How important is it to have a separate rainy-day fund and emergency fund? In an effort to simplify money, people sometimes consolidate these accounts. This is not necessarily a bad thing, but it’s important to remember rainy-day funds and emergency funds serve different purposes. It’s important to have not just one, but both funds available to tap into as needed.
Why have a rainy-day fund?
Say your washing machine suddenly needs replacing. You’re looking at an extra expense that can run anywhere from $350-$850. Where are you going to get that kind of money?
Here’s where your rainy-day fund comes in. It’s a savings account created for these small, unfixed expenses you know will sometimes arise. You’ll tap into your rainy-day fund to pay for minor household repairs, to cover the cost of summer camp or to replace a broken kitchen appliance. When you have a way to fund these small financial hiccups, they won’t disrupt your financial health.
Why have an emergency fund?
In contrast to your rainy-day fund, an emergency fund is for much larger expenses. It should have enough padding to keep you afloat even if you experience a major disruption in life, like a divorce, job loss or illness. Without an emergency fund, any of these, or a similar event, can leave you scrambling to pay your bills and quickly send you into a debt trap that can last years.
How much money should be in each fund?
Your rainy-day fund, created for minor expenses, only needs to hold $500-$1,000. That should be enough to tide you over in the event of a small, unfixed expense.
Your emergency fund, however, should be positioned to pull you through major financial crises, so it will need a lot more to fulfill its purpose. Ideally, it should hold 3-6 months’ worth of your living expenses.
Where should I keep these funds?
The cash in both of these funds needs to be easily accessible. Don’t lock the money up in a Certificate of Deposit or another long-term savings account that will make it difficult and/or expensive to withdraw when the need arises.
A Partner Colorado Savings Account is a perfect home for both your rainy-day fund and your emergency fund. You can set up multiple accounts for each one. Your money is always safe here, and can grow with interest. Best of all, you’re free to withdraw your funds without penalty whenever the need arises.
How can I build my funds?
- Start a side hustle. Freelance for hire, take online surveys for spare cash or accept a seasonal position. Keep all or most of the extra money you pull in for your rainy-day and emergency funds.
- Trim your budget. Take a hard look at where your money goes each month and cut back on your spending. Use the money you save to fund these accounts.
- Make it automatic. Set up an automatic transfer from your checking account to your savings accounts so your funds grow automatically.
Start setting up your savings today! You’ll sleep better at night knowing you’re prepared for an unexpected financial situation.
If you want to live a financially healthier life in 2019, join us for our free Financial Health Seminar on January, 15. We’ll discuss ways to design your life for financial success in 2019. You’ll learn how to create and stick to your spending plan, ways to use credit to your advantage, how to build a good credit history and the best ways to tackle your debt. Register online to save your seat.