Emergency Savings – Three Bucket System

Emergency Savings
The 3 Bucket Emergency Savings System

The 3 Bucket Emergency Savings System is simple: 3 different buckets of money that are filled one at a time and contain different levels of risk and potential growth.  After first bucket fills, the excess flows into the 2nd bucket.  Next, when the 2nd bucket is filled, the excess flows into the 3rd bucket.  Lastly, the 3rd bucket is filled; the excess is free to flow into other goals.

If you have an unexpected expense and need to dip into your emergency savings, pull from Bucket 1 first, then Bucket 2, then Bucket 3.  When you replenish them, fill them back up in order, 1, 2, 3.  You don’t use your other buckets to replenish other buckets.  Just let your cash flow replenish your buckets in order.

Bucket 1 – High Interest Savings

This is the bucket you fill first.  This is the bucket you empty first.  You keep this money in a savings account, the higher the yield, the better.  Right now, our 1st bucket is in an Ally online savings account earning 2%.  You can find other savings accounts earning a bit more than 2%, but I use Ally Bank and I trust Ally Bank.

Bucket 2 – High Interest Investment Grade Bonds

Only after you fill up your 1st bucket do you start to fill up this 2nd bucket.  There are some options here depending on your risk tolerance (emergency savings should be low risk in general but there is some flexibility within ‘low risk’).  If you want the lowest risk, stash this money in a fund like Vanguard’s Short-Term Bond ETF with a 2.90% yield (BSV).  If you are OK with more risk,  put the money into a fund like Vanguard’s Long-Term Corporate Bond ETF with a 4.84% yield (VCLT).

The 6 funds I would choose depending on my risk tolerance, from less risky to most risky are:

Emergency Fund

When you need to dip into your emergency savings, after you use up your 1st bucket, you start taking out of this bucket.  When you replenish your buckets, you replenish your 1st bucket first before your 2nd bucket.  Once your 2nd bucket is filled, you move on to…

Bucket 3 – Total Stock Market Index

So, you are fortunate enough to fill your first two buckets, you now move to the last bucket in your emergency savings.  It might be tempting to put this money in a multitude of funds with more risk.  It’s important to remember that this is still part of your emergency savings.  The Total Stock Market Index ETF (VTI) is plenty of risk for a portion of your emergency savings.  Plus, once you fill this last bucket, you can devote the excess money coming in to your emergency savings to other more exciting things (but seriously, what’s more exciting than a fully loaded emergency fund???)

Once your third bucket is filled, use that newly freed-up cash towards your other retirement goals.  Use my Savings Hierarchy to help decide where to put that money:

Savings steps, savings hierarchy

The Buckets with the Details:

Emergency Savings

How Much Goes into Each Bucket?

That’s a question you get to answer yourself.  My only recommendation is that your largest pool of money should be Bucket 1, the smallest should be Bucket 3.  The sum of all 3 buckets should be the number of months expenses that you want as your total emergency fund.  The more risk-averse you are, the larger your Bucket 1 will be.  Some examples of how you might set up your buckets:

Example 1

Emergency fund of 3 month’s expenses or $7,500; Low Risk Tolerance

  • Bucket 1 – $5,000 High Interest Savings
  • Bucket 2 – $1,750 Intermediate-Term Bond ETF
  • Bucket 3 – $750 Total Stock Market ETF
Example 2

Emergency Fund of 6 month’s expenses or $21,000; High Risk Tolerance

  • Bucket 1 – $9,000 High Interest Savings
  • Bucket 2 – $6,500 Long-Term Corporate Bond ETF
  • Bucket 3 – $5,500 Total Stock Market ETF
Example 3

Emergency Fund of 4 month’s expenses or $10,000; NO Risk Tolerance

  • Bucket 1 – $8,500 High Interest Savings
  • Bucket 2 – $1,000 Short Term Bond ETF
  • Bucket 3 – $500 Total Stock Market ETF


Of course, if your risk aversion allows you to only use Bucket 1 & 2 or just Bucket 1, then you should do that if that is what makes you most comfortable… it stops being the Three Bucket System, but I’ll forgive you.

Why Are Emergency Savings Important?

For us, we ran into needing to tap our emergency savings when we were remodeling our kitchen/first floor.  We had already tapped a lot of debt (see the Home Equity loan in our latest Net Worth Update) on the remodel and had our HVAC go out.  We had about $7,500 in our emergency savings and repairs were quoted at $6,500.  While that really sucked, I can’t begin to describe the feeling of security that came with having the money at hand to pay for the repairs.  (Which had to be made because a hot house in the summer would cause the new wood floors to warp and buckle).

The feeling would not have been possible without the emergency savings we saved up.  Just having a credit card would not have provided the same feeling that having cash on hand did.  Fortunately, we “only” paid ~$3,500 out of pocket due to a warranty on the outdoor unit (PHEW!).

Unexpected expenses will happen, and they will not wait around for the best time to happen.

Why you want the 3 bucket system

The goal here isn’t to earn money off of your emergency savings (although it is entirely possible) but to mitigate the erosion of your emergency savings by inflation over time while keeping the core purpose of the stash intact.  This system will help with that.


If you liked this post, feel free to check out some of the others.  We’re on our journey to achieve a Million $ nest egg by the year 2030, and we’re 4,192 short days away.  No doubt we will tap our emergency savings many more times over the next 11 years.  I hope you’ll join us along the way.


6 thoughts on “Emergency Savings – Three Bucket System”

  1. Great post! You might also be able to extend the analogy to include saving for large purchases, possibly increasing the amount in bucket 2. Large purchases might include buying a new car or a nice vacation.

    1. Hey Susie – I agree! This same system could be used for regular savings as well. Another bucket (or system of buckets!!) could be hanging out on the other side after the your emergency savings goal is met. I think you call those buckets whatever you are saving for; new car, vacation, special gift, etc.

      As Genx FIRE mentioned below – I-bonds could be a good way to save for those medium and longer term savings goals.

  2. I agree with your system but I think I-bonds should be a part of it. The yield is about or a tad higher than a high yield savings account, but you don’t pay Federal income tax on them. Treasurydirect.gov has a great FAQ on it.

    1. Hi Genx FIRE – My only hesitation with using I-bonds for emergency savings is that you can only cash them after a year (if someone is just starting out).

      BUT, after the Emergency fund is filled up, I think it could be a great idea to start buying/incorporating I-bonds (after they are over 1 year old) into Bucket 1.
      Or if someone already has I-bonds that are over 1 year old, they definitely could use those as their Bucket 1.

      It’s a really great idea/call out – Thanks!

    1. Thanks G!

      I like the flexibility ETFs give when you don’t have the $$$ to buy the equivalent mutual fund (which you probably won’t have when you are just building up the emergency savings).

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.