Experts emphasize the importance of having a dedicated savings account as a contingency plan for emergencies. This can help prevent falling into debt or having to dip into retirement savings or other dedicated bank accounts if an unexpected event occurs.
While emergency funds and rainy day funds are often used interchangeably, they actually serve different purposes. According to Chip Griffith, SVP of retail sales and operations at OneAZ Credit Union, rainy day funds are typically meant for short-term, unexpected and non-critical financial needs. On the other hand, emergency funds provide a more comprehensive financial safety net.
Recent studies have shown the consequences of not having these funds. For example, a LendingTree survey found that 27% of Americans are in debt due to emergency expenses they couldn’t cover. Additionally, the Federal Reserve’s Economic Well-Being of U.S. Households report revealed that 37% of Americans would not be able to cover a $400 emergency.
Differences Between Rainy Day Fund and Emergency Fund
An emergency fund should generally consist of at least three to six months’ worth of living expenses. It acts as a safety net for unexpected expenses, ensuring that individuals don’t go into debt or deplete their retirement savings. On the other hand, a rainy day fund is intended to cover minor unexpected expenses that arise in day-to-day life without relying on credit cards.
Experts argue that having both funds can provide comprehensive financial preparedness. While having peace of mind is one reason to have both funds, it also allows individuals to manage minor disruptions easily while preserving the emergency fund for major financial crises.
Saving for Both Funds
Saving for unplanned expenses can be challenging, as many Americans struggle to save. Establishing a rainy day fund and an emergency fund may work for some, but simply establishing and building one fund would be a significant step forward for most people.
Experts recommend establishing a rainy day fund only when there are excess savings beyond the emergency fund. Vijay Marolia, co-founder of The Cash Square, suggests creating a second savings fund once an individual has enough to cover three-to-six months of vital living expenses.
Another difference between the two funds is the amount of money to save. While emergency funds should cover multiple months’ worth of living expenses, rainy day funds can range from $500 to $2,500. It is also recommended to keep emergency funds in high-yield savings accounts, money market accounts, or certificates of deposit.
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