How to save money: Your rainy day fund vs. your emergency fund

How to save money: your rainy day fund vs. your emergency fund

How to save money

It’s a well-known fact that having savings on hand is an essential component of good money management and keeping debt down, but do you have different kinds of savings to use for different purposes?

“If you’re in the habit of regular savings, that’s great. Make sure you’ve identified the goals and intended use for your savings so you know where to turn when you need funds. It’s a good idea to have multiple savings going on at once, including retirement savings, emergency savings and rainy day savings,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.

The goal for retirement savings is obvious, but did you know that there is a difference between rainy day savings and an emergency fund? Here is how they differ and tips on how to stock these savings accounts.

The emergency fund

Think of your emergency fund as your backup savings to cushion you should you encounter something major that will impact your finances, change or interrupt your income. Life events like job loss, death, illness, death of your spouse or disability will all seriously impact your finances, potentially cause you to incur extra costs and cause financial distress if you aren’t prepared.

Plan to have from three to six months of savings on hand to cover your ongoing expenses (like your bills and your mortgage/rent payment) should you experience something catastrophic. Make sure that you earmark these funds for this purpose only.  You don’t want to add to your problems by creating debt too.

The rainy day fund

The rainy day fund is also a kind of emergency fund, because it is meant to cover unexpected expenses, but they are typically less serious in nature. It’s also these kinds of expenses that people commonly turn to debt to cover, which can create debt problems, especially if you’re adding to your debt load.

“Reserve your rainy day fund to cover things like car or home repairs, unexpected bills or last minute travel” says Schwartz.

The other difference with a rainy day fund is that it typically has a lower balance than your emergency fund, because it’s intended to cover specific, one-time costs.

Savings strategies

To help distinguish between these savings and make sure that they are directed to support your goal, set up separate savings accounts.  Make sure that your rainy day fund is fully accessible, because you’ll need to access it in a hurry. You need for your emergency savings to be accessible too, but because you need more and because it will likely be in place for longer, you can consider other savings options that will get you more interest than a regular savings account.

It’s ok to start these savings with a few dollars a month. It will grow over time to give you the cushion that you need and avoid taking out more debt.

Is it a challenge to come up with money for savings because you’re paying out so much for your debt? We can help. Call us at or check out our free online debt analysis .

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