Unexpected expenses happen but staying prepared with proper savings can help make your finances less stressful! Setting up a rainy day and emergency fund allows you to have a savings account with a purpose.
What is the difference between Emergency and Rainy Fund?
Chances are, you’re familiar with the term emergency fund. According to financial experts, they suggest keeping at least three to six months of living expenses in case of an unexpected financial emergency, such as job loss or sudden illness. An emergency fund is a safety net in the event of a financial crisis. These emergencies include but aren’t limited to job loss or a major illness or injury. Still, on the emergency fund, this account should be relatively liquid where you can access it quickly if you need to.
While the Rainy day fund aims to pay for the occasional more minor expense, it pays for a one-time, smaller expenditure. Rainy funds help you avoid going into debt by covering all those minor inconveniences that always seem to pop up—for example, saving to replace the tyres of your car.
How to set up both Emergency and Rainy Fund?
To set up your emergency fund, you first need to decide how much you’d like to have in your fund. For some, three months’ living expenses is the most they can swing. Others may be able to set aside six months. Remember, the most important thing is that you have at least something in your emergency fund. Then, you can work toward your goal over time.
This same principle applies to your rainy day fund. Figure out how much money you’d like to have in your fund, then work backwards from there. Divide the amount you’ll need to adequately fund your account by how much you can afford to put aside each month. Then, you’ll be left with the number of months it will take you to reach your goal.
For example, let’s say your monthly expenses are about N8,000, and you want to set up a 3-month emergency fund. That means you’ll need to save around N24,000. If you set aside about N1,333/month, you’ll fully fund your emergency fund in about 18 months.
Setting Up a Rainy Day Fund
For a Rainy Day fund, you’ll need to decide how much you need. In this case, thinking long-term about some of your expected expenditures will help you determine how much you need.
Then, like your emergency fund, divide the total amount by how much you can spare each month. So, if you want a N2,000 rainy day fund and can afford to set aside 75/month, it will take 27 months to reach your goal. You could also make other minor cuts to your budget or even collect spare change to help fund your rainy day savings.
You will need to factor both these expenses into your budget. If possible, allocate the funds to different accounts and set up automatic debits each month to avoid falling behind on your goals.
You should keep your Emergency and rainy day funds relatively liquid. This liquidity means you can access it quickly and without paying the penalty.
In other words,
- An emergency fund protects you from unexpected financial emergencies.
- A rainy day fund protects you from one-off, unplanned expenses.
- Both are essential to an apt savings strategy.