Is Having a Rainy Day Fund Better Than Having an Emergency Fund?


emergency

Many people think about saving money the way they feel about flossing. I’ll get to it eventually. Like flossing, saving is a habit. 

If you’ve tried to save money but can’t seem to get into action, you’re not alone. 

According to recent reports from The Federal Reserve, 4 in 10 Americans cannot afford an unexpected expense of $400 or more.

That’s not all. Only 3 in 10 Americans have an emergency fund, and only 1 in 4 Americans have a rainy day fund according to Bankrate’s Financial Security Index.

If you’re thinking about starting to save, you may be wondering which is more important a rainy day fund or an emergency fund? The answer may shock you. 

What Is a Rainy Day Fund? 

A rainy day fund is savings for one-time, unexpected expenses. A rainy day fund should be liquid, meaning it should be available to you when you need it. 

Most financial planners recommend having at least $1,000 in your rainy day fund. However, you may want to consider the types of expenses that may be looming down the road. 

  • Do you have an aging pet that may need veterinarian care? 
  • Is your car an older model that may need repairs? 
  • Are your children coming of age to where they might need braces? 

The way you answer these questions will determine how much you may need in your rainy-day fund. Having a rainy day fund will save you from learning how to use credit card limits to pay for unexpected expenses. 

What Is an Emergency Fund? 

An emergency fund covers expenses for extreme circumstances like the loss of a job, a major illness, or some other serious setback. Due to the nature of these problems, your savings should be much more substantial in relation to a rainy day fund. 

Experts suggest having three to six months of your overall monthly expenses saved in your emergency fund. Therefore if your overhead is $3,000 a month, you should save $9,000 to $18,000 in your emergency fund. 

While this seems like a lot of money, if you make saving a habit, you can and will get there with time and patience. 

Rainy Day Fund vs. Emergency Fund: What’s More Important?

The short answer to this question is both, but for different reasons. Take a look at any credit card bill, and you’re sure to find some unexpected expenses.

While $350 may not seem like a lot, with interest, it can build up to a much larger amount. This kind of spending leads to feeling like a hamster on a wheel. Just as you’re ready to get ahead, Wham! You have an unexpected expense. 

The easiest way to make saving a habit is to automate it. Set an amount to come out at each pay period. Have it go straight into a high-yield savings account. Only use it for unexpected expenses.

Because a rainy day fund goal is more comfortable to reach, that should be your first focus. Once you have a comfortable amount for your rainy-day fund, move on to your emergency fund.

You may want to open another savings account or a money market account for your emergency fund. Another option is investments that can accrue interest over time. Your emergency fund is a long-term investment, so you should look to maximize interest rates. 

Save for the Unexpected and Make It a Habit

Saving for the unexpected can be difficult when you’re living paycheck to paycheck. If you automate your savings, you can and WILL reach your savings goals. So start saving for your rainy day fund and emergency fund.

For more information on saving, investing, and the stock market, check out our informational blog content for the best tips and tricks for wealth management.  

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