job, is unable to work, or you experience some other catastrophic event that leaves you with no other options. There’s a bit of debate over how much should be in one of these funds but between three and sixth months of expenses is typical.
While seemingly similar, rainy day funds are for unexpected expenses that might not qualify as catastrophic. Unlike an emergency fund this money can be taken and replaced at your discretion. For example you could decide to keep an extra $1,000 in your “just in case” fund that you could use for car repairs or unplanned travel but then replenish it afterwards. Also keep in mind that there’s nothing wrong with further growing your fund and having even more extra cash on hand at any given time. Just be sure to stick to your goal of how much should be in the fund and reach that number as quickly as possible after making withdrawals.
Having multiple forms of savings like this can help drastically your stress when it comes to your personal finance. For one you’ll be able to avoid putting unexpected expenses on a credit card that would surely end up costing you more in the long run. Additionally once you get into the habit of saving money, you may even be able to begin investing (while still maintaining your non-invested emergency and rainy day funds of course). Overall maintaining these two types of funds and sticking to the rules of each is a great way to start saving money and improve your financial future.
Also published on Medium.