I just had an interesting conversation with my colleagues today about spending habits. One of my colleague spends almost every single penny of his income each month on items he doesn’t need but wants. Somehow, he doesn’t seems worry about the future where he might need some extra cash.
We are shocked in surprise and started talking about the importance of establishing an emergency fund and the importance of thinking of the future.
In our discussion, my other colleague who is financially prudent also mentioned about Rainy Day Fund. A term that not many have heard of.
- What is the meaning of an emergency fund?
- What is the difference between an emergency fund and a rainy day fund?
- Aren’t an emergency fund and a rainy day fund the same?
- Do we even need both an an emergency fund and a rainy day fund?
This struck me that most people know or heard of an emergency fund and may even have it allocated, but many have never ever heard of a Rainy Day Fund.
In this article, we will outline the small but important differences between an emergency fund and a rainy day fund. What each funds should be used for, and most importantly the best strategies to easily setting them up.
Question to ask:
“Do you need them?”
Let’s Find Out!
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BONUS: Readers who read the whole article to get to know the ONE important Fund that will help you to achieve Success!
What is EMERGENCY FUND?
An emergency fund is the fund intended only for emergency, a financial safety net in the event of a financial emergency. These emergencies include many unforeseen events, such as loss of job during an economic downturn, or a major illness that requires a huge sum of cash for surgery.
We should always aim to build and maintain an emergency fund of at least 3 to 6 months of living expenses not your salary. A typical living expenses include all house bills, rental, debt payments, and day to day spending, such as grocery, transportation or even childcare.
An emergency fund will become even more important if you are are the sole bread owner of the family where your wife and your kids depends on your income on your daily life.
If one day the unfortunate event of losing a job happens, an emergency fund is the only financial safety net that help you to weather the storm while you find a new job or even start your own business. An emergency fund is an pivotal piece in your financial planning.
WHAT IS A RAINY DAY FUND?
A rainy day fund is simply a small amount amassed to pay any one-time, unexpected smaller expenditure that seems to pop up from time to time.
A good example where I recently face is to cover the cost of repair of my trusty 5 year old car. While $750 repair don’t sounds much to some, it can be a problem for many who live by with a tight budget, and if you are not careful, it might even put you in debt. Some other common examples can be paying for your kid’s summer adventure camp or replacing an spoil computer that you need for work.
Basically a Rainy Day Fund helps you to prepare for the little unexpected things in life and avoid going into credit card debt. It covers the small expenditure that seems to always pop up every now and then.
Through you can still live your life without Rainy Days Fund by using a credit card, or borrowing from friends which are both highly not recommended. Having a Rainy Day Fund just simply helps to relive the stress in your life by enabling you to plan ahead.
Lower stress equals to happier life! Period
what is First Thing I need to know before building my fund?
First, you need to find out how much you will need in each of your funds. Generally speaking most emergency fund is around 3 to 6 months of a family’s living expenses and rainy day fund is around half a month of a family’s living expenses.
I heard people telling me, “I can’t save so much money! I spend almost every penny each month just to get by!”
But my answer is simple.
You just need to start doing it and have at least something in the fund. Even $1 is better than nothing.
Remember: To start something is the hardest, once you start, you are already half way to success.
Once you have started, slowly but gradually you can work toward your goal over time and build your emergency fund and rainy day fund.
Knowing where your goal will help you in reaching it easier.
How to Build Your Emergency Fund and Rainy Day Fund
Now the fun part!
Let’s say you are just like my colleague who spend every penny he have every month for things he wants but not needed.
You have an “basic” monthly expenses of $2,000, and will want to set-up an 3-month emergency fund. Which will calculate to $6,000 ($2,000 * 3 = $6,000).
If you set aside $500 per month, you will reach your goal of fully funding your emergency fund in just 12 months (1 year).
But wait! You spend almost every penny you have every month. How will you be able to save up $500 per month?
2 Simple Ways
- Earn More
- Spend Less
Getting a part time or even starting your own business as a sideline is one of the ways to earn more.
I have written an article that can help you to earn more passively, bringing you passive income. This not only help you to build your nest egg for the emergency fund and rainy day fund but also an opportunity for you to be free of financial stress and be financially free.
Read Also: Easy Guide to Make Passive Income
You will learn some amazingly easy ways to make passive income and thus to earn more and have a better quality of life.
The dreadful word of spending less!
Many people reject the idea of spending less, and think spending less means lower quality of life.
This is NOT true.
Spending less means to spend with a goal in mind.
Illustration of an Example
Lets say you are planning your holidays with your family of 3 for a 5 days round trip to Bali. You brought the following 1 week before your memorable trip at the original price.
- Hotel $400 per night ($200 * 5 nights = $1,000)
- Round-trip Plane tickets at $1,000 ($1,000 * 3 person = $3,000)
- Car rental at $200 per day ($200 * 5 days = $1,000)
You spend a basic total of $5,000
or alternatively, you plan your trip and book the same hotel, round-trip plane tickets, car rental 2 month in advance during its 20% off promotion.
You will only spend a basic total of $4,000
Not only you have enjoyed the same quality of life, you have saved $1,000 from one single trip which will allow you to have a short getaway with your family or to fund your emergency fund and rainy day fund.
If you add, the same idea of planning early with a goal in mind to other stuff in your life, you can easily save tones of money. And it multiplies by the everything you do and spend in your life.
Well, it seems spending less isn’t so dreadful anymore isn’t it?
If you want to know more about some life changing ideas and methods to change your life, you can also check some of our other best articles.
An emergency fund and rainy days fund are not the only fund you will need.
You Need a Fund for Opportunities.
But it can only be built when your foundation is stable.
In this uncertain times, opportunity happens a lot!
A Wise man once said
“Future is built for the man or woman who is most prepared.”
What is an opportunity fund?
An Opportunity Fund is a fund you use when an opportunity arises. Unlike emergency fund and rainy day fund, an opportunity fund is a fund that the rich and successful build.
Opportunity Fund in Investing
People call it the war-chest where when the opportunity to buy an amazing stock at a dirt cheap price arise, the investor can invest into such companies and build massive amount of wealth and eventually financial freedom and freedom from financial stress.
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Opportunity Fund in Business
An opportunity fund is the seed money where entrepreneurs build an empire of successful business. An opportunity which he/she will not have if he/she spend all his income every month.
An opportunity fund allows the entrepreneur to build his business when the time is right. A tough path but when equip with the right knowledge and timing, success is just in the matter of time.
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An opportunity fund is important but it can only be built after you have set-up your emergency fund and rainy day fund.
Emergency fund and rainy day fund are the foundation of having a minimal financial stress life and the foundation of financial success.
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After learning about some basics of each funds and reviewing so many of the importance of each funds, I asked myself the final question.
“Which to start with?”
If I just graduated and will like to start building my 3 funds I will probably start in this order
- Rainy Day Fund
- Emergency Fund
- Opportunity Fund
First, I will focus with Rainy Day Fund, is simply because of 2 important points
- Foundation of having a financial stress free life
- Easiest to build (usually around half month of monthly expenses)
Next I will build my Emergency Fund, because of the following
- Foundation of having a financial security net
- Harder but essential to build (usually around 3 to 6 month of monthly expenses)
Lastly but to me, the most importantly, I will focus my remaining energy and time to build my Opportunity Fund before I will spend buying stuff on things that I may want but not what I need, because of the following:
- Opportunities is only for man/woman who are prepared
- The way to financial freedom is to grab hold of opportunities when it presents itself and to know when is the opportunity I must first learn to see one. The way to see one is to read and learn from the best. Here is how!
These are just my opinion yours may vary.
Taking your First Step is always hardest, But it is the Most Important Step to Greatness
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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.