06 Mar
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A rainy day fund vs. an emergency fund. What are the differences and what is each one for?
Saving money is important no matter how you do it, but there are some things you can do to be even smarter with your money.
And one of the ways to do that is by splitting up your money into separate accounts for specific purposes!
In today’s blog post, we’re going to go over what the differences are between a rainy day fund vs. an emergency fund, and which one you should start first!
Rainy day fund vs. an emergency fund- What’s the difference?
Rainy day fund
A rainy day fund is typically the smaller of the two funds and is more for smaller expenses. Something that isn’t going to cause you financial ruin and can be fixed quickly.
So, a small unexpected dentist bill, a flat tire, or anything else that may pop up.
It’s always good to be prepared for these unexpected situations because it’s not really a question of “if” something like this pops up, but “when.”
Life has a way of throwing curveballs at us but you can minimize the damage by having a plan for quickly and easily taking care of it!
It’s recommended that you keep something like $1-$2,000 in your rainy day fund.
Emergency fund
On the other hand, an emergency fund is bigger.
This is where you should keep enough money to cover unexpected things that are more complicated to solve, could go on for months or are more expensive.
Like you lost your job, you have a huge car expense, maybe a big dr. bill or something breaks in your home that you need to replace.
This is where many experts recommend you keep 3-6 months of bills or income in your emergency fund, just in case you do lose your job unexpectedly.
Do you really need two accounts for savings?
If you really want to simplify things, you can technically keep these two funds in the same account, but it may be harder to track in the end.
Because you don’t want to keep pulling from the emergency fund for small expenses, and vice versa. So it makes sense to keep the two separate.
It’s also a good idea because you can keep your emergency fund in a high-yield savings account.
What that means is you’ll get a lot more interest over the year than you would in just a regular savings account.
This gives you more bang for your buck essentially because your emergency fund is typically bigger, and in a high-yield savings account you’ll gain more interest the more money you have in the account.
Discover Bank is a good one to use, and it’s easy to open if you already have a credit card with them!
Verses your rainy day fund, which you could keep in a regular savings account that you have with your bank.
You’ll earn less interest on the account, but it will be easier to pull from for those smaller expenses so you won’t have to worry as much about accessing the money when you need it.
The idea is to pull from your emergency fund way less than you’ll be pulling from your rainy day fund, so you hopefully won’t need to access the money as quick.
When building up a savings account, don’t forget the most important part of the process! Tracking your progress!
It can be so fun to watch your savings grow over time, but one of the most important things you need to do is get in control of all your finances.
I’m talking budgeting, tracking your spending, your income, debt, and savings.
It’s going to be really hard to build up a savings account if you don’t know where your money is going or how much you’re bringing in each month! So here’s an easy solution.
Check out this simple budget tracker I created for just this purpose. You can really master your finances, keep track of everything and make sure you are in control of your money!
Which savings should you grow first- a rainy day fund vs. an emergency fund?
I realize this can sound daunting. If you’re in your 20s and you have little to no savings, hearing that you “should” have all this money in separate accounts can make it overwhelming and may be hard to start.
Especially if you’re starting with zero savings, to begin with!
So which one is more important to work on first?!
My suggestion is, to open a savings account with your regular bank if you don’t already have one.
And then each time you get paid, deposit whatever you can into that account. If you can, set up an auto-deposit with your job into your savings so that you won’t even have to think about it.
The rainy day fun is the best way to get started.
Then, once you hit an amount of money you’re comfortable with in that regular savings account, say $2,000 or so, open up a high-yield savings account from there.
Keep auto-saving into what will be your “rainy day fund” with your bank, and whenever you hit above a certain amount of money, transfer the extra into your high-yield “emergency” savings account.
This is going to take some time, and you’re going to need to be smart and patient with your money for a while.
You may even hit some bumps in the road where you have to dip into that account before you’re ready, but in the end, it will pay off. So just keep saving!
However, in order to do this, you’re likely going to need to set a budget for yourself in order to help save, so check out this blog post Mastering Your Money- How to Budget and Save in your 20s!
