The Purpose-Driven Bank Account

There are approximately 378,922 (give or take a random number) reasons to have an emergency fund.

Or are there?

Having an emergency fund is a great idea. Having money available when you need it is a good feeling. (Especially when compared to feeling panicky and depressed when you need money in an emergency but don’t have it.)

But if you use your emergency fund for everything under the sun, it’s not really an emergency fund. It’s a buy-random-stuff fund or a doh-I-forgot-that-Christmas-was-coming fund or a my-car-needs-new-tires fund. That can be just fine — if you keep a very large emergency fund and you constantly replenish it so that it can also be used in case of things like an extended job loss.

But I firmly believe that your emergency fund (and any other savings that you have) should have a clearly defined purpose. If you’ve got an emergency fund, what constitutes an emergency? I have two things on the list for mine: involuntary job loss and life or death events. That’s it. If it’s not on that list (and I sure hope it isn’t), the money stays in the account.

But that’s why we have funds for other things too:

  • Appliances (which is inappropriately named but still clearly defined — that’s for appliance repair, household repairs, occasional household upgrades, and vet bills)
  • Vacations
  • Escrow (taxes & insurance)

Those three funds + our emergency funds make up our permanent “savings” funds. My husband also has a car repair fund. (I choose not to have one of those, since in a car repair “emergency” I’ll just walk until I get the money.) If we want to do other things with our money, we lay out what we want to accomplish and then save for that.

Of course we have checking accounts as well — and we know what kinds of things get paid from those too. These funds don’t actually have to be a series of bank accounts. It’s not so much about where the money is as it is about what the money is for. A list of the various “funds” (along with their purposes and amounts) may work great.

Money needs to have a purpose. Saving for the sake of saving isn’t usually as effective as saving for a specific thing or event. (Such as emergencies, an entertainment center, travel, or retirement.)

Bank accounts need a purpose — even if that purpose is to “buy random stuff with x amount of money and no guilt”.

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10 comments

  • Wow. I hadn’t even really thought of clarifying what an emergency is in regard to my emergency savings. Thank you so much for this post! I was lumping virtually all unexpected expenses into acceptable emergency savings costs, but you are so right. I’ve got more planning to do!

  • Great post! A lot of people don’t think about dedicating specific savings accounts to specific goals, like buying a new car or going on a vacation.

    I have a bunch of savings accounts with ING that are just for short-term savings goals, including paying off debt and taxes.

  • Jason, I find that having the separate accounts makes it easier to save for those specific things. (Although I hate actually spending the money when it comes time…)

  • An emergency fund should be used for just that–emergencies.

    It was actually the very last thing that I did during my financial crisis, that is, establishing and maintaining one.

    One should also remember that just because its an emergency fund, does not mean it should just sit there–it should be somewhere accessible, but also gaining interest (high interest checking, etc).

    • David, but I think it’s important to define what an emergency IS so that the fund is large enough to cover whatever has been specified. I agree with you on gaining interest, so long as it’s easily accessible.

  • I have different accounts but never really thought about having a separate account as emergency fund. I just treat them the same way, except for my checking account. Glad I bumped into your blog and got an idea somehow. Thanks.

  • I love the idea of multiple accounts but I do try to keep it simple. I have my regular checking account, random savings account, emergency fund/long term savings account and an account for my rental property.

  • Single Guy Money, sounds like your accounts all have a purpose :)