Multiple Emergency Funds: Are They Necessary?

Let’s face it: an emergency fund of some sort is a necessity. However, some of my readers think a single emergency fund isn’t enough (remember, this comment was discussing the personal finance of a single person):

Aside from the 6 month contingency fund he has saved, does he have emergency funds for insurance deductibles, a major auto repair, a major house repair, medical/dental fund over catastrophic limits or things that aren’t covered, and other personalized emergency fund lines? I believe you should keep the income disruption fund separate from emergency fund. Traditional way of thinking about emergency fund only accounts for living expenses, but not real emergencies outside of income disruption. Is 6 months contingency fund really necessary or is it enough? Is he in a high risk occupation that should require a 12 month contingency fund?

I’ll tell you right now that having five or more emergency funds is overkill – it’s not worth the time to manage that many different cash accounts.

However, I do have two emergency funds. One of them is simply for salary replacement in the event of losing my job or career transition. This contains the equivalent of four months of take-home salary in it (I’m targeting six to eight months’ worth in the account).

The other account is basically for all other emergencies, including the ones listed above. I put about $500 a month in it and usually pull out $200 in an average month since I started it.

The truth is that you should do what feels comfortable to you. It’s a huge risk not to have an emergency fund at all and thus I firmly recommend one. Anything beyond that is a matter of personal preference. Just remember that there are multiple kinds of emergencies, and you may eventually have a “perfect storm” of such events.

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  1. Tim says:

    My point was that you should be thinking about a contingency fund for income disruption and a separate emergency fund for other items in your life that will affect most people. There are things in life that are almost certain to occur and can be properly planned for in advance. These emergencies would consume a traditional emergency fund that only covers X months of expenses. The idea was to highlight various things that have a high probability of occuring according to your evaluation, and to plan for how much they may cost. Whether you lump these together is a matter of personal choice as you stated. So are the things you feel are most likely to occur in your personal situation.

    Our worst case scenario that we currently budget for is loss of wages for 12 months (contingency fund) plus three major emergencies (emergency fund) simultaneously occuring (we are currently living in a high risk environment and have tailored or fund accordingly). We have determined how much we think three major emergencies would cost just as we determined our 12 months expenses. we do not separate the two fund, but we do have these funds in a mixture of laddered cd’s (laddered, b/c you aren’t going to need 6 months expenses right away), high yield savings, and cash (remember, high risk area).

  2. thc says:

    Since money is fungible, a discussion about how many emergency “funds” one has really doesn’t make sense. What’s important is how much, not where.

    For our clients I often point out that a HELOC and/or margin privileges on a brokerage account can serve nicely in event of a cash flow disruption.

  3. I’m on the extreme end. I think you don’t actually need much of on emergency fund at all (but i won’t bore you with the details here).

    If you do have 1, that should be it. If you have 4 months of takehome pay saved, that should be more than enough to take care of salary replacement and emergencies. I think of it this way:

    Lets suppose that isn’t an option. If you lose your job, are you intending to maintain the same lifestyle you currently have while not having a job? I hope the answer is no. You should have less transportation cots. If you regularly by things you don’t absolutely need, you wouldn’t be doing that at all. If you are actively saving for retirement, you’re not going to be doing so if you are out of work. Then, maintaining 4 months of required expenses really should be that difficult. For me, it comes out to about 40% of my income. I think that at least a good portion of that can be replaced wiht a part time job while I look for a real job.

  4. db says:

    well — having survived an 8 month layoff, I’m of a completely different point of view than the previous poster. Being out of work especially when it is not of your own choosing is incredibly stressful, and the bills do NOT stop just because you are of reduced means. I feel nervous not having a full year’s living expenses saved up now — knowing as I do that when I was unemployed it lasted longer than I wanted it to, and I was spending money on things like going out and actively networking, taking people to lunch and keeping my wardrobe up for first impressions.

    Anyway, I think you do need that emergency fund for salary interruption, and then also funds for those emergencies like unexpected repairs, car replacement and the like. It really doesn’t matter whether you arrange it in one, two or five accounts, or between cash accounts, CDs and mutual funds so long as it works for you.

    db
    http://www.debtblitzkrieg.com

  5. db says:

    P.S. — IMHO turning to a HELOC or margin on a brokerage account would be an absolutely disastrous way to plan for covering an unemployment. What? At the time you are most vulnerable economically you are going to take on additional debt burden that needs to be repaid or take a speculative gamble on margin?

    HMM — I’ll let somebody else take that on.

    db

  6. Debbie says:

    Can you imagine needing a car repair at the same time your refrigerator or water heater breaks? I can. And then what if you get laid off two weeks later? Or you have to go to a funeral across the country? It’s surprising how often these kinds of things happen two or three at a time.

    That’s why you need a big pile of money. There’s no need to keep it all in cash. I think plenty of it can be in stocks (even though getting laid off is more likely to occur when stocks are plummeting). Laddered CDs or T-bills or whatever can also work well. Even that “substantial penalty for early withdrawal” you’ve heard so much about is generally much cheaper than credit card interest, not to mention HELOC fees.

  7. Brian says:

    I think few people have these types of expenses(refrigerator/air conditioning breaking/etc.) on their radar screen and are usually caught off guard when they do occur. As for how many accounts one has to cover them, the key would be manageability. I use an ING savings account to fund both by annual expenses(car/home/real estate taxes/etc.) AND my emergency expenses. Not to sound like an ad for ING, but they allow you set up numerous ‘sub’ accounts that you can nickname as you wish and automatically withdraw money from you checking account to fund them. Only one withdrawal will appear on your checking and when you pull up your ING account, all of your ‘sub’ accounts will appear.
    For me, the compartmentalization ability is wonderful, as it allows me to break down specific needs and potential needs while earning a high return on my savings account money.

  8. John says:

    Hi all,

    I see these posts are rather old, but I just came across this site today, so I hope there will be some chance of input!

    Anyway, I have a question about emergency funds. My home mortgage is an access bond, ie, I can withdraw funds from it. I have not yet activated the access part of the bond because ideally I don’t want to withdraw.

    So, my question about emergency funds is this. Would it be a good idea to pay all of my savings for emergency funds into my mortgage? That way, I save on the interest payments I’m making and I pay my home off quicker. If I do have some emergency, I could always take that portion back out and still be better off over the long run than if I never had this lump sum in there.

    The only downfall to this scenario that I can think of is when I pay my house off many years before the end of contract. This is great, but it also means I close the mortgage account and poof, there goes my access to emergency money, should I need it. Of course, I could always keep a small portion of the bond account active and never really fully pay it off. Or, you can also argue that by paying the house off completely, the amount of emergency funding needed would be alot smaller, so just pay it off and start again?

    John

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