You probably already know how important it is to have savings set aside for emergencies, such as a job loss or an unexpected hospital bill. To avoid tapping your emergency fund, consider creating an additional savings account for expenses that aren’t so dire.
No one seems to agree on how to create the “right” emergency fund, because your needs and your situation are different from others. We should prepare for the unexpected, though, with at least some kind of emergency fund.
Washington Post columnist Michelle Singletary also recommends a “life happens” fund:
Money in your emergency fund is left untouched in a deposit account. And yes, it’s not going to earn much interest. But that’s ok because, remember, you’re not trying to grow this money.
The second savings account is a “life happens” fund. I created this pot so that I wouldn’t have to tap the emergency money. You’ll withdraw money from this fund to pay for unexpected or major expenses that don’t quite fit the dire straits definition. Car repairs would come out of this account. Start with trying to save $500, ideally increasing to a few thousand.
Money will be going in and out of this account. You save. An expense comes up and you’ll pull some money out. As soon as you can, replace the funds.
Why not just use your emergency fund as the only bucket? Psychologically, I think it’s better to never dip into your emergency fund. But also, there are some expenses that we tend to treat as emergencies when we really should expect or be able to predict them: Things like the water heater breaking down or needing new brakes on your car (everything breaks down over time) or your kid needing braces. These are only emergencies if you don’t have the money saved to cover them, whereas losing your job or needing emergency surgery are more unpredictable and potentially disastrous expenses.
In other words, once you’ve reached your emergency fund goal (of three, six or 12 months or whatever dollar amount you’re aiming for), keep on saving.
Unsure what money to save and what to invest? Here’s the answer. [The Washington Post]