THE BROKEN WALLET

*Disclosure: This page may contain affiliate links. We receive a small commission if you purchase something we recommend (at no cost to you). All opinions remain our own.

What is the difference between a rainy day fund and emergency fund? (and why you should have both!!)

There’s a lot we can say about a savings account – the importance of having one, how to grow a bigger account, and savings mistakes to avoid. We can even talk about the different types of savings accounts to have.

But as we talk about different funds, without thinking we might use certain words interchangeably. This is something I see often when people discuss rainy day funds and emergency funds. 

Now, I have definitely made this mistake in the past. I’ll be giving advice about emergency funds – and in my mind, that’s what I’m thinking about. But when I open my mouth I’ll sometimes say “rainy day,” and unfortunately I don’t always catch myself.

This is something I’m working on, though. Because even though some people think rainy day funds and emergency funds are one and the same, they actually aren’t. They don’t have the same purpose and they don’t hold the same amount of money.

So, what is the difference between a rainy day fund and emergency fund?!?

Life is unpredictable. Therefore, it’s not a question of if something will happen, but rather when. And when the unpredictable happens, a cash reserve can ease some of the stress.

In the simplest term, a rainy day fund is money specifically earmarked for smaller unexpected expenses. 

These are those one-time surprises that can temporarily throw off your budget. They might include a minor home or car repair, a speeding ticket, an unexpected bill, or it might be something else like going out of town unexpectedly.

These types of expenses can be hundreds of dollars, so you might not have cash in your everyday budget for them. This is where your rainy day fund comes into play. You can take money out of this account and address the matter without using a credit card or robbing Peter to pay Paul.

In a nutshell, this is money for a short-term crisis – which is a crisis that doesn’t lead to financial ruin. 

Now, I know what some of you might be thinking: What’s the point of having BOTH a rainy day fund and emergency fund? If you like to keep things simple, it might make sense to have one account for everything that happens unexpectedly.

To answer this question, you must first understand the actual purpose of an emergency fund. Because whereas your rainy day fund is for a short-term setback, your emergency fund is what keeps your head above water during a major financial crisis. These are unexpected events that don’t have an immediate solution such as a job loss, reduction of income, a serious illness, or another big hardship. 

Since these types of problems can last weeks or months, you should maintain enough cash in reserves to specifically address these events…just in case. This can be the difference between staying afloat and losing your home.

Therefore, don’t get into a habit of tapping your emergency fund for smaller surprises.

How much to have in a rainy day fund and emergency fund?

Ideally, you want to maintain a minimum three to six months of living expenses in this account. This is the general guideline, although you might prefer three to six months of income. So if your living expenses are $2,500, that’s at least $7,500 in an account (preferably a high-yield savings account) that you don’t touch.

As far as your rainy day fund, a good range is a minimum $1,000 to $2,000. You can keep this cash in a high-yield savings, too, or a regular savings for quicker access. 

Personally, I think it’s best to keep these funds in two completely separate savings accounts, so there’s no accidentally dipping. But if you prefer a single account, some banks like Ally allow customers to split their savings into different savings buckets.

• Related: Is a High-Yield Savings Account Worth It?
• Related: 6 New Money Saving Challenges to Try This Year!!
• Related: How to Pay Yourself First

Did you find this information helpful, or got a question about the difference between a rainy day and an emergency fund? Let us know ↓↓