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Understand the difference between an emergency fund and rainy day fund and learn why both are crucial for financial stability and peace of mind.
The conflict between saving enough and spending to fulfill our heart’s desire is long-standing. Managing finances can be stressful, but it reaps many benefits when done right. An essential part of managing finances involves setting up a rainy day fund and emergency fund to deal with financial emergencies.
The question is - If both cater to financial emergencies, then what's the difference between the two? Let's find out!
Emergency Fund Vs Rainy Day Fund
Emergency funds provide for unexpected, urgent financial requirements that significantly impact daily lives. On the other hand, a rainy-day fund account is a type of emergency fund for short-term needs, but not unforeseen emergencies. A rainy day fund allows us to cover short-term expenditures.
Both emergency funds and rainy day funds are financial safety nets that cater to different circumstances. For instance, an emergency fund can help us deal with a job loss or medical emergency. In contrast, a rainy day fund can help us meet small expenses like home maintenance, broken appliances etc.
Emergencies occur unexpected and require us to spend considerably. If you haven't saved up adequately, emergency expenses can be challenging to arrange. We might end up borrowing money at higher interest rates.
On the other hand, we generally spend little on ad-hoc expenses like electronics repairs. They are not financially taxing, but require liquidity. Having a rainy day fund for such expenses will help us plan our budgets better.
What is the Ideal Amount?
Experts suggest that an emergency fund should cover at least three to six months of our expenses, including daily living expenses. These include groceries, electricity, rent, medical bills, etc; however, there is no specific limit. Depending on your circumstances, you can save up as much as feasible.
Nonetheless, we can calculate emergency expenses by maintaining monthly excel sheets. It will give us a clear picture of what needs to be considered per our needs. How we build an emergency fund or a rainy day fund largely depends on our lifestyle. The more we save, the better prepared we are for any emergency.
We don't have to save a large corpus for a rainy day fund. We merely need to save enough cash to fund expenses such as appliance replacement, car repairs or ad-hoc home repairs without affecting our monthly budget.
Emergency fund calculators available online can help us determine the required fund for emergencies. Moreover, many banks also provide emergency fund calculators.
Similarly, we can use the rainy day fund app to estimate an ideal rainy day fund.
What Should We Do?
Setting up emergency or rainy day funds is pretty simple; however, we must remember that these funds are not built overnight. First and foremost, we have to maintain separate accounts, determining, early on, the amount for each; every month, a part of our income should go into these accounts.
Automating our savings is the best way to maintain consistency. Setting up a direct debit from one savings bank account to another will ensure discipline and eradicate the temptation of ad-hoc expenditure.
We should keep a monthly check on these funds and can remain flexible in terms of investing as long as we stick to our goals. Remaining flexible reduces our stress in case we aren't able to contribute the amount we decided to commit to these funds.
We can always make up for the shortfall in upcoming months resulting in more likeliness of sticking to our goals.
Emergency Fund Savings Tips
Here are a few essential emergency fund savings tips that we should always remember:
Rainy day funds are for meeting sudden unexpected expenditures of less amount. If you are wondering where to put rainy day fund, then it can simply be maintained in a savings bank account. However, when it comes to emergency funds, we usually consider investing it.
Therefore, it is important that emergency funds are invested in liquid assets to ensure easy conversion in times of emergency.
If we invest our emergency fund, then we should ensure that it is invested in a secure asset. Investing the emergency fund in a volatile asset would defeat the very purpose of investment and would reduce the corpus invested.
Our monthly expenditure and cost of living is never the same. As our income increases, so does our lifestyle. Therefore, it is important that the emergency fund is restructured considering our lifestyle and expenditures.
How to Build an Emergency and a Rainy Day Fund?
The easiest way is to create a separate saving account yielding decent or higher returns. Maintaining a dedicated account for each of these funds other than our regular savings account is essential. Considering the returns provided by the savings bank account, another alternative could be to invest the amount in a liquid asset.
ChangeJar Technologies allows us to invest in digital gold which is not only a secure investment but also highly liquid. Digital gold tracks the actual gold price and also mitigates the shortcomings of physical gold investments.
Therefore, digital gold investments are one of the best fits for maintaining an emergency fund. Changejar allows us to automate our investments in digital gold so that we can systematically allocate a portion of our income each month toward emergency funds.
Gold being a less volatile and secure asset minimizes the risk and ensures that we earn adequate returns on our emergency funds as well. And guess what, we can start investing with as low as Rs. 10! Have you created your emergency and rainy day fund?