As you’re stockpiling toilet paper, disinfecting wipes and groceries, maybe you should have stashed away more money in that emergency fund. Because it’s times like now when you really could use that fund. Did you have enough cash ready?
Maybe you didn’t think the money you socked away in an emergency fund earlier would come in handy so suddenly with the 2020 virus pandemic? Most of us didn’t. Like accidents, emergencies aren’t planned events – and neither is using up your emergency fund.
Kudos to you if you had an emergency fund to draw upon these last few weeks. Unfortunately almost 7 in 10 Americans say they don’t have a savings cushion or an emergency fund large enough to cover an unexpected expense of even $1,000, says a December, 2019 survey report from Bankrate.com.
Even in the middle of all this financial upheaval, it’s time to re-think how much of an emergency fund you really would use. You see, having a small stash for a rainy day compared to having an ample emergency fund is like comparing a glass to a gallon jug. And in actuality, you can use both a rainy day fund and the emergency fund. It’s two different savings buckets.
Yes, have both rainy day + emergency fund
Simply put, a rainy day fund is used when inconvenient expenses happen, like having your washer break or needing a car battery – a bump in the road that you sidestep. It’s for those unfortunate, but predictable expenses that eventually arise in anyone’s life.
On the other hand, an emergency fund is what you need when a random catastrophe causes you to change course entirely. It’s totally unforeseen, forcing you to miss a few weeks of pay or make an unplanned hospital trip. That emergency fund is something many won’t or don’t expect to use – ever.
Here are the basic differences between these two savings buckets:
- Amount. Your emergency fund is suggested to be roughly three to six months of living expenses, while a rainy day fund might be $500-1,000.
- Likelihood you need it. Throughout life, you might have several unexpected, inconvenient expenses that require your rainy day funds. But you may encounter only one, if any, financial upheavals that could drain your emergency fund.
So you need both.
Budget to build rainy day and emergency fund
It can be hard to build up your rainy day stash and an ample emergency fund simultaneously. Using a budget, tracking expenses and auto-save are key to helping you do it. If you know what you spend, you can find and funnel amounts to both these savings buckets regularly.
But I don’t really know many who love to budget – it’s like being on a diet. Unlike a diet, your budget isn’t about denying yourself. It’s more about taking control and choosing how you want to spend your money.
A good budget doesn’t need to be complicated or take a lot of time to make. Use a pencil and paper, or if you like spreadsheets, start one. You can find my free budget template here. Or you might use an app like Budget Pulse, PocketGuard or Clarity Money.
If money is tight (you’re a student, have erratic income, live paycheck to paycheck, lost your job), then do a monthly or weekly budget. If you have ample income that doesn’t change much and a good handle on your finances, then an annual (12 months) budget might work better for you.
A budget estimates where you plan to spend your income. You’ll want to earmark or categorize where every dollar of your income goes. The categories for your expenses might include:
- Housing (rent, mortgage, utilities)
- Transportation (including car loan)
- Food (groceries, restaurants)
- Insurance, pension, 401k (portions you pay)
- Medical/Health care
- Miscellaneous (personal items, cell phone)
- Debt repayment (student loan)
- Travel/Vacation savings
- Rainy day fund savings
- Emergency fund savings
- Savings goal bucket #1
- Savings goal bucket #2
Your budget will show two main columns:
- Cash coming in = your estimated income from paychecks, bonuses, dividends, tips, alimony received, etc.
- Cash going out = your estimated expenses to live, plus debt repayment and savings.
3 Tips to boost your savings buckets
Here are three tips that can bring more success in funding your buckets for both rainy day and emergency funds.
- Create specific savings buckets. Rather than dump all the savings into one “catch-all” bucket, notice the categories above list several buckets with specific savings goals. This method helps prevent you from spending that general “savings” for just any expense.
- Go small, then boost. Start funding both your rainy day and emergency funds, even if it’s a small amount for each. Increase the amounts as you’re able.
- Do two budget scenarios. Your ordinary budget will likely include categories for spending on vacations, clothing for occasions, eating out, entertaining, gifts, etc. In an emergency situation, you might have a “no-frills” budget that cuts out most of your wants and focuses on only what you need. So compare your no-frills budget to your ordinary budget. You might easily see where to cut downsize an expense or two in order to fill up those rainy day and emergency fund buckets.
Savings is the name of the game. And it starts with making a budget. To easily create your budgets, get the Money Godmother’s free printable.