Do You Need a Rainy Day Fund If You Already Have an Emergency Fund?

When life throws you a curveball, it’s nice to have some emergency savings to fall back on. A rainy day fund can provide welcome relief when an unexpected expense crops up.

But what is a rainy day fund, and why do you need one? We’ll cover everything you need to know about rainy day funds, including how they differ from emergency funds and why you may want to consider both to protect your financial future.

What is a rainy day fund?

A rainy day fund is designed to cover small to midsize expenses that would otherwise require you to take on credit card debt or dip into your long-term savings. Depending on your situation, this could include parking tickets, minor car repairs, routine medical or vet procedures, and home appliance replacements.

Without a rainy day fund, these costs can feel overwhelming. And if they pop up unexpectedly, they can throw a wrench into your financial plans. By building a fund to cover rainy day costs, you can have peace of mind knowing you’re prepared to tackle any costs that may arise.

Rainy day fund vs. emergency fund

Though the concept of a rainy day fund and an emergency fund is similar, these funds differ in the types of expenses they are meant to cover.

Rainy day funds address occasional short-term expenses, while emergency funds protect against costly, unexpected major life events. A rainy day fund, for example, may help you pay to fix a broken appliance, while an emergency fund should cover three to six months of living expenses if you lose your job unexpectedly.

Because the funds serve different purposes, many financial experts recommend building both an emergency fund and a rainy day fund. Without a rainy day fund, you may deplete your emergency fund by using it to pay for smaller expenses, leaving you vulnerable if a larger expense arises.

How much should you save in a rainy day fund?

Your rainy day savings should be enough to cover minor costs, but the specific amount you need depends on your circumstances. In general, experts recommend saving between $500 and $5,000 in a rainy day fund.

To set a more specific savings goal, identify any expenses that could arise in the near future. For example, your aging dog may require extra veterinary care, or your child might need braces. Knowing those estimated costs can help you determine how much you’ll need to tuck away.

How to build a rainy day fund

Now that you understand the importance of a rainy day fund, it’s time to learn how to build one. Though building your savings can seem like a daunting task, breaking it down into smaller, more manageable steps can help.

1. Choose a financial institution

First, you’ll need to decide where to build your rainy day fund. Because you’ll want the funds to be readily available, it might be best to stick with your existing bank or credit union. But if your financial institution doesn’t offer the specific type of account you want to open or if its annual percentage yields (APYs) are relatively low, you may want to consider other options, such as a high-yield savings account.

2. Choose the right account

To avoid accidentally dipping into your rainy day fund for everyday expenses, establish a dedicated account for your savings. Ideally, you’ll want an account that lets you grow your savings while allowing you to make withdrawals as needed. Your best options include:

• Basic savings accounts: Some banks and credit unions offer basic savings accounts that earn a small amount of interest. These accounts are usually easy to open, with low or no minimum balance requirements. However, you’ll earn less interest than you would with other interest-bearing accounts.
• High-yield savings accounts: A high-yield savings account can earn an APY of up to 5.00%. But you may need to maintain a certain balance to earn the advertised rate. Rates may change based on economic conditions.
• Money market accounts: These accounts offer higher interest rates than traditional savings accounts. Unlike many high-yield accounts, money market accounts may include ATM access and check-writing abilities. However, money market accounts also tend to have higher minimum balance requirements than traditional savings accounts.

3. Make a list of expenses

To set a savings goal for your rainy day fund, it can be helpful to list the types of expenses you’ll likely face in the next few years. Think about what could go wrong and how much it might cost to handle. For example, if you drive an older vehicle that will need repairs or if a household appliance might break down, you’ll want to factor these potential costs into your plan.

Depending on circumstances, some households may need a rainy day fund of about $500, while others may want to save up to $5,000.

4. Automate your savings

To avoid the temptation of spending money when you should be saving, it may be a good idea to automate your savings contributions. You can achieve this goal in multiple ways, including scheduling automatic transfers between accounts and sending a portion of your paycheck to a designated savings account.

5. Take advantage of windfalls

In finance, windfalls are unexpected sums of money — such as large investment payouts, higher-than-expected tax refunds, inheritances or lottery winnings. Depositing these windfalls directly into your rainy day fund can help you reach your savings goals faster.

Frequently asked questions

What’s the purpose of a rainy day fund?

A rainy day fund’s main purpose is to provide a cushion for small, sudden expenses, such as car repairs, veterinary bills or home maintenance costs.

How much should you save in a rainy day fund?

Depending on your financial situation and the types of costs, you may need to save between $500 and $5,000 in your rainy day fund.

What is the difference between a rainy day fund and an emergency fund?

Rainy day funds are typically smaller and used for minor costs, while emergency funds are larger and meant to cover major, costly life events, such as job loss.