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Rainy Day Fund vs. Emergency Fund: What’s the Difference?

One is for unexpected costs — the other is for more dire circumstances.

Justin Cupler

Contributing Writer at Tally

December 17, 2022

When it comes to saving money, people have a variety of goals — from the down payment on a home to retirement. But you also need to put away money in rainy day and emergency funds for unexpected expenses, such as a car repair or medical bills.

Some Americans can’t afford these types of unexpected expenses and resort to credit cards to cover the extra expenditures. If this happens too often or once on a large-enough scale, it could result in serious credit card debt and big-time interest charges.

Keep reading to learn about rainy day funds vs. emergency funds, including how they compare, where you can store your savings and how to get started. 

What’s a rainy day fund?

People often confuse rainy day funds and emergency funds, but there’s a difference between the two. A rainy day fund contains money you’ve saved for an unexpected, one-time expense. It should be readily available so you can withdraw it at a moment’s notice without any fees or penalties.

Financial advisors recommend keeping $500 to $2,000 in your rainy day savings to cover small financial shortfalls. The amount you choose to save depends on what kinds of expenses might come up. While these will be unexpected expenses, you may have some clue as to what emergencies could arise based on your situation:

  • Owning an older vehicle that may need repairs

  • Having pets that require emergency care

  • Owning an appliance that’s been giving you problems for months and may need to be replaced

Save enough in your rainy day savings so that, when life comes at you, you’re ready to cover that $400 (or more) expense without going into debt.

What’s an emergency fund?

An emergency fund is different from a rainy day fund. Your emergency savings covers you in more life-changing circumstances, like a job loss or a major healthcare expense. Personal finance experts often recommend saving enough money to cover three to six months’ worth of living expenses in an emergency fund. This is a safe amount that should give you enough time to get back on your feet.

On the other hand, financial economists Jorge Sabat and Emily Gallagher crunched the numbers and found $2,467 to be a good minimum starting point. In their report, Sabat and Gallagher found that lower-income families who can save at least that amount drastically lower their likelihood of experiencing major financial troubles and falling into poverty.

Remember, you can always save a larger financial safety net than $2,467. Every dollar you save up to that number lowers the chances that you’ll experience major financial troubles if life throws you a curveball, but you might still need more.

The ideal amount of money in your emergency fund depends on your specific situation, where you live, the stability of your job and if you’re single or have a family depending on you. 

For example, if you’re single and your job skills are in high demand, maybe you only need to save three months’ worth of living expenses to have peace of mind in the event of a financial emergency. But if you have a family and kids relying on your income, it might be worth saving up closer to six months of expenses in your emergency savings fund.

Where should I put all this money?

Now to the mechanics of it all. If you’re trying to save for a rainy day or a longer-term emergency, you want to keep it in the correct accounts so you can access your money when you need it while maximizing the returns you earn.

For your rainy day fund, you could put it in a standard checking account, but these often earn little to no interest. Instead, consider keeping your rainy day fund in a high-yield savings account (HYSA) at an online bank or your local credit union. Interest rates on HYSAs have been increasing in recent years.

In today’s market, you should be able to find a savings account that offers you about 2% annual percentage yield (APY). On the high end, some banks offer upward of 3.83% APY. This APY generally follows the federal reserve rate, which rises and falls with inflation. This adjusting APY will help your emergency fund combat inflation — which, thus far for 2022, has clocked in at 7.7% — so that you’re not losing spending power by keeping it in this bank account.

For your emergency fund, it’s important to find someplace that earns some interest — since this money could sit around unused for years — but still provides a safe return for your money without too much risk. In this case, you may decide that simply opening another HYSA, separate from your rainy day fund, is good enough. You might also consider investing in the market in something like a money market fund, which may provide greater returns on your money.

However, putting your money in a savings account or money market account (not to be confused with a money market fund) is the safer option since these banks are member FDIC, meaning up to $250,000 of your money is insured by the FDIC. If you decide to invest your emergency fund into stocks or other financial products, there is a possibility you could lose money. It’s ultimately up to you to assess your financial situation and decide what level of risk you’re comfortable with.


How do I get started?

When saving money for anything, the important thing is simply to start saving, even the smallest amount. Make a habit of it and work toward your goals over time. No one is necessarily expecting that you’ll suddenly have six months’ worth of monthly expenses saved overnight.

The Consumer Financial Protection Bureau (CFPB) launched its Start Small, Save Up initiative in February 2019, and it has some useful reading and resources to help you get started with your savings:

  1. Start by creating your own savings rule, essentially deciding your savings goal and what’s feasible for your monthly budget. If you can spare $20 a week, you’ll have $1,000 in a year.

  2. Next, the CFPB came up with a worksheet to help create a savings plan, just to help you create a simple budget and think through how to stick to it.

  3. One tip is to take your tax refund (if you get one) and use it to jump-start your savings. Even if you only use part of your refund for your rainy day or emergency fund, that’s a great start.

Rainy day fund vs. emergency fund: Having both is best

It’s common for people to confuse a rainy day fund and an emergency fund, as both cover you in the case of an emergency. But now you know the rainy day fund covers smaller emergencies, like a broken-down fridge, whereas an emergency fund covers more prolonged financial emergencies, like job loss. Because they have different purposes, having both a rainy day and an emergency fund is essential.

Has credit card debt and the monthly payments prevented you from saving toward your rainy day and emergency funds? Check out the Tally† credit card debt repayment app. The app can help you manage your credit card payments. Plus, Tally offers a lower-interest personal line of credit so you can pay off higher-interest credit cards. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.