Save your 'emergency fund' for the real thing

Balansag is one of the master savers of the WIR. Her strategy is to have not one safety net, but several.

Aside from her main emergency fund -- now $25,000 (for her, that's six months' worth of expenses) -- she has a separate account for house repairs and emergencies, another for the car, another for gifts and a regular savings account for miscellaneous expenses.

Total stockpile: $55,000

Although she and her husband have a combined yearly income of about $100,000, in high-cost Hawaii that doesn't go as far as you'd think ("Even the cheapest milk at Costco is $4 a gallon," she says).

Here are some of the ways they manage to save so much.

• Keep saving. "They say to put roughly 10% of your home's value aside each year for repairs," Balansag says. To her that means if you don't spend your cushion one year, you will the next. She estimates that the $8,500 they spent after the robbery was close to three years' worth of saving.

• Plan ahead. In order to keep her emergency fund just for desperate moments, Balansag relies on the other savings accounts to cover smaller crises. "You know you're going to need to replace your car at some point," she says.

Guarding a windfall

Angela Friedman, a social worker who lives in New York City, says that she and her husband lucked into their emergency fund in 2005. "We received many cash gifts for our wedding, and I wouldn't let my husband touch any of it," she says.

That was fortunate, because in the spring of 2006 -- right after her husband quit his full-time job to embark on a career shift -- "I was very unexpectedly fired," she says.

Out of work for three months, with $2,120 in rent and nearly $800 in monthly health insurance premiums, never mind other bills, Friedman and her husband still managed to slash their living expenses to just under $4,000 a month.

By leaning on their savings, they weathered the crisis. "We came out the other side with no new debt and all our bills paid on time," she says.

Like Balansag, Friedman had multiple accounts on her side. She used about $1,200 set aside for family gifts, about $8,000 from her housing and vacation funds, and $2,000 from her emergency fund to get through.

But Friedman's real trick was not only socking away all that wedding money, but to invest it in two Vanguard funds -- a money-market account and a municipal bond fund.

It's not that her investments grew. It was a safety zone. "To me, Vanguard equals 'do not touch,' " Friedman says, explaining that her and her husband's retirement accounts are also with Vanguard.

• Video: Reap benefits with a Health Savings Account

But living in one of the world's most expensive cities on $59,000 a year, while supporting her husband who is studying for his new career -- and saving $155 a week -- is still an astonishing feat.

Friedman says the key is to balance constant thrift with occasional splurges. She says a combination of little treats (Starbucks coffee, the occasional pedicure or happy hour with friends) and her natural frugality ("I'll see how long I can sweat it out before I turn on the AC," she says) keeps her happy and financially secure.

That, ultimately, is the gift you give to yourself when you save: It's not just the money, it's how you feel when the bills come and you don't have to turn to plastic or call for an extension on your home-equity loan.

It's called precious, priceless peace of mind.

Published June 27, 2007

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