The Tri-level Emergency Fund

Here's something I've been doing for some time and just saw an article on the Frugal Dad blog that showed me that a lot of others are doing it too. It is called the tri-level emergency fund and its a great idea.

Basically, you have three emergency funds. One within arms reach, the second fairly close by and the third one for the long-term.

The first would be a cash stash at home for when you need money on the spot and can't run to an ATM, power is out, etc. I've been doing this for years just for piece of mind. Frugal Dad suggests stashing about $500 or so. I generally like to keep $200-$500 in what I call my piggy bank account...my secret cash stash. And, no, I'm not telling you where it is!

The second is a local checking account where you can write checks for those things that happen that aren't always budgeted for such as busticated something or another or some kind of budget busting situation. This is the curve-ball or Murphy fund for when shit happens and things that pop up once or twice a year that would blow your normal monthly budget, such as car repairs, home repairs, speeding tickets... that type of thing. Dave Ramsey would probably call this the baby emergency fund so let's put about $1,000 there ($500 if your income is under $20K). The way I personally work this account is that I have a savings account at the same bank where I have my checking account. I transfer a set amount from my checking account every month to take it out of my normal spending allowance. Since they are both at the same bank, I can transfer money back and forth as needed online to take care of life's little emergencies. Ideally, I would like to see about $2-3k here as a more liquid account. Murphy seems to visit my house often, you see.

The third emergency fund is that real one people talk about where you have several thousand dollars socked away. That's my money market account over at the credit union which I will fund to 3-6 months of expenses after I dig myself out of debt. (I'm still only on baby step 2). Suze Orman says 8 months expenses is the correct amount. Personally, that is really a stretch goal for my situation and I'm sure many others feel that way. It's one of the reasons I can relate more to Dave than Suze. She's more for the yuppy crowd.

Many people put this main emergency fund (#3) into a higher paying online savings account at ING or Ally or a money market account or CD. This is the emergency fund for the big emergencies such as job loss or major illness when you are literally living off your savings so don't touch it for anything less. Life's little curveballs are paid from account #2. Unfortunately, right now I am nowhere near fully-funded in the main emergency fund, but I'm making direct deposits from my paycheck to get it going. I think that when I get it up to $8-10K I will be happy and start investing and working more on college and retirement goals.

I hope this idea of a tri-level emergency fund helps you also. I think it is the one thing that I am personally doing that will help me avoid credit card debt.