Difference Between Rainy Day Fund And Emergency Fund

Most people are probably familiar with emergency funds. Perhaps you even practice saving your hard-earned money in it. Well, to summarize, the idea behind the emergency fund is it acts as an ‘urgent cash reservoir’ where money can be withdrawn instantly—in case of an emergency such as an unexpected job loss or other unforeseen financial crisis shall happen.

 

Excellent management of money and having multiple streams of income is proper. But having a fund where you can immediately get cash in times of need is necessary too. Emergency funds solve the uncertainty of financial stability. It has what is called an emergency fund ratio or liquidity ratio, wherein it provides an ideal computation on how long would the cash in your emergency fund will last. Usually, emergency funds have a liquidity ratio of three to six months.

 

Emergency funds have become a vital part of everyday finances, mainly because it immensely helps to avoid headaches in the future.

 

However, recently there’s this growing trend of saving up money in a rainy day fund.

 

What is a rainy day fund?

 

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. It is this reason why rainy day fund is sometimes called short term savings.

 

To put it, rainy funds are there to cover for the expenses when a minor bump on the road suddenly appears.

 

Where to put the rainy day fund?

 

It is often a good idea to put your rainy day fund in a high yield savings account. Besides, high yield saving account has higher interest rates compared to the usual 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 source of income. No matter how small 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 work! Hopefully, you’ll save up enough money to start your rainy day fund.

Michael Aniston
Michael started out with a degree in Finance Master, before devoting his time to tech and coding. He now works as a freelance journalist and video producer living in Berlin, Germany. When he's not writing , he travels many countries.