What Is the Difference between An Emergency Fund and a Rainy Day Fund?

Saving money is a great idea, but let’s face it, this isn’t the easiest thing in the world to accomplish. Life just seems to always get in the way. Monthly bills, increasing gas prices, and there’s always that urge to splurge on something fun once in awhile. These are all a part of our daily lives, but what happens in the event that those expenses that come at the most inopportune time?

A pricey car repair, a refrigerator that stops working all of a sudden, or God forbid, some major emergency that comes with a steep medical bill can throw your budget for a loop. Establishing an emergency or rainy day fund will help you weather the brunt of unexpected costs that could prove to have a negative impact on your financial situation.

You may be thinking an “emergency” fund and a “rainy day” fund are one and the same, but contrary to common belief they are two entirely different things. Sure, money is money, where it comes from doesn’t really matter as long as the financial burden is met. Unfortunately, it’s that kind of thinking that dooms most people right from the start. Knowing the difference and adhering to the particular purposes of each of these funds will keep you on solid financial ground through good times and bad.

Emergency Fund

The name says it all. Emergency. Most folks might feel that word is up for interpretation but, no, an emergency isn’t buying that new limited edition PS4 or some other dazzling object of material desire. An emergency fund is to be withdrawn from in the case of an actual emergency such as the loss of a job, sudden medical bills, a divorce — you know, potentially life-altering or even life-threatening events that require you to shell out large sums of money.

Build your emergency fund relative to the lifestyle in which you are accustomed. A typical fund of this kind usually equals anywhere between three to six months of your current income but it could be more. The fund should have enough in there to cover significant expenses.

Rainy Day Fund

This one is the smaller version of your emergency fund. No, you really shouldn’t dip into this one either to get yourself a little something nice. This fund is there in case you need to get something fixed or replaced. The car needs new brakes, the air conditioner is on the fritz, things of this nature. It’s also good to have around in case you have an unexpected travel necessity, such as in the event a relative passes away or your best friend is getting married on the other side of the country.

Contributing to this fund should be easier to do, you may even find you can stretch your tax refund by using it to fill these coffers for use at a later date. You can keep a few hundred bucks in here, maybe a grand or two. But that’s all the savings you’ll need for a rainy day fund.