When you are hit with an unexpected expense like your A/C going out, a tire blowout, or car breakdown, do you have the money to cover those unexpected expenses? These things happen more frequently than people would like to think and, as a result, are caught unprepared.

The key to weathering these unexpected expenses is being prepared with two different savings funds – a rainy day fund for small expenses and an emergency fund for larger expenses. Having two different accounts helps you budget for both short and long-term emergencies.

Rainy Day vs. Emergency?

The main difference between a rainy day and an emergency fund is the size and scope of each.

• A rainy day fund is meant to safeguard you from shorter-term, lower-cost emergencies such as an appliance repair, annual home maintenance, buying new tires, or paying a parking ticket. This fund is typically smaller ranging from $500-$2,500 depending on your situation. Plan to draw on this account when needed and replenish it when used.
• An emergency fund is used for a bigger crisis such as losing your job or facing an unforeseen medical emergency. This fund helps you stay afloat without relying on credit cards or loans. Your emergency fund should cover things like your rent/mortgage, vehicle payment, utility bills, and insurance. It’s recommended that you save as much as 6-9 months of living expenses or $10,000 – $15,000 depending on your situation.

Where to Put Your Rainy Day and Emergency Funds

These special rainy day and emergency savings should be easily accessible to you in the event of an emergency. You don’t want to lock it up in a certificate account where you pay an early withdrawal penalty but the account should be separate from any savings account that you use regularly so you are not tempted to dip into it. Find an insured account that allows for quick, fee-free withdrawals and set up two separate accounts. High-yield savings accounts and money market accounts are two great options.

How to Build a Fund

Saving isn’t easy especially for those living paycheck to paycheck, but it is critical for your financial safety. Here are some tips to help you get started.

1. Calculate how much you want to save for both funds. Use our savings calculator to help you run the numbers.
2. Set a monthly goal for saving. Once you know how much you need, decide how much you can afford to allocate to your rainy day and emergency fund accounts.
3. If your employer offers direct deposit, there’s a good chance they can automatically break up your paycheck into different accounts so you “pay yourself first” before anything else. If not, you can always schedule automatic transfers via home banking to streamline the process.
4. If you typically get a tax refund, don’t spend it! Use it to boost your rainy day or emergency fund.
5. When you get change, drop it in a jar at home. When the jar fills up, deposit it into your fund.
6. When you get a pay raise, use some or all of it to reach your saving goals.
7. If you pay off a loan, divert that payment to your rainy day or emergency fund.

A secure financial future depends on saving for the unexpected. It can mean the difference between weathering a short-term financial storm or going deep into debt. A bad day doesn’t have to ruin your finances if you’re prepared. Contact us to discuss your options.