Have you ever run into a car issue and really haven’t had the money to cover it, so you’ve had to charge the expense to your credit card? Or have unfortunately run into the issue of being laid off and now wonder how your bills are going to get paid? Or maybe you’ve gotten a new job and want to go out and buy a few things for your first day?
These are all great examples of when you would want to tap into an emergency or rainy day fund and although they both serve different purposes, it’s important to have both available to tap into as needed. Read on for answers to all your questions on emergency and rainy day funds.
Why have an emergency fund?
Emergency funds are typically used for the much larger and urgent expenses. It should have enough padding to keep you afloat even if you experience a major disruption in life, like major car issues, divorce, job loss or illness.
There’s a few reasons why it’s important to have an emergency fund to keep you afloat during hard times. For example, the biggest reason is so that you aren’t making bad financial decisions. There’s nothing worse than having to charge a big expenses on a credit card, that you know you can’t pay off, sending you into debt. An emergency fund alleviates that financial pressure and bringing us to our next reason, stress. Feeling stressed due to financial and life stressors is natural, having an emergency fund can help boost your confidence during hard times which can help you to make better decisions.
Why have a rainy day fund?
Say you just got a new job and you want to go out and get new clothes, get your hair done and buy a work bag to impress your new colleagues. These expenses are a sign of a positive thing and as positive as they are, they could put a big dent in your wallet. Have you thought about how you’re going to afford your mini makeover?
Here’s where your rainy day fund comes in. It’s a savings account created for these small expenses that you aren’t totally prepared for, so having some extra cash set aside can be helpful, especially when you have other expenses to cover. Other reasons to tap into your rainy day fund could be for minor house repairs or if your child has unforeseen school expenses pop up. When you have a way to fund these small financial hiccups, they won’t disrupt your financial health.
How much money should be in each fund?
Generally, your rainy day fund only needs to hold $500-$1,000 because it’s for those small expenses. Whereas your emergency fund, however, should be positioned to pull you through major financial crises, so it will need a lot more to fulfill its purpose. Ideally, it should hold 3-6 months’ worth of your living expenses.
Where should I keep these funds?
A traditional savings account is a perfect home for both your emergency fund and your rainy day fund. Compass Wealth Management explains why CD’s and Money Market accounts may not be the best options in this case, because there’s a risk of penalty and losing money, unlike a traditional savings account. You can set up multiple accounts for each one. Your money is always safe here, and thanks to interest both funds have the potentially to grow a bit. Knowing where you can store these funds is helpful, but what about growing these funds? Here’s a couple helpful tips.
- Start a side hustle. Thanks to those money making apps like Uber, Lyft, Wag and Poshmark you can earn some cash to deposit into your emergency and rainy day funds.
- Trim your budget. Take a hard look at where your money goes each month and cut back on your spending. Use the money you save to fund these accounts.
- Make it automatic. Set up an automatic transfer from your checking account to your savings accounts so your funds grow automatically.
Start setting up your savings today! You’ll sleep better at night knowing you’re prepared for any financial eventuality.