What Are the Differences Between Rainy Day Fund and Emergency Fund?

Parking a portion of your income in a savings account can provide financial security during contingencies. Two such funds are rainy day and emergency funds. Although the purpose of depositing money in these two funds is almost the same, there are some marked differences between them.

This guide offers a detailed distinction between rainy-day funds vs emergency funds so that you can make the best financial decisions.

A rainy day fund is built with the purpose of paying for an occasional smaller expense. For example, you can pay for a summer camp for your kid, repair broken electronic devices or vehicles, etc. These are usually one-time expense funds and do not require substantial savings.

Although they might sound similar, several minor differences between them make them distinct from one another.

Wondering how to begin the process of building an emergency fund? Here are some simple steps that you can follow to start building your emergency fund immediately:

Step 1:  First, determine the goal of your building the emergency fund. This allows you to save sufficient money that would be essential to serving your goal.

Step 2: Next, frame a budget to save the required money easily. This will help you maintain your current lifestyle requirements.

Step 3: Automate your contingency fund contributions so that you do not miss out on putting money in your fund every month.

Step 4: Put your emergency fund contributions in a high-interest-yielding investment option to ensure stable returns.

A contingency fund can be immensely beneficial if you are anticipating a recession or looking forward to changing your job or taking a break. So, you can stay worry-free about meeting your lifestyle needs, enjoy your break, or look for better job opportunities.

You can also build an emergency fund to meet other life goals to have enough funds when you meet lifestyle requirements. This can include unforeseen medical expenses, major home repairs, sumptuous vehicle repair costs, etc.

Building a rainy day fund is somewhat similar to an emergency fund, with minor differences. So, if you are planning to start one, you can follow the steps below:

Step 1: Make a list of all the possible unexpected expenses that you might encounter. This can give you an idea of how much to contribute to your emergency fund.

Step 2: Keep your rainy day fund money in a separate account. While doing so, make sure that it provides sufficient returns.

Step 3: Try to automate your contributions to this account so that you do not have to take the additional burden of transferring money every month.

Step 4: If you feel that it is becoming difficult to contribute to the rainy day fund every month, you can look for ways to increase your savings and earn extra.

A rainy day fund helps you to cover one-time immediate small-scale monetary expenses. You can use this money to cover the costs of routine medical check-ups, small-scale car repairs, home repairs, and so on.

There is no fixed goal for which you will need to build your funds. This allows you the flexibility to use this money for any other purpose. So, you can start building this fund today to meet your immediate small-scale monetary needs.

This guide on rainy day funds vs emergency funds and how to build the two helps you to get a comprehensive idea about them. Accordingly, you can plan your savings and contributions to stay worry-free about encountering a sudden financial crisis. This notably improves your financial health and minimises the wastage of money.