What will you do if you face a financial emergency? Most people don’t have a good answer to that question even if they aren’t living paycheck to paycheck. If you want to make sure that you are financially secure even if a disaster occurs, you need to have money put away to deal with the problems that you cannot foresee. Smart financial planners don’t just make sure that they have one safety net available when it comes to their finances – they have a second net available for lesser problems.
If you want to build a solid financial future, you’ll need to understand the importance of a rainy day fund as well as an emergency fund.
The importance of a safety net
In truth, everyone needs a safety net. No matter how much money you make, there are situations out there that can reduce your healthy bank account to something far less pleasant. While it’s generally helpful to know that you have enough money in your account to deal with most problems, creating something that’s actually dedicated to dealing with emergencies goes a step further. It’s not just extra money that you have – it’s money that is meant to give you an extra degree of safety.
There’s a psychological benefit to having a financial safety net available. It gives you more freedom to use the money that you actually have available and reduces the amount of stress caused by your overall financial situation. Though it’s always possible to continue to fund emergency accounts, knowing that you have a reasonable amount available really can give you a kind of peace that’s very hard to find elsewhere.
As you move forward in your financial journey, there are two specific types of accounts that you’ll want to open. The first is the standard emergency fund, while the second is the rainy day fund. Taken together, that makes an ideal way to keep yourself afloat despite unexpected financial issues.
Why an emergency fund matters
If you’ve ever paid attention to basic financial information, you’ve almost certainly heard about how important it is to have an emergency fund available. An emergency fund is meant to be the kind of safety net that saves you from a true financial disaster. These accounts are used to pay your mortgage after you’ve been laid off from a job, for example. As you can imagine, this is the bedrock on which most strong financial plans are built.
A good example of why you might need an emergency fund can be seen by anyone who has ever been in a major car accident. These accidents can not only quickly cause you to owe thousands of dollars in medical bills, but they can keep you from going to work and cause you to have to sink quite a bit of money into a new car. If you have an emergency fund, though, you can concentrate on healing after you’ve been injured in a car accident, and you’ll even have the money available to pay for a good injury attorney without having to miss paying all of your other bills.
Funding an emergency account is usually one of the first major financial steps that a person will take. The exact amount that you’ll want to put into this account varies depending on the expert to whom you speak, but anywhere between one and six months’ worth of expenses is the norm. This account should absolutely never be touched unless you are dealing with a true emergency – if you have to touch this money, it’s because you truly have nowhere else to turn. This is a fund that should absolutely be used if it’s necessary, but also one that should be quickly replenished as soon as your financial troubles have moved past.
Why a rainy day fund matters
A rainy day fund is a great additional safety net, if not always, one that’s given as much importance as it deserves. Unlike the emergency fund, this isn’t some sort of sacred fund that you will never touch. Instead, it’s something that you have in place to keep your regular budget on-track when unexpected incidents occur. This isn’t a tool to save you from disaster – it’s a tool that you use to ensure that you’re able to keep up with your other financial goals.
In most cases, your rainy day fund exists to make sure that you don’t break your budget when an unknown expense occurs. If you get in a fender-bender or you suddenly have a leak spring in your house, you’ll tap into this fund to pay for repairs. This is what you use when you find out that your child has an expensive field trip coming up or that your dog is having puppies – not a bank-breaking emergency, but something that might otherwise put you just a little bit behind.
Your rainy day fund should be one that’s funded from the excess money in your budget. If you have an unexpected windfall, consider putting some of that extra money into this account. When you have to tap into this account, do so – just remember to put money back in later. Doing so not only helps you to ensure that you can take care of those little extra expenses, but that you’re less likely to touch your emergency fund for less-than-necessary reasons. A good rainy day fund is a key part of keeping your finances on track.
If you want to be financially stable, make sure to build your plans on the bedrock that is an emergency fund. While you establish this very necessary safety net, you should also build up a solid rainy day fund to help you stay on track as you pursue your financial goals. If you can properly fund both of these accounts and use them only when necessary, you’ll be able to avoid the kind of deficit spending that puts so many people in trouble. While you never want to use your safety net, it’s always good to know that it’s there when it is most needed.