Why Saving for a Rainy Day is Just as Important as an Emergency Fund

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Why saving for a rainy day is just as important as an emergency fund

BY AMANDA SPURGEON

Imagine your boss pulls you aside after you’re done reading this article and tells you you’re being let go. Would you be prepared to live off your savings for another month if you lost your job today?

If you said no, you’re not alone. In fact, the 2016 Federal Reserve Board Report shows that nearly half of all Americans say they couldn’t cover a $400 emergency expense without selling something or borrowing the money.

If a few hundred dollars is enough for you to resort to racking up new debt, creating a solid savings plan is crucial to your financial wellbeing.

But just socking all your extra cash away into one account may not make the most financial sense. Distinguishing between an emergency fund for unexpected purchases and a rainy-day fund for everything else could be the key to being prepared in a financial emergency.

What’s the difference?

Your emergency fund should be used for just that: financial emergencies. That means the kind of expense that threatens major financial upheaval and couldn’t have been predicted with any certainty. Things like divorce, unexpected job loss or the diagnoses of a major illness would all fall into the emergency category.

Your rainy-day fund should be for everything else: occasional expenses like your vehicle registration, planned spending like a family vacation or a minor financial hiccup like a surprise car repair.

Here’s an easy rule of thumb: if you’re not shocked by the event that causes an expense, it probably shouldn’t come out of your emergency fund.

What’s in a name?

Making a distinction between these two kinds of savings might seem kind of arbitrary. After all, it shouldn’t matter what you call your savings as long as you’re doing it, right?

Not necessarily.

It comes up in fairy tales and pop culture all the time: knowing the name of something gives you power over it. Correctly guessing Rumpelstiltskin’s name frees the miller’s daughter from captivity; letting the name Baggins slip to Gollum allows the latter to track Bilbo in The Hobbit; calling Voldemort by his name instead of You Know Who gives Harry Potter the strength to conquer the fear of his enemy.

This behavioral psychology isn’t limited to the world of fantasy: it can apply to your savings account, too. Simply calling one account your vacation savings and another your emergency fund is enough to visualize a purpose, and prevent yourself from dipping into it for any reason other than what you’ve dictated.

Dave Ramsay’s famous envelope budget is a notable example of this working in real life. The act of naming creates a mental barrier that can prevent you from paying for your entertainment from your grocery fund when the correct fund is tapped out.

You can save for multiple things at once.

If you struggle to save at all, suggesting that you should have two different savings accounts probably sounds ridiculous. But, with a little sacrifice and planning you can absolutely save for both things at once. Even if you don’t have any savings right now.

The key is to employ just one more mental trick: automate your savings. Set up your direct deposit so that a specific amount goes into each of your savings accounts without ever touching your checking.

This little act of separation increases the likelihood that you actually save this money. If you’re prone to overspending, putting all your money directly into your checking account makes it all too easy spend it all and plan to save next month.

The ultimate goal for your emergency fund should be somewhere around 3-6 months’ expenses, but it’s totally crazy to think you can save six months’ expenses in the same amount of time. You still have to pay your bills and have a life.

Start by putting a couple dollars into each account every month, and adjust as you become more comfortable with saving. Changing the way you spend or save is never easy, so it’s important to be realistic with yourself about what you can actually accomplish in a set timeframe.

Real life can be crazy, and you’ll probably never be completely prepared for every bump in the road. Saving for unexpected expenses and potential spending in two different buckets can help get you closer to feeling financially secure in the face of the unexpected.

Ready to get started? Our Rainy Day Savings calculator is a great way to set a realistic goal and start visualizing your spending! •