Rainy day funds vs. emergency funds: Why you need both

What is a rainy day fund?

Key features of a rainy day fund:

• Amount: Typically, a rainy day fund contains between $250 and $1,000—enough to cover minor expenses like car repairs, household fixes or an unexpected trip to the vet.
• Purpose: It’s ideal for smaller, short-term needs such as paying for a parking ticket, fixing a broken appliance or covering a surprise medical co-pay.
• Accessibility: Keep your rainy day fund in a basic savings account that’s easy to access. This ensures you can quickly address minor setbacks without hassle.

What is an emergency fund?

An emergency fund, on the other hand, is your financial safety net for larger, more serious challenges. It’s designed to cover significant life events or crises that can impact your financial stability for months at a time.

Key features of an emergency fund:

• Amount: Aim to save 3 to 6 months’ worth of living expenses, although the exact amount depends on factors like your job stability, health and financial responsibilities.
• Purpose: Emergency funds are for major financial disruptions, such as job loss, medical emergencies, or unexpected events like divorce or natural disasters.
• Importance: This fund protects you from needing to rely on debt or other risky options when facing a significant financial crisis. It ensures you can meet your basic needs, even during tough times.

Why you need both

Having both a rainy day fund and an emergency fund is essential because they serve different purposes, and combining them can leave you underprepared for certain situations.

1. Separation of funds

Keeping these funds separate ensures that you don’t accidentally use money intended for major emergencies to cover small, routine expenses. This way, your emergency fund remains intact for more serious financial needs.

2. Financial stability

By maintaining both funds, you’re prepared for both small hiccups and larger disruptions, reducing financial stress and helping you stay on track with your financial goals.

3. Avoiding debt

When unexpected expenses arise, having savings means you don’t have to turn to high-interest credit cards or loans. This helps you avoid debt traps and keeps your financial health intact.

How to build your funds

Building up both a rainy day fund and an emergency fund takes time, but with a few simple strategies, you can make steady progress:

Start small

Begin by saving a manageable amount each week—say, $5 or $10—to build your rainy day fund. For your emergency fund, aim to save a larger portion of your income, such as 10% to 20% of your monthly earnings.

Create a spending plan

Track your expenses to see where you can cut back and redirect those savings. Even small adjustments, like reducing takeout or unnecessary subscriptions, can free up money for your funds.

Automate your savings

Set up automatic transfers to your savings accounts. This “set-it-and-forget-it” approach ensures you’re consistently contributing to both funds without needing to think about it.

Use windfalls wisely

Tax refunds, bonuses, or other unexpected windfalls are great opportunities to boost your savings. Consider putting a significant portion of these extra funds directly into your rainy day or emergency fund.

Where to keep your funds

Both your rainy day and emergency funds should be easily accessible in case you need them quickly. High-yield savings accounts or money market accounts are excellent options because they offer competitive interest rates while keeping your money readily available.

Conclusion

Having both a rainy day fund and an emergency fund is a cornerstone of strong financial planning. Together, they help you handle life’s surprises with confidence—whether it’s a small inconvenience or a major financial challenge. By starting small, staying consistent, and keeping your funds separate, you can build a solid financial foundation that protects you from debt and gives you peace of mind.

A quick call with one of our experienced banking professionals can get you started. Or schedule an appointment at any of our Associated Bank locations to discuss the options and strategies available to help you save.