The Magic of Purpose-Driven Bank Accounts
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Having an emergency fund is a great idea. (Here’s how to quickly build a starter emergency fund if you’d like tips on that.)
Having money available when you need it is an even better feeling. — especially 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.
Instead, it’s a buy-random-stuff fund, or an I-forgot-Christmas-was-coming fund, or a my-car-needs-new-tires fund. Or whatever.
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 find it much more effective to have a variety of purpose-driven bank accounts instead — one of which is my emergency fund.
I’ll talk more about purpose-driven bank accounts in a sec, but before we go further, know this: you should ALSO clearly define the purpose of your emergency fund itself.
What’s your fund for?
Asking “what’s your emergency fund for? may seem like a silly question. (“Emergencies!” you answer.)
But what exactly constitutes an emergency?
You need to know that ahead of time, otherwise your e-fund will quickly turn into an empty fund instead.
At this point, mine is only for medical expenses that aren’t covered by insurance that I can’t cashflow. That’s it. If it’s not on that list (and I sure hope it isn’t), the money stays in the account.
Your list might be completely different, but you need to know what you WILL consider an emergency so that you can make sure the amount in your fund is adequate.
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, travel, a new car, etc.)
Bank accounts need a purpose — even if that purpose is to “buy random stuff with x amount of money and no guilt”.
That’s really where the magic of purpose-driven bank accounts come in. When you’re saving for particular, clearly identified goals, you’re much more likely to get there.
It’s easier to measure your progress and feel good about things, which means you’re more likely to keep going.
Save for the things that matter to you
There’s more to life than standard bills and emergencies (thank goodness!) so we have more than just one savings account for our money.
For example, we have funds for:
- Income Taxes (since I have a small business)
- Insurance & Property Taxes
Those three funds + our emergency funds make up our “savings” funds.
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 each of those too.
Should you have multiple accounts or just one?
All of 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 spreadsheet or simple list of the various “funds” (along with their purposes and balances) may work great for you, even if the money itself is in a single place.
You know yourself and how you’re most likely to save best. Personally, multiple accounts work REALLY well for us.
But no matter what, you’ve got to put your money somewhere. (I don’t recommend stuffing it under the mattress!)
Where to put savings
I find it extremely helpful to literally have our savings separated out into separate accounts instead of going through mental gyrations. Knowing their purpose and being able to see the balances at a glance really makes a big difference.
We have our savings accounts at:
They’re both online accounts, and I’m super happy with them. (In person just isn’t for me, even though I promise I’m not antisocial.)
A lot of people agonize over where to put their savings, but as long as fees are (ideally) non-existent or VERY reasonable, the accounts are FDIC or NCUA insured, and you’re getting paid interest, you’re probably good to go.
The important thing is that you not invest your savings. Investments always come with the risk of losing value. Typically that’s a risk you want to avoid for savings, unless your savings goal is many years away AND you’re ok with potentially losing value.
What about checking accounts?
Pretty much the only things I use my checking account for is paying bills, so that’s it’s clearly-defined purpose.
But sometimes the money sits in there for a while before it goes out to bills, so lately I’ve been thinking it might be good to earn INTEREST on my checking account. Why not, right? I’ve started exploring options there.
(Quick note: there’s definitely no reason to pay fees on a checking account. If yours has fees, it’s absolutely worth shopping around.)
Radius Bank is one of the places I’ll be checking out. (I just heard about them from a friend who is also into personal finance.) Their high-interest checking account looks pretty good too, because in addition to earning 0.85% APY on balances over $2,500, they have:
- Free ATMs around the world (handy for the traveling I like to do
- Mobile check deposit (which is awesome, because I hate leaving the house to deposit checks)
- No monthly maintenance fees or ongoing minimum balance requirements (both must haves!)
- Plus free bill pay, mobile wallet, direct deposit, etc.
They also check the FDIC-insured box, and it seems like the process to open an account is really simple. Have you tried them out? Let me know what you think if so.
Keep the purpose in mind
No matter how you choose to handle your savings (and checking), keep the purpose in mind! Managing your money is much easier when every dollar has a job to do — and you know where those dollars are coming from. Start by defining exactly what your accounts are for. You’ll be amazed at what a difference it can make.