Difference Between Rainy Day Fund And Emergency Fund

Difference Between Rainy Day Fund And Emergency Fund

Life is not all smooth, and often we need to plan ahead for our future life. So we will save our money into our portfolio in order to have a secure future. However, unemployment and illness will be a life stumbling block that we may encounter. If we are unprepared, where will the cost of living expenses come from? Therefore, we need a financial lifesaving plan in the form of an emergency cash fund and always ready.
Although many people agree that contingency funds are an important solution, they don’t know how much to save and when. Others wonder how they can find extra money to save. A survey found that 28% had no emergency savings at all. But it cannot be denied that the emergency fund has become an important part of personal finance, mainly because it can greatly help to avoid trouble. And a new type of emergency fund has recently begun to emerge, and people call it the Rainy Day Fund.

What is a rainy day fund? How is it different from traditional emergency funds?

Traditional emergency funds mainly include housing, transportation expenses, insurance, and medical expenses. Housing and transportation expenses make up the majority, and money each month to pay off mortgage loans for cars and homes are remaining. Secondly, the average family now has one or two insurance (car insurance, life insurance, critical illness insurance, etc.) in the payment period, and reserve some money to go to the hospital.

Rainy day fund is a fund only to be used when a minor financial setback happens. While emergency fund should cover grave emergencies, rainy day fund covers small-scale expenses that might occur in the future. This is the reason why rainy day fund is sometimes called short term savings. In short, the Rainy Fund, as its name shows, uses the rainy fund to pay for small accidents. So where should the rainy fund be deposited? Generally, we recommend depositing the rainy fund into a high-yield savings account.

When to put up a rainy day fund?

The ideal time to put up a rainy day fund is when you have a stable source of income. No matter how low your income is, try to spare at least 5% and place it in your rainy-day fund. You can also save your spare change, over time it will build up.

The best time to put up a rainy day fund?

Of course, the best time to put up a rainy day fund is today. When it comes to saving money—the earlier, the better, so get your ass off and just do it! Hopefully, you’ll save up enough money to start your rainy day fund.

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Michael Aniston

Michael started with a master's degree in finance before he went into technology and coding. He is now a freelance journalist and video producer living in Berlin, Germany. When he doesn't write, he will travel many countries.