Do you need Rainy Day Fund & Emergency Fund, And What Is The One Fund for Financial Success?

I just had an interesting conversation with my colleagues today about spending habits. One of my colleagues spends almost every single penny of his income each month on items he doesn’t need but wants. Somehow, he doesn’t seem worried 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.

Questions asked:

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 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 fund should be used for, and most importantly the best strategies to easily set them up?

Question to ask: “Do you need them?”

Let’s Find Out!

BONUS: Readers who read the whole article get to know the ONE important Fund that will help you to achieve Success!

What Is An Emergency Fund?

An emergency fund is a fund intended only for emergencies, a financial safety net in the event of a financial emergency. These emergencies include many unforeseen events, such as the loss of a job during an economic downturn, or a major illness that requires a huge sum of cash for surgery.

An emergency fund will become even more important if you are the sole bread owner of the family where your wife and your kids depend on your income in your daily life.

How much do you need to save for an emergency fund?

An emergency fund should be at least 3 to 6 months of living expenses. Typical living expenses include all house bills, rentals, debt payments, and day-to-day spending, such as groceries, transportation, or even childcare.

Living expenses are different from your salary.

Living expenses is the expense you incurred to maintain your desired lifestyle.
Salary is how much you earn per month from a day job.

Why having emergency fund is important?

An emergency fund is important to create a financial buffer that keeps you safe from financial-related worries in a time of need due to unexpected events. An emergency fund lets you rely on your saving in view of emergencies instead of using credit cards, or borrowing from a high-interest loan.

Emergency funds protect you from an unfortunate event such as:

Losing a job; an emergency fund is the financial safety net that helps you to weather the storm and let you pay your monthly living expenses while you find a new job or even start your own business.
Falling sick and needing money to pay for medical bills; an emergency fund lets you have the cash required to seek medical attention.

House or car requires an unexpected repair; an emergency fund gives you the option to make the repair immediately.

An emergency fund is a 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 that I recently face is covering the cost of repair of my trusty 5-year-old car. While a $750 repair doesn’t sound much to some, it can be a problem for many who live 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 a spoiled 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 relieve 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 Emergency Fund or Rainy Day Fund?

First, you need to find out how much you will need in each of your funds.

An emergency fund is around 3 to 6 months of a family’s living expenses and a 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!”

To start saving for a fund is not really that hard.

You just need to start.

Start by putting $1 into your fund, then $2 then $3, and so on…

Even a small sum of money in your fund is better than $0.

Remember: To start something is the hardest, once you start, you are already halfway 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 is will help you in reaching it easier.

Why build an emergency fund or rainy day fund according to your family’s living expenses and not salary?

The reason is that the estimation of the salary is vague and doesn’t reflect the true amount you require to make to live the lifestyle you are currently enjoying.

If you always overspend your salary, the calculation for the amount of money you require to save will not be accurate, or even reliable.

If you are a great saver and spend just a small portion of your salary, the amount of money you put aside for your emergency fund or rainy day fund will be massive, which money can be better utilized elsewhere.

The estimation of the family’s living expenses helps to give us a clearer idea of how long can you live with your current lifestyle until you will feel the pinch of not having enough money.

How to Build Your Emergency Fund and Rainy Day Fund

Now the fun part!

Building a saving fund, whether it is called an emergency fund or a rainy day fund, we need a plan

First, create a budget for your home expenses.
Then, save enough to build it into a fund.

Let’s say you are just like my colleague who spends every penny he has every month on things he wants but not needed.

You have “basic” monthly expenses of $2,000, and will want to set up a 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 to $500 per month?

Earn More

Getting a part-time or even starting your own business as a sideline is one of the ways to earn more. And if you want to know more about the different ideas on earning more.

I have written an article that can help you to gain more income streams and even bring you passive income. This not only helps 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.

Building a passive income through investing

You will learn some amazingly easy ways to make passive income and thus earn more and have a better quality of life.

Spend Less

The dreadful word of spending less!

Many people reject the idea of spending less and think lowering their spending means lower quality of life.

This is NOT true.

Spending less means to spend with a goal in mind.

Illustration of an Example

Let’s 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, and car rental 2 months 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, but you have also 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 tons of money. And it multiplies by everything you do and spends 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 out some of our other best articles.

Emergency funds and rainy days funds are not the only funds you will need…

Emergency fund saves you from financial worries during an emergency.

Rainy days fund helps you get cash fast when immediate spending is required.

And the last fund helps you to become financially free when an opportunity arises.

You’ll need a fund for grabbing hold of opportunities.

The fund you’ll need is called the “Opportunity Fund” or “War Chest”.

This fund can only be built when your foundation (emergency fund and rainy day fund) is stable.

In these uncertain times, opportunity happens a lot!

“Future is built for the man or woman who is most prepared.”
Wise Man

What Is An Opportunity Fund?

An opportunity fund is a fund you use when an opportunity arises. Unlike emergency funds and rainy day funds, 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 arises, the investor can invest in such companies and build a massive amount of wealth and eventually financial freedom and freedom from financial stress.

Opportunity Fund in Business

An opportunity fund is the seed money where entrepreneurs build an empire of a successful business. An opportunity that he/she will not have if he/she spends 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 a matter of time.

Emergency funds and rainy day funds are the foundation of having a minimal financial stress life and the foundation of financial success.

An opportunity fund is like a build that is built on top of a strong foundation. A fund that grows your financial health, letting you become wealthier and experience less financial stress.

What Do I Think About Emergency Fund, Rainy Day Fund, and Opportunity Fund?

After learning about some basics of each fund and reviewing so many of the importance of each fund, 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 on Rainy Day Fund, is simply because of 2 important points

Foundation of having a financially stress-free life

Easiest to build and essential to managing any urgent needs (usually around half a month of monthly expenses)

Next, I will build my Emergency Fund, because of the following

Foundation of having a financial security net

Harder to build but essential if you want long-term financial security (usually around 3 to 6 months of monthly expenses)

Lastly, 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 are only for man/woman who is prepared

The way to financial freedom is to grab hold of opportunities when it presents themselves 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.

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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Read Also:

7 Streams of Income to Build Wealth Now! (Powerful Income Ideas)

How Much Do I Need to Save For Retirement at 55, 60, 65? (Retirement Calculator)

Antony C.

Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).