Do you have an emergency fund?
I have two of them. And I heart them both. Do you want to meet them?
Loose as a goose and a bucket of fun
Located in a humble savings account tied to our checking account, Fund #1 is our flexible emergency fund. Known as our Short Term Savings, it’s intended for those smaller emergencies that come up from time to time, like broken garage doors, trips to urgent care, and cracked radiators.
This account is also where we save up for those dry summer months when my college-teaching husband’s income becomes scarce.
And when our checking account dips a little too low because we don’t budget to the penny, this account serves as our overdraft protection.
We contribute a fixed amount to this fund bi-weekly. Sometimes it’s looking plump and healthy, other times it’s in need of TLC. Sometimes we put money in only to turn around and take it out the next week, but that’s okay, because that’s what it’s there for.
In essence, Fund #1 is a slush fund. Intended to be our first line of defense in the face of unexpected expenses. It also likes long walks on the beach and candlelit dinners, but who doesn’t, really?
All business, but that's how we like him
Fund #2, on the other hand, is not so flexible. In fact, we keep it under lock and key in a tall tower guarded by our own personal fire-breathing kitten. It’s accessible, but not everyday accessible.
This fund, known affectionately as our Long Term Savings (we gotta work on these names), is reserved for TRUE emergencies, like job loss or major medical catastrophes.
We contributed to it while simultaneously paying off debt by using our patented 50/50 method. Once it reached the magic (read: arbitrary) number of $10,000, we left it alone.
It’s also been used for those OMG-we-need-a-lot-of-money-fast situations. Which, to date, has only been twice - once when we refinanced our underwater home to get out of our bad loan, and once when A-Rob’s laptop died.
I have dreams of beefing this fund up even more someday.
Why the Two Fund System Works for Us
This system of two emergency funds was developed originally as a way to deal with our variable income (mine is fixed, musician husband’s is variable). The slushability of Fund #1 helps us when our income dips from one month to the next. And the stability of Fund #2 gives us the warm fuzzies in knowing if all else failed, we could fall into its loving arms.
But the thing I heart the most about this system is its compatibility with our hands-off money management approach. Transfers are automatic. Overdrafts are covered. And when those big expenses come up, we know exactly where to turn.
If you’re in the process of building an emergency fund, I highly recommend the dual system.
Double Funds in Action
A few months ago, I had to replace a cracked radiator in my car to the tune of $870. Yeah, it hurt to spend that money. It left Fund #1 in a pitiful state when all was said and done.
But honestly, I wasn’t too devastated. Partially, because I bought pumpkin flavored fro-yo right afterwards to medicate the pain, but also because I knew another automatic transfer was only a few days away. The system would take over, and transfer after transfer would slowly fill it back up again.
I also knew Fund #2 was there as back up if another catastrophe happened right away.
So tell me my friends, how many savings accounts do you have? Do you have more than two? Are you in the process of building an emergency fund? If so, how’s it going?
January 9, 2012 at 5:24 AM
Nice to meet you Mr. and Mrs. Term Savings.
We have a similar system. Our long term is shut down under lock and key. Our short term has all different labels. Car, home, Christmas and vacation. I think this way works because I have qualms about depleting the short term savings. That’s what it is for.
January 9, 2012 at 10:25 PM
I love the idea of segmented savings accounts for different purposes.
January 9, 2012 at 6:08 AM
I just had to come here and LOL at fire-breathing kitten. I want one! Except my son is allergic, but it would still be a great way to keep hands off the long-term savings.
My savings accounts have morphed into short-term savings and quarterly tax savings. No long-term right now because I have to be prepared to tap into it at a moment’s notice, which stresses me out a little. As the year goes on and my income stabilizes into a pattern, I’ll be able to resume long-term savings again.
January 9, 2012 at 10:18 PM
Everyone needs a fire-breathing kitten. So cute, yet so fierce.
January 9, 2012 at 7:08 AM
We have the same as you. I consider the fund that is attached to the checking account as my emergency fund and the other as a straight savings.
I know some feel guilty for touching their emergency fund but my budgeting mentor told me is this: When you create a budget you want to account for all the facts (based on last years spending and consider any changes going forward). You can’t predict the future so padding expenses for what you ‘think’ might happen just doesn’t make sense. You will probably pad the budget too much. The emergency fund is that 5-10% of your overall budget where you say, ‘Hey, I know I will need this money I just don’t know where it will end up going’.
It takes the guilt out of it.
January 9, 2012 at 10:20 PM
Before we got the hang of using Fund #1, we used our credit card for car repairs because Fund #2 was NOT to be touched. Doh! Definitely no guilt in using it if you need to.
January 9, 2012 at 7:22 AM
I’ve thought about having more than 1 account, but currently it’s all just sitting in the savings account gaining no interest. We need to change this.
January 9, 2012 at 10:21 PM
Interest is a good thing, though ours isn’t earning much right now with the current rates. That’s why I want to beef it up so I can skim the top off for some other type of investing.
January 9, 2012 at 8:05 AM
We are coming from having no savings!
So right now I am working on building one, then in 2013 I’ll probably start to focus on a long term one.
January 9, 2012 at 10:21 PM
Good luck as you build! It’s worth every pinched penny.
January 9, 2012 at 9:42 AM
I really like it! It’s amazing you were able to have the discipline to do the 50/50 payments/savings contributions. Love overdraft protection via savings accounts. Love love love.
January 9, 2012 at 10:23 PM
It’s not the most financially sound way of paying off debt, but the psychological factor of building a cushion simultaneously made all the difference. At least for us.
January 9, 2012 at 10:37 AM
Great idea!! We only have one EF, and it’s nowhere near 10K unfortunately. I’m trying to get it back up to 3K by the end of January, then hopefully will be able to add another $1-2K to it throughout the year. It does give me a sense of security and it’s nice knowing we have $$ set aside for a rainy day. I’ve had to use it a few times… $1K gift to sister for University tuition, mattresses for kids, washing machine, etc… but it’s awesome being able to pay cash for these things and know we don’t owe “anyone” after all is said & done!
January 9, 2012 at 10:23 PM
I know, it was a great feeling paying cash for my big car repair. Good luck as you get yours bigger!
January 9, 2012 at 3:26 PM
THis looks like a great system and Im glad that it works for you lindy! Seems like it has helped you out of quite a bit of issues- along with pumpkin fro-yo!
January 9, 2012 at 10:24 PM
Yes, pumpkin fro-yo makes everything better.
January 9, 2012 at 8:45 PM
I have two savings accounts. OK, two and a half.
I have one high-interest savings account that’s broken up into three things: long-term savings, short-term savings and emergency fund. I keep track of the relative balances with an excel spreadsheet. I don’t know if this is more or less complicated than something else, but I like it.
I also keep $2,500 in my chequing account to maintain a minimum balance, so I don’t have to pay bank fees. This is also part of my EF. (This is the half!)
Just recently, I opened up a second, regular savings account to use as a slush fund now that I’m working for myself. My high-interest one charges me $5 to make a withdrawal, which is why I opened up this one. I put some cash in there, and now I filter all my freelance into into that account, and will pay myself a “salary” into my chequing account. That’s the plan anyway. Haven’t really put it into motion yet. Haha!
January 9, 2012 at 10:28 PM
Wow, that’s a hefty minimum balance. But in a way, it’s a nice way to force yourself to have an emergency fund.
January 10, 2012 at 1:15 PM
I currently have 2 accounts, but our credit union allows for multiple suffixes under each and I have 6 suffises under each. It may seem a bit extreme but it works for me. I have one for vacation, escrow, car liscence and repairs, wedding accounts for our 2 daughters, Christmas, theather tickets and a few others. Our emergency fund is with another entity and is more work to get money from, it’s only a phone call but that keeps me from using it unless truely needed. It may seem like a lot of accounts but for me being able to put a specific amount torward each item with each paycheck works best for me. When the time comes to pay for these items I know the money is there and do not take more than I should that was allocated for something else.
January 11, 2012 at 11:27 AM
I am overrun with saving accounts LOL.
1) The REAL E fund (your fund #2) – at an online bank – currently at only one and a half months of expenses due to having been spent down to darn near zero to pay the insurance deductibles on the hail damage to two roofs (mine and the rental) and three cars (mine, son’s and sister’s) last spring. On the good side, the actual tornado didn’t hit us!!! Goal is three months of wages again, and maybe more (I’d like to get it to a year some day). This account if funded by a small deposit every month and my annual bonus. (Yes, sis and son have paid me back.)
2) The “lost my job” fund – a series of laddered CDs – meant to suplement unemployment. Currently at 12 months difference between expenses and estimated unemployment.
3) Property tax account – in a money market fund attached to the checking account. 1/12 of property tax on house, cars and rental goes in every month. In addition there is a ‘base amount’ to keep the account open that is pure savings and the rental deposit escrow is tucked in here as well. After the hail disaster, my new goal for this one is to have 100% of all deductibles and medical ‘max out of pocket’ in there. Once the efund is back to 3 months, I’ll divert funds to this account for a while.
4) Penny wise account – this is like your #1 fund and in a simple savings account attached to the checkbook – a place to ‘even out’ the ups and downs. If there’s excess/shortfall in the budget, this is the place for it.
5) Vacation fund – at my old bank, along with the safety deposit box. One of these days, I need change my direct deposit and close the account and move the box, but for now, it doesn’t do any harm to have it collecting funds for next summer.
6) “Back of the checkbook” = One month’s take home pay. I like the idea behind “you need a budget” to get to the point where you pay THIS month’s bills from LAST month’s wages. This is also the ‘first stop’ efund and functions as overdraft protect to boot.
7) Future goals account – at the online bank. Saving for upgrades/repairs on my house and the rental. A little low right now since it was the first thing tapped for the hail damage.
8) In a big enough emergency, I could tap the investment accounts (2% of gross pay on autodraft) and I have a non retirement annuity that I could cash in as well. So I guess that counts as savings, as does the cash value of life insurance. I’ve been pretty good about not cashing these out, maybe a total of $9K over 25 years, some for dental work not covered and once for a car (stupid of me, but I was young).
9) The retirement accounts – totally off limits at the moment. I’ve never touched them nor taken out a loan on them. May I never need to. 13% of gross pay auto deduction before I even see it.
It’s too complex and I need to think about to simplify it, but I like having a seperate ‘bucket’ for each type of expense. This keeps from spending the ‘tax’ money on a repair, and from feeling guilty for going on vacation.
January 11, 2012 at 9:57 PM
I don’t think one can have too many savings accounts. Thanks for sharing your method!
January 15, 2012 at 11:52 PM
I set up a similar set of funds for dear husband and me:
- emergency savings fund: enough to cover expenses if one or both of us loses our job for at least a few months (with UI figured in & if we both lose our jobs, we’re covered for at least 6 months)
- slush fund: where the extra money goes to pay for unexpected expenses or for extra debt payments
- car fund: savings up for the next new-to-us vehicle and for car expenses/maintenance
- fun fund: just what it sounds like…FUN! Clothes, vacations, etc.
- gift fund: money set aside for birthdays & Christmas gifts
- tuition fund: this has transitioned into a fund for student loan repayments but was used to pay the bulk of my master program tuition
- house fund: for unexpected home-expenses…we live in a condo building built about 90 years ago, so it’s inevitable that we periodically have “special assessments” for necessary repairs.
I’ve got all the savings accounts online with ING – if we’re ever in a jam with money (I only get paid once a month so there are times when our primary checking account is a little lean), I can transfer instantly to our ING checking account and do a bill pay from there.
We also recently restructured our savings/debt goals. We use to have a much larger emergency fund, but in doing the math and being realistic about the low possibility of us both losing our jobs at the same time (*knocking on wood*), we made the decision to take a chunk of that e-fund to pay off the remainder of our car loan. This will allow me to double or triple up my student loan payments, throw more cash at our mortgage, invest more (Roth IRA likely so it’s still somewhat accessible in a true emergency), or save up more for our next car (the hope is to buy our next car with cash or a combo of trade-in & cash). New year, new financial plans and goals!
January 12, 2012 at 5:33 AM
A fire-breathing kitten…. LOL! Reminds me of the Hare of Caerbannog.
January 13, 2012 at 8:43 PM
There is three components for my emergency fund: primary savings, secondary savings and a broker account. Primary savings earn 0.8% apy and it can be transfer to checking account in same day(same institution). Secondary savings earn a little more in interest, 0.9% pay. It takes a week to transfer to my checking account, so it is perfect way to avoid aggressive touchdown. Holding stocks in broker account for inflation protection, for withdrawal after I use up 4 months worth of expense in both saving accounts.
January 14, 2012 at 9:12 AM
Our secondary fund also takes a week to transfer. Definitely makes us think twice about using it. Thanks for sharing, Nicole!
January 15, 2012 at 6:03 PM
Dittos. Keep my initial emergency funds in a money market along side my checking in my credit union. Its at 5k and just let it acquire its whopping .15% interest :)
Then I have the second with ING which is currently at 6k+ and I contribute $25 a week to it. It dosent get touched unless its life threatening emergency (for now) and will continue to add to it for ever. Earns more interest and is harder to get to as it takes about 5 days to transfer to my credit union.