Dear Young Saver, Today I am discussing emergency funds and rainy day funds. I was recently listening to a conversation amongst some people discussing saving money. It was a group of people that appeared to be varying in ages, from I would guess late teens to late fifties. They were discussing setting aside money for unexpected expenses.
As I listened to this discussion, it became apparent to me that everyone was not on the same page. Instead, they ascribed different purposes to the savings and used different names for what they were calling the pools of money to be used for unexpected expenses. In short, I realized that they were mixing up the two different types of funds: emergency funds and rainy day funds.
What is an Emergency Fund?
First, an emergency fund is money that is set aside to cover large unexpected financial issues. For example, some common large expenses include having to pay for an unplanned car purchase, or unexpected large and ongoing medical bills. But the main unexpected expense that should be covered by an emergency fund is loss of employment.
How Much Should Be Kept in an Emergency Fund?
Up to the present time, many people suggested to keep enough to pay 3 to 6 months of your bills in your emergency fund. However, after COVID, some financial experts began recommending saving up to a year’s worth of living expenses. Alternatively, If you are in a two income household, you may be able to get by on a 9 month fund. If you have a one income household, or if one of the incomes in your household comes from self-employment and the income is not stable, you may want to shoot for 15 to 18 months of expenses saved. Other people who may want to consider the 15 to 18 months include single parents and people with chronic illness in the family.
That might sound like a lot of money. But, don’t let that deter you from starting your emergency fund journey. Just get started and keep adding to your account on a regular schedule. It is best to automate those deposits. Over time, you will get to your destination. If you can’t focus on saving large amounts of money each month, I like the idea of focusing on saving five dollars a day.
Calculating Your Emergency Fund Target Amount
To calculate your emergency fund target amount, look at your bank statements and credit card statements. Write down all of your monthly outflow of necessary expenses. These bills should be all inclusive. So, they should include expenses such as housing (rent or mortgage), utilities, groceries, insurance bills, transportation, regular medical expenses. Everything.
Once you have determined how much your monthly expenses are, you use that to determine your emergency fund target amount. So, if you are shooting for 6 months of money, multiple the monthly amount by 6. If you want a 12 month emergency fund, multiply your monthly expenses by 12. That’s it.
What is a Rainy Day Fund?
A rainy day fund is also money set aside for unexpected expenses. However, they differ from emergency funds in that rainy day funds are for lower-cost, shorter term unexpected expenses. Examples of rainy day fund uses include things such as needing to get a new car tire when getting a flat, or for a vet bill, if your pet gets sick. The rainy day fund could eleven be used for pleasant unexpected expenses, like the need to purchase a wedding gift.
How much should Be Kept in a Rainy Day Fund?
A good amount to keep in a rainy day fund is $1000 to $2000.
Do People Need Both Emergency Funds and Rainy Day Funds?
The short answer is, yes, you need an emergency fund and a rainy day fund. This is because the two funds serve two different purposes. They both lessen the emotional and financial stress of unexpected expenses.
These accounts are important in being able to handle the impact of unforeseen expenses. However, the rainy day fund protects you in the case of small one-time unexpected expenses. This is in contract to an emergency fund which is for larger, on-going expenses.
Both of these accounts are important in being able to handle the impact of unforeseen expenses. They can save you from both mental and financial stress.
These funds act like insurance for your personal finances by preventing you from having to pull from other monies, such as retirement accounts, taxable investment accounts, and education funds.
Should Emergency Funds and Rainy Day Funds Be Kept In Any Special Way?
In short, yes.
First, emergency funds and rainy day funds should be kept in accounts that are separate from each other. They should also be kept separate from your other monies. This makes it easier to keep up with the exact amount that is in the fund. Even more importantly, it prevents you from accidentally spending money that is for unexpected expenses.
Second, emergency funds and rainy day funds are not investments. They should be kept liquid, and not put into the stock market.
Third, while the money should be kept liquid and not invested in stock, you want to earn as much interest income from them as safely possible. This will help the fund grow.
Lastly, I would not (and do not) have a debit card attached to my emergency fund or rainy day fund. Having easy access to an emergency fund makes it too easy to dip into the accounts.
The Ideal Place to Keep Emergency Funds and Rainy Day Funds
I have found that the ideal places to keep the money for these funds include high yield savings accounts. At the time that I am writing this, my favorite place for these accounts is Marcus by Goldman Sachs. Goldman Sachs is an investment bank that has been around for about 154 years, and their online Marcus Bank offers some of the highest yields that I have seen.
In addition to their high interest rate, if you would like to use my link, they are offering 3 months of an additional 1% on top of their already high interest rate, while the offer lasts. So, as I am writing this, their 4.50% would be bumped up to 5.50% for 3 months if you use my link.
(Here’s my link: Marcus by Goldman Sachs )
Be sure to check out the offer online to make sure that you are comfortable with it, and feel comfortable that this is not a scam. It’s not. But, there are lots of scams out there, and I encourage you to always verify any offers before you sign up.
Key Takeaways About Emergency Funds and Rainy Day Funds:
- Emergency funds and rainy day funds are two different types of funds.
- Emergency funds are for larger, longer term unexpected financial problems, most notably being loss of employment.
- Rainy day funds are for smaller, more immediate unexpected expenses.
- It is a good idea to have both of these funds.
- In today’s economy, it is a good idea to have a 1 year emergency fund.
- A good amount to keep in your rainy day fund is $1000-$2000.
- It’s best to keep these funds separate from other monies that you have.
- You should not get a debit card for these funds.
- High yield savings accounts are the ideal place to keep these funds.
- As with most financial goals, saving for unexpected expenses requires patience to see the results.
The most important thing to remember is that, while saving for emergency funds and rainy day funds may not be as exciting as investing in stocks, if and when you have a large unexpected bill, you will be very happy that you have prepared for such an occasion.
Love, & Hoping That You Set Yourself Up for Future Financial Success,
Rich Mom
Looking for more financial resources? Check out the Rich Mom Poor Kid Resources Page.
Who is Rich Mom?
If you’re wondering who Rich Mom is, check out my “About Rich Mom” page.
Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
The information shared here is not intended as financial advice, just encouragement and entertainment.
If you would like to read more about emergency funds, you can check out these posts:
Do You Have An Emergency Fund?