Do You Need Both an Emergency Fund and a “Life Happens” Fund?

Photo credit: Addie (cropped), CC BY 2.0.

Yesterday, the Washington Post’s Michelle Singletary wrote a post about how to tell whether you’re living above your means. It begins with her thoughts on the whole Paul Manafort thing (which I’ve largely been ignoring but we can discuss in the comments IF YOU WANT) and then launches into a list of reasons why you, like Manafort, might be living above your means.

One of the items on her list? Not having a “Life Happens” fund.

You need an emergency fund for the big financial storms such as losing a job. But you will face unexpected gusts such a major car repair for which you need savings too. To keep from tapping your emergency fund all the time, create a life happens account. Money will flow in and out of this fund as needed. So when you have a major repair you tap this account rather than your emergency fund. When you recover from the smaller storm, you build the life happens fund back up.

If you don’t have your “Life Happens” fund — or any of the other items on her list — it’s time to cut back on the restaurants, vacations, etc. etc. etc. you know how this goes.

I’m interested to hear whether you agree with this advice.

I know that YNAB, for example, advises that you give some of your dollars the job of “future car repairs,” stashing ’em in a savings account until your car breaks down. This sinking fund method has worked for more than one Billfolder, so that’s one way of taking care of the “Life Happens” stuff.

Other people (like me) put part of each paycheck into a general savings account, with the idea that our savings will cover emergencies, unexpected major expenses, and anticipated major expenses that won’t fit into our monthly spending budget. Instead of creating separate savings accounts for “holiday travel” or “new piano,” we just pull what we need out of our general savings account and replenish our savings as new paychecks arrive.

I had actually been thinking about creating an additional savings account for major expenses, with the idea that I’d label one account “emergency fund” and keep it at a certain dollar amount (let’s say three months of expenses, since I already have a month of expenses in my checking account buffer) and then put all future savings dollars into the “major expenses” account.

The problem, in my case, is that I’d view that second account as something I could withdraw from whenever I wanted. It would essentially become another checking account, one that would quickly get spent on travel and giant plants and the fancy FitBit with the gold band, and it would defeat the purpose of putting part of every paycheck into savings.

The advantage of having just the one savings account, for emergencies and “life happens” stuff and so on, is that I have to think carefully before I make a withdrawal. Do I really need this? Are there other ways I can cover this expense? If I take money out of the account, how long will it take to pay myself back? Or, as I put it in my Monday advice column: what will this purchase help me achieve, and what will it push me away from?

So those are my thoughts on multiple savings accounts — but I’m curious to hear yours.

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