You don’t need just one emergency cash account, you need two!
When you’ve come through being in debt you know you need to have a firm handle on your finances and emergency cash in the bank.
It’s not enough to just balance your books every month, you want peace of mind and money in the bank.
You need to be able to deal with the bumps in the road that come along.
They always happen when you least expect them.
I recently wrote about how to start your rainy day fund when you are broke.
To manage your money you need to have a back up for when unexpected things happen. Unexpected things that cost money.
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Everyone needs to have cash that you can draw upon in times of emergency.
This stops you from going into debt just when life has become that extra bit difficult.
If you haven’t already got your first emergency cash fund set up please do so ASAP.
Emergency cash stops you worrying and going into debt when you going through bad times.
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You absolutely need a rainy day/emergency cash account. But the one other thing I recommend you do is:
Have TWO Emergency Cash Accounts
But why would you want to have two emergency cash funds I hear you ask?
The way I see it is that there are different types of emergency and this is where having a 2nd separate savings account comes in.
Keeping your emergency cash separate will help you to differentiate between the different types of emergency.
Your first savings account will likely be dipped into a couple of times a year, maybe more. Your second account much less frequently.
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No.1 Emergency Fund
Your 1st emergency cash savings account is to cover the unexpected bills that pop up when life throws you a curve ball.
A large car repair bill, replacing your boiler just as the first cold snap of winter kicks in.
These are one off costs but over the period of a year or two you will dip into this savings account more often than you might have planned.
If you thought you wouldn’t need to touch this fund more than once in a blue moon then I am sorry to say this is unlikely.
Curve balls get thrown at you more often than you want and do seem to follow the rule of 3.
It’s bad enough when you have one curve ball thrown at you but 3?
That’s why you need this rainy day fund.
No.2 Emergency Cash Fund
So why the 2nd account if you already have the 1st account up and running?
Because there is always a bigger, more long term curve ball that life can throw at you which requires a bit more money over a longer period of time.
I’m talking about job loss or long term illness.
If you are in a one income family and lose that income how long can you survive without going into debt or defaulting on your mortgage/rent?
Having a few months worth of your essential living expenses (mortgage, bills, food) tied up in this account only for this type of bigger emergency is essential for anyone who is reliant upon an employer for their income.
Being self employed still makes this emergency cash account essential, what happens if you fall ill or your best client goes bust owing you thousands?
How Much To Save
Work out what your basic, essential living expenses are for a month. Aim to get at least 3 months worth into your second savings account.
If you have the cash to spare it would be even better to have 6 months of living expenses saved.
If you lose your job the recruitment process to get another job can take an age even when you are successful.
I know it may take a little time to save enough into both these savings accounts but believe me it is worth it.
For peace of mind and for when life throws you that curve ball.
What do you think about keeping your emergency cash in 2 accounts?
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Last Updated on 5th April 2023 by Emma
I have two Emergency Cash funds but not for quite the same purposes as yours.
No. 1 Emergency Fund is for the large car repair bill, boiler repair but also for the job loss scenario.
No. 2 Emergency Fund is smaller and is used to help with cash flow and help keep my savings rate up. For example, my car insurance costs £300. It’s cheaper to purchase in full but if I pay for it all in one go, I take a big hit on my savings rate that month. So I use this emergency fund to pay the £300 and then I immediately set up 5 x £60 standing orders to pay back my Emergency Fund in instalments (for free).
I like your 2nd emergency fund reasoning Weenie, especially as it’s one of your stretching goals each year. We have a big bills account which tends to be spent and topped up regularly and then we have the long term fund which isn’t to be touched unless something totally unforeseen happens.
I agree with this. I keep my first emergency fund as more of a sinking fund though. For example I know as soon as I buy a new washing machine that at some point in the future it is going to need replacing so I start saving for it immediately. Obviously this is only a small amount each month. But this way I manage to stay slightly ahead of those emergencies.
I’d not heard of sinking funds until recently although I have a big bills account which is probably a sinking fund by another name. Staying ahead is absolutely what it’s all about isn’t it? We do exactly the same especially with 2 cars to run and potentially replace in the next 3-5 years. Got to be saving now for them.
why i must read everything tuppenny writes: that #mediavine money 🙂
Thanks so much MERJ! Always lovely to see you and read about your latest dietary attempts!
I too use a big bills account. Each year in January I calculate what I expect my big/annual expenses to be, then divide that by 12 and transfer that amount each month into the big bills account. I do the same for saving for birthdays/anniversaries/Christmas. I also start saving for a new car every month as soon as I’ve bought a new (second hand) car. On top of all this I also have an emergency account which I try to keep at about 3x my monthly expenses. Phew, a bit belt and braces, but after being in debt in the past I’ll do anything to stay out of debt! Spreadsheets are my friend 🙂
You sound like the Queen of emergency cash funds! We used to have separate bill accounts exactly the same as you so each balance was visible. I found it so helpful when money was really tight to see what I had saved for Christmas/car expenses etc. When you’ve been in debt I can see why it’s so important to plan well. We have recently merged these into one account purely for simplicity purposes and with experience that I now know this system works so I don’t need to see separate balances.
I have one bank account for savings, but it has a spreadsheet I use, where I have a large Emergency Fund, and other categories such as Christmas, Car, Shares, Holidays, Pets and Household projects.
I used to have separate accounts but then UBank changed the rules on me, so I lumped everything in together to get the bonus interest rate.
I’d never be without an Emergency Fund.
If lumping all your emergency cash together means you earn more interest than absolutely it has to be done. Your spreadsheet sounds fab – I am fairly excel illiterate so prefer to have visibly separate accounts. Although if I could earn more more in one account I would do it!
Great idea! I have two emergency funds but one is my personal account and the other is my business account. But the business emergency fund accounts for sudden loss of income!
You definitely need emergency cash to cover a sudden loss of income so makes sense to have your accounts set up this way. We had similar when Mr2p was self employed. Took the worry away when his work wasn’t booked more than a month or so ahead. Hate to think what my stress levels would have been like if we hadn’t had that extra account set aside. Thanks for stopping by Kieran!
Definitely agree that you need several different accounts, even if you haven’t designated each one for a separate emergency. In my case, I only have one “emergency fund” but it’s spread across a few different current accounts to maximise the interest rate and also provide some safety if one of the banks suffers some unforeseen technical problems (like TSB earlier this year!).
Hi Dr FIRE – love the name! Chasing the best interest rate is an absolute pain but a must given the shockingly low rates currently on offer. Must admit I was super relieved TSB wasn’t my main/only bank when their tech problems hit. It wasn’t even shortlived either was it? Thanks for stopping by!