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Why you need 2 emergency funds

One is a slush fund -- a first line of defense against unexpected expenses. The other is for big catastrophes, which, knock on wood, may never come.

By MSN Money Partner Jan 11, 2012 12:38PM

This guest post comes from Lindy at Minting Nickels.


Do you have an emergency fund?


I have two of them. And I heart them both. Do you want to meet them?


Located in a humble savings account tied to our checking account, Fund No. 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 biweekly. 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 OK, because that's what it's there for.


In essence, Fund No. 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?


Fund No. 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. Post continues below.

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 No. 1 helps us when our income dips from one month to the next. And the stability of Fund No. 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 No. 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 afterward 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 No. 2 was there as backup 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?


More on Minting Nickels and MSN Money:

Jan 11, 2012 3:07PM
We have too many savings accounts to count (thank you ING). One for her. One for emergencies. One for taxes (emptied quarterly). One for annual bills (LLC renewal fee, HOA fee). One for car repairs (monthly addition + mileage reimbursements). One for house repairs (monthly contribution). One for end-of -year when our flex runs out of money. One for in case clients default on bills. 
Jan 11, 2012 2:27PM
We also have a HIS, HERS and OUR savings accounts.  Our goal is to get all three up to $10,000 each this yearSmile.  We occasionally dip into these accounts, but for the most part try to stay in checking for all expenses.  I've gotten more aggressive with my savings deposits (on payday) to keep myself focused. Once we have the $10K in each account I want to set up a secondary account that isn't easily accessible to serve as our "#2".  I really would like to have one year of expenses in that account just in case.  Then there's getting started on investing outside of our retirement accounts, which in truth, overwhelms me.
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Jun 27, 2012 4:34PM
I have an emergency fund (ING) and a decent amount in my checking ( Short-term emergency fund I suppose) and a car replacement fund (ING), and a house down payment fund (ING).
Jan 11, 2012 2:09PM

We have HIS, HERS, and OUR savings accounts. The HIS and HER get small automatic deposits through our employers. I deposit to OUR savings out of checking, every month. We have hit all of them for emergencies over the years, but the point of the HIS and HERS is to save for personal dreams like being able to buy and rebuild an old classic car, or take a nice trip. No guilt - no finding out the spouse was thinking we could use that money for something else.

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