There is something about human nature that when you have worked hard to create a substantial emergency fund, you don’t want to dip into it for ANY reason.  For most people, a substantial emergency fund takes plenty of sweat equity and time to build.  You usually need to sacrifice some things materially to fund the emergency fund.  While the money gives you priceless security, the very fact that you had to work so hard to build it is often deterrent enough from wanting to use it.

If your car needs a $1,000 repair, you can pay out of your emergency fund, but you will probably want to avoid taking out the money because all you can think about is how much work it is to build an emergency fund back up.  You may even pull out plastic to pay because it is less painful than withdrawing the money from the bank.  You may rationalize that you will pay it off soon enough and be able to retain the emergency fund for a true emergency.

However, there is a better way.  Instead, create both an emergency fund and a rainy day fund.  The emergency fund is not to be touched except under set circumstances you deem ahead of time such as loss of job, medical emergencies, or disability.  The emergency fund should hold at least 3 to 6 months of living expenses (or even up to 12 months, depending on how conservative you are).

The rainy day fund should hold enough to pay for small financial upsets such as car repairs, minor house repairs and other expenses that cause bumps in your budget.  The idea is that instead of reaching for the plastic to preserve your emergency fund, instead, dip into your rainy day fund.  Lynnette Khalfani-Cox, a personal finance expert and regular contributor to AARP recommends people, “ stash away between $500 and $1,500 to have an adequate rainy day fund” (AARP).

If you are aggressively paying down debt, setting aside money for a rainy day fund may seem to be just one more way to slow down your debt snowball.  However, a rainy day fund is even more essential during debt repayment.  There is nothing more discouraging than making excellent progress paying down your debts only to have an unexpected expenses that you don’t have cash to cover.  Putting it on the card and adding to the balance instead of reducing the balance seems like a defeat, an enormous step backwards.

If, instead, you have the money set aside in a rainy day fund, you feel empowered because you don’t have to resort to credit cards.  You have the money to pay your expenses, even unexpected ones such as an expensive car repair.  A rainy day fund would have been a lifesaver a few months ago when we had our budget crisis.

What are your thoughts?  Should you have both an emergency fund AND a rainy day fund?

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