Why a Rainy Day Fund Should Be Your #1 Savings Priority

When it comes to personal finance tips, there's a lot of advice out there. A good chunk of it is common sense—don't spend all your money at coffee shops and bars, try to live within your means, save where possible, splurge only when you can afford it, etc.

But some of the finer points of responsibly enjoying your money and working toward financial goals can easily get lost. Read on to learn the difference between a rainy day fund and an emergency fund and why the former should be at the top of your financial to-do list.

Emergency Fund vs. Rainy Day Fund

Emergency Fund

Building an emergency fund is a big talking point for personal finance. The emergency fund is the financial cushion that can keep you afloat if you lose your job, are in an accident, or are otherwise unable to work for an extended period of time.

Emergency funds are typically rather large—the standard recommendation is to save three to six months of expenses—and often overshadow their smaller counterpart: rainy day funds.

Rainy Day Fund

A rainy day fund is a savings account for surprise emergencies, like a pipe bursting in your kitchen, a pet suddenly getting sick, or your car breaking down. While an emergency fund keeps you afloat during extended periods of financial difficulty, a rainy day fund gets you through a short crisis or one-time incident without going into debt.

And as such, a rainy day fund should be everyone's first priority once they start supporting themselves and making money. Even if you can't save enough money for a real emergency fund, having a small amount of money tucked away is better than nothing.

"I very strongly believe that the rainy day fund or the financial safety net, the one that we would say is equivalent to one month's worth of expenses, is going to take priority, even over paying off the high-interest rate debt," says Lauren Anastasio, CFP.

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Rainy Day Fund vs. Paying Off Debt

Putting away any cash savings may feel unglamorous or impossible, especially for those facing high-interest debt, but it needs to be prioritized. It may seem counterintuitive, but reducing debt payments enough to make tucking away one month's worth of expenses possible can actually make it easier to stay out of debt in the future.

What often happens, Anastasio says, is that people will work hard for months to pay off high-interest debt (think credit card debt or a high-interest personal loan), choosing to put money toward reducing that debt instead of into savings. They pay off the debt, and—as it tends to do—life happens, and their car breaks down, or they have an unexpected medical bill. Without any kind of savings to fall back on, these people may have to pay to fix the emergency with a credit card and fall back into debt, undoing all their hard work in one fell swoop.

"They're devastated because they've worked for so long to try to pay [debt] down, and the cycle just started all over again," Anastasio says. "So making sure that that fund is there is really one of the things that helps ensure their success in their efforts to pay down that high-interest rate debt."

That rainy day fund doesn't have to be much—again, any savings is better than no savings—but tucking away just a small sum of cash before focusing on paying down high-interest debt can mean the difference between staying out of high-interest debt and falling back into it when catastrophe strikes.

How to Prioritize Financial Goals

Prioritizing financial moves can be tricky, but Anastasio's advice is to establish a small rainy day fund, then pay down high-interest debt. After that, decide between saving for retirement, building an emergency fund, or tackling another financial goal.

Everyone's financial situation is different, but for the vast majority of people, the rainy day fund should be a priority. "Having it there is going to make it much more likely that [you're] able to accomplish other goals," Anastasio says.