Here's Why I Have Two Separate Emergency Funds

When I needed a root canal in my early 20s, the cost was more painful for me than the procedure itself. It was from that point onward that I pledged to always do my part to maintain emergency savings.

At the time, that $2,000 withdrawal constituted a large chunk of my cash reserves. But I spent years building up my emergency fund to where it is today. And having that money in the bank gives me peace of mind in the face of life's many unknown expenses.

Many people have a single emergency fund they tap for unplanned bills. I, however, have two separate emergency funds. Here's why.

When you're after complete protection

You'll often hear that your emergency fund should contain enough money to cover three months of essential living expenses at a minimum -- costs like rent or mortgage payments, groceries, and utilities. The logic is that if you were to lose your job, it might take three months to find work again. So if you have enough money in your savings account to cover three months of bills, you can conceivably avoid having to rack up costly debt during that time.

However, your emergency fund is also supposed to be able to cover expenses like home repairs, car repairs, and unplanned medical bills. And if you have enough cash on hand to pay for three months of general expenses, then chances are, you have the money to pay for one of these things, too.

But what if you happen to lose your job at the same time your heating system at home goes kaput? Suddenly, you might have to cover three months of general living expenses while you look for work and spend thousands of dollars on a new heating system.

That's why I like to maintain two separate emergency funds. The first one is what I call my income replacement fund, and it has enough cash in it to cover multiple months' worth of bills.

My second emergency fund is my home repair/car repair/medical emergency fund. That one has a lump sum of money in it that gets whittled down and replenished as needed. When things go wrong with my car or home, or medical bills pile up, I dip into that account and get the peace of mind of not having to tap my income replacement fund.

A system you might prefer, too

Data from SecureSave notes that 63% of Americans don't have enough savings to cover an unplanned $500 expense. If you have a three-month emergency fund (or more), then you're clearly in a much more solid place.

But still, you may specifically want your emergency fund to be able to get you through a period of unemployment. And if so, then you may want to create a separate emergency fund for additional surprise expenses that could apply to you.

For example, if you drive an older car, you may inevitably end up having to replace or repair certain components before you're ready to get a new car altogether. If you don't like the idea of dipping into your main emergency fund to cover these expenses, then building a separate one could make sense.

Ultimately, an emergency fund should do two things for you -- keep you out of debt and give you peace of mind. So if having two separate accounts achieves the latter purpose, then you might as well go that route like I do.