The differences between rainy day funds and emergency funds

Quick insights

• Rainy day funds are savings set aside for predictable, midsize expenses, such as replacing the tires on your car.
• Emergency funds are savings allocated for major, unexpected expenses, like medical bills from surgery or periods of unemployment.
• Emergency funds might cover 3 to 6 months of living expenses, while rainy day funds may contain up to $5,000.

Many people understand that saving money may help enhance their financial health. They may save money toward a milestone like a down payment on a house or paying down debt.

However, it may be less apparent that having multiple savings accounts with specific purposes—such as rainy day funds and emergency funds—can be beneficial. Designating savings accounts for particular financial goals can potentially help you organize your finances and track your progress toward these goals. By clearly defining the purpose of each account, you may also become more disciplined about when to use your savings.

Here are a few differences to consider between rainy day funds and emergency funds as you determine the right savings account type and funding strategy for your needs.

Comparing rainy day and emergency funds

Establishing both a rainy day fund and an emergency fund may help you avoid taking on additional debt and improve your financial stability. Here’s a look at what these funds are for and how they differ:

Rainy day funds

• Purpose: Rainy day funds are intended for midsize, non-emergency expenses that aren’t part of your regular monthly bills. Routine car maintenance or replacing electronics are examples of costs typically covered with a rainy day fund.
• Size: These funds may range from $500 to $5,000, depending on your anticipated costs over the next few years. The amount you save may depend on factors like your family’s size and lifestyle.
• Usage frequency: Rainy day funds tend to get used a few times a year as certain expenses arise.
• Potential benefits: Maintaining a rainy day fund may help you avoid debt, ensure other financial accounts are used for their intended purposes and provide peace of mind.

Emergency funds

• Purpose: Emergency funds—sometimes called a “cash buffer”—are reserved for large, unexpected expenses or unforeseen events that prevent you from earning an income. Major home repairs or job loss are examples of situations where you might use your emergency fund.
• Size: For many, 3 to 6 months of living expenses may be sufficient for an emergency fund. Freelancers or those who work in unstable industries may want to save up to a year of living expenses.
• Usage frequency: Emergency funds are meant for unexpected financial expenses, not for regular or frequent use.
• Potential benefits: Maintaining this cash buffer may provide financial security during unemployment, help you avoid borrowing money and offer greater financial flexibility.

Key differences

Rainy day funds and emergency funds differ in the scale of financial need they address.

Rainy day funds are for specific, midsize expenses, like purchasing a new dishwasher. These expenses may disrupt your monthly budget but are not so large as to impact your long-term financial health. Emergency funds are for substantial expenses related to emergencies, such as covering months of essential expenses during unemployment or replacing your home’s roof after storm damage.

Rainy day funds are generally smaller than emergency funds. For example, if someone calculates their essential monthly expenses at $3,000 and determines they need at least 6 months of expenses, their emergency fund would contain at least $18,000. That’s significantly more than a rainy day fund, which usually doesn’t exceed $5,000.

Choosing savings accounts for each fund

Selecting the appropriate type of savings account for your emergency fund and rainy day fund depends on your specific needs. Here are some options you may consider:

Traditional savings account

Traditional savings accounts usually offer liquidity, allowing quick access to funds via bank transfers or ATM withdrawals. However, there may be a limit on the number of monthly withdrawals. You can typically fund the account by setting up automatic transfers from your checking account. Traditional savings accounts may be a good option for both emergency funds and rainy day funds.

High-yield savings account

For an emergency fund, you may consider a high-yield savings accounts, which generally earns more interest than a traditional savings account while maintaining similar access to funds.

Money market account

These accounts may offer higher interest rates than conventional savings accounts. Funds are often accessible, as money market accounts sometimes come with check-writing privileges or a debit card. However, they often require a higher minimum balance than some savings accounts.

When comparing savings and money market accounts, it can be helpful to review their savings account features. This might include withdrawal limits or penalties, account fees and the accessibility of funds.

In summary

Rainy day funds are intended for unexpected, non-emergency expenses that are likely to arise in the coming years. It is generally advised to keep between $500 and $5,000 in this account, depending on the anticipated expenses.

Emergency funds are meant for true financial emergencies, such as major expenses or job loss. It’s often recommended to save 3 to 6 months of living expenses in an emergency fund.

Many people choose to keep these funds in traditional savings accounts, high-yield savings accounts or money market accounts. When selecting the right account for your needs, you may want to consider any fees, penalties or limits on withdrawals, as well as the available spending tools.