The Tri-Level Emergency Fund

This past Saturday evening I joined radio talk show host Michael Finney of KGO AM 810 San Francisco on his weekly radio show, “Consumer Talk with Michael Finney,” to discuss my recent post about safe places to keep cash at home. During our conversation I shared with him my Tri-level Emergency Fund Plan, and even though I have mentioned all three levels here separately in the past, I thought it might be nice to present in a single, concise article.

What is a Tri-Level Emergency Fund?

A basic definition of a traditional emergency fund is a pile of money saved separately from other savings goals, and outside of a normal spending account. Its main purpose is for covering emergencies, or required expenses that crop out outside of the normal budgeting process that cannot be cashflowed with regular earnings. A sale is not an emergency, and job layoff, broken transmission or serious illness is – you get the idea.

Emergency funds come in many shapes and sizes, and while experts disagree on the amount that should be saved, everyone agrees that we all should have one adequate to cover some months of required expenses. Whether that number represents one month or twelve months, or somewhere in between, is entirely up to you. I say save just enough to sleep comfortably at night and invest the rest.

Level I:  The In-House Emergency Fund

The first $500 of so of your emergency should be something completely liquid (cash) and saved within arm’s length. This amount could be spread out around hiding places in your home, your car, or at your job (or some combination), or could be locked down in a fireproof safe bolted to the concrete slab under your closet. The point is to stash some cash to cover short emergencies that may happen around the home, when using a debit card or visiting the ATM is not possible. Think state-wide power outage, a family member in desperate need of cash, a local natural disaster, etc. Don’t keep your life savings at home, but stashing a few hundred dollars makes sense.

Level II:  The Local Emergency Fund

I recommend keeping the next $1,000 of your emergency fund in a local emergency fund at a bank or credit union checking account. These funds would cover things like car repairs, broker appliance and late-night calls to the local plumber. The beauty of these accounts is they are local and have check-writing privileges from a local bank, so most service providers in your area would not give you a hassle about accepting a check. If they did, a quick trip to the ATM, or a counter check from the local branch, should resolve the problem.

Level III:  The Mega Emergency Fund

What’s a “mega emergency?” Mega emergencies are the types of emergencies that might require you to live off this fund for a short time. Think job layoff, medical disability, a serious accident, etc. My mom suffered an aneurysm and stroke about a year ago and had to wait six months for disability insurance to begin coverage. Are you prepared to live six months without an income? Most of us are not, and unfortunately, neither was she.

The Mega Emergency Fund is the only place I worry about interest rates, and even then security is a more important consideration. Still, you at least want to stash the money where it will earn a little interest, and the higher the rate, the better. Consider one of the best online banks (read my ING Direct review), or if you have enough saved, a tiered money market account at a credit union may offer higher interest rates than traditional savings accounts.

A tri-level emergency fund is the ultimate way to diversify your cash portfolio dedicated to emergencies, and when fully funded, should help you sleep better at night. It’s been said that there is no softer pillow than money in the bank. After many sleepless nights in the past with an empty bank account, I would have to agree.


  1. I am glad to see you elaborate on what you mentioned in your radio interview with ABC late last week.

    Mrs. Jabs & I are not currently employing these methods in full, but are in part. I always keep $200 stashed around the house (for any thieves reading this I keep it in my neighbors mailbox). I have my “big boy” EF sitting in my ING Direct savings… but I do not have a buffer amount set aside in a local bank, and I will most likely be working to remedy that error on my part.

    Thanks for sharing this wise tip.

  2. I just can’t see essentially self-insuring. An ex-boss was out of work for over 9 months with cancer. He said the only thing that kept him and his family afloat was the disability payments from a policy he had purchased years ago. I found a site at where they were able to send me quotes from different providers so I could compare before buying a policy. It’s affordable and now I’m covered up to 70% of my regular salary if I can’t work.

  3. I think this is a fantastic idea. We currently only employ step #3 since our savings for new house, car and emergency is all in one account (sub-accounts were basically mental notes). After we purchase our new home later this week, I need to implement this strategy….as soon as I find some good hiding places! Thanks, Frugal Dad.

  4. The wife and I use cash envelope budgeting as a matter of course and as such it creates the first tier of our tri-level fund. I love putting a name on it though, tri-level sounds way better than the old three legged stool analogy. #3 is coming next year, I’m checking out your how to hide money at home article as well, great tips.

  5. Interesting new approach to the fund. Although you hear a lot of people saying not to leave the money in an online banking account. Possibly it could have higher interest rates, but is not as liquid if you really need a large sum of cash right away. Granted that probably is not the case and the few days it takes would be fine. How about a money market savings account? Right now especially the interest rates are basically the same as online banking but more liquid.

  6. Great post. We’re already doing two of your three tiers – but not the first tier – keeping money at home. Although as mentioned by a commenter above – we use the envelope system. In a bind I think that could count as tier 1.

    Has anyone actually had a situation where they absolutely needed the tier 1 emergency fund?

  7. @Bible Money Matters: Back in the “hiding places for cash” post a reader shared a story about living through a state-wide power outage. In her area, small stores and service providers had to operate on a cash-only basis. Because they had no cash at home they had to borrow money from in-laws for gas for generator, groceries and ice. I think having to borrow from in-laws was motivation enough to start an in-house emergency fund.

    On a smaller scale, I had to dip into cash to have my vehicle towed from home to a shop outside of the range the travel club would tow for free. I was low on cash at the time (in my wallet) and the tow company did not accept credit cards or checks – cash only. I used some of my in-house fund to cover the towing charge and replenished it later on.

  8. I’ve never seen or heard of the emergency fund being split up this way, but I was thinking another advantage is the fact of three separate accounts making it more difficult should you weaken and decide to drain a fund on a non-emergency. Since you’ll have two others set up, you won’t have to start over again.

    It’s interesting that the idea of having cash at home is resurfacing, as though it’s almost an exotic idea, but it’s really a return to traditional money management. Up until about the early 1980s, when millions of people began moving their last dollars into the stock market, having cash at home was quite common. Even young people did it, not just depression babies.

  9. For keeping some cash in the house, try giving a check to a plumber at 3AM Sunday morning, they want cash because thats a 30% raise, cash goes in the pocket, not on the books.

  10. I have parts two and three in place, but am notoriously bad about keeping cash on-hand. I need to remedy that situation.

    My local bank happened a bit accidentally, but it presently hold a mortgage payment plus a little extra. This way, if something happens somewhere in my financial system, I have at least one mortgage payment ready to be paid.

  11. There are rumors on Wall St. about a banking holiday around the Sept timeframe. This has been done before. Though the propaganda off of CNBC and “stellar” banking profits, the opposite is true from all my research. Just check into the major banks plays in the casino/derivatives markets. The removal of mark-to-market rule made the banks actually valuate the crap assets for what they were really worth, now afterwards the same crap can be valued at 100% at the discretion of the bank. So this is where all these profits are coming from, trickery and the famous papershuffle. The 0.25% or 2.25%(a riskier bank) savings rate isnt the worth the risk.

  12. I like how you break it down. You make an important strategy sound so logical and simple. Thanks for all the tips…I always look forward to your posts!!

  13. Superb advice there. Emergency funds are a must, but splitting them up and keeping a bit of it in true liquid cash is a great idea.