When my wife and I were considering purchasing a vehicle, we decided that it was time to talk a little bit more about our savings. We have an emergency fund to deal with any unexpected expenses, but we were wondering if we needed to have additional savings account for our car. It would be like a maintenance fund, one that would take care of oil changes, new tires, and any minor repairs. The question is, do we need an additional fund to cover those expenses, or should we simply use our emergency fund?
This got me thinking about multipurpose money. Could we, instead of separating different accounts for different purposes, combine accounts to take care of multiple potential tasks? Would that be smart? Would there be a benefit?
I think one of the best benefits of using the money for multiple purposes is that you need less money to achieve the same purpose. If you need a $2000 emergency fund, and you need $1500 in a car maintenance fund, and you need to maintain a $1000 balance in your bank account to eliminate fees, then you could need up to $4500 if the money is split between three different accounts. By combining accounts you need less money to meet your goals.
A second benefit is that you can maximize your money. If you keep all of your money in one place, a single large multipurpose fund, then you can easily ensure that all of your money is working hard for you. Instead of keeping it split between three accounts, with three different interest rates, you can keep all of your money in the account that has the highest interest rate. This ensures that your money is maximized, earning you every cent possible.
A third potential benefit is that multipurpose money needs less work to manage. If you have three accounts in three different places, that is three times as much paperwork to take care of. Even if you have all the money in the same account, but simply divided mentally or in a spreadsheet, you still need to do work to keep track of individual “account” balances.
By far, the worst part of using the same money for the same task is that it leaves you open to more risk. What happens if you replace your car tires, and while driving home from the shop get into an accident with a depleted “multipurpose” fund? Using the same money for the same purpose leaves you open to more risk.
A second negative, and probably the more damaging one, is that it invites ignorance. You know that you have a bunch of money in an account, for groceries and retirement savings, and your car, so you have no problem seeing that you have a significant balance and buying a new stereo for your car. Except some of that money might have been set aside for your retirement, and now you don’t really have so much to buy strawberries. Keeping track of each account individually in a spreadsheet, or having them physically separated, may be annoying – but it forces you to understand your money and its purpose.
Who should use multipurpose money?
Given the risks and potential benefits, the only people who should use the money for multiple purposes are those who cannot afford the time or money to single task their money. I think that students and young couples would be the best served by one giant fund because they already have so few dollars that they are forced to keep track of their money if they want to make rent. In addition, they have the least to risk. However, anybody else would probably be better off separating funds for different tasks, as long as they are able to afford it.
I do not suggest having a different bank account for a car maintenance fund, a house maintenance fund, a college savings account, a retirement savings account, and three separate accounts for groceries, savings, and entertainment. That is overkill. However, if one is able to single-task their money for separate purposes, one can dismiss risk, embrace conscious spending, and invite a sense of well being that can only come when one has a well-padded bank account.
Do you have multipurpose money? How do you manage the risks of multipurpose money? Is it worth the extra cost to single-task your money?