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Multipurpose money

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?
Multipurpose Money

Potential benefits

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.

Potential risks

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?

Comments

  1. Ken

    I have retirement investments withdrawn directly from my paycheck. Our emergency fund does cover many ‘unexpected events’ I do hear you warn about using Emergency Fund for non-emergencies..we’ve been guilty of this…you have to be disciplined about it. Good thought-provoking post. Keep up the good work.

  2. 2 Cents

    I use the Savings Goal feature in Quicken, which lets me partition money in my savings accounts for various purposes. This is really helpful if you have variable income and you need to allocate higher income amounts so that you can pay your bills during lower income periods.

  3. Kazza

    I have two savings accounts. One is for unexpected expenses, saving for a big purchase etc, and when that is ‘full’ I put money into the other one which is for real rainy day big emergencies and not to be touched otherwise.

  4. RainyDaySaver

    As a user of the multipurpose account example (my husband and I are a “young couple”), I don’t think it’s better to have separate accounts for things at this point. We have our own 401(k)s for retirement savings. However, our savings is in one single account. As we get old and hopefully accumulate more wealth, it may make sense to partition it. It also takes a strong financial sense to use just one account — as you pointed out, bad things can happen if you spend some of it on “extras” and then don’t have enough for your “needs” (groceries/rent/retirement). Luckily, we haven’t had any issues thus far.

  5. I like the idea of the multipurpose fund. In my opinion the emergency fund concept harks back to the roaring 80s and 90s when everyone wanted to be “fully invested” in the stock market and were looking for a bench mark for some sort of minimal emergency provision that would be relegated to a boring savings account.

    Apart from retirement and investment accounts there’s really no point in maintaining earmarked savings funds. Better and simpler to have one account with 3-6 months living expenses, plus a couple (or a few) thousand extra for just in case.

    When the balance rises above a certain level, it’s time to look at paying down or paying off a debt, or at buying something really needed or wanted.

    Personally, I think a single, healthy savings account makes for good sleep.

  6. Alan Schram

    Wow. From all the comments so far, it certainly looks like everyone finances are as individual as each person. Unique people make for unique circumstances, and as such, require unique solutions. I certainly hope I can help by offering a perspective that may differ from yours, but can be the basis for thoughtful reflection.

  7. Evolution Of Wealth

    So many people don’t focus on the use of their money. It’s great to save and have your emergency fund, everyone needs that. However, there comes a point when you can overdo it. Especially in today’s environment where there aren’t a lot of good rates to be had. By combining funds it might just help you qualify for the next band of rates and give you a little extra out of your savings.

  8. Rachelle

    We are just trying to work out this issue. We’ve been together a year and have just recently merged our finances. We each have chequing accounts and we have a joint ING savings. I also have some old RRSP accounts that are just in my name. Right now we’re loading everything into one chequing account and tracking in our budget binder the balance of each category (emergency fund, groceries, car maintenance, etc.). Our ING savings account so far is just our vacation fund. We’re going to have to sort this out soon, so thanks for raising the topic and thanks to all the commenters too!

  9. Monique

    This is something I struggle with. I currently have a few accounts, but one of them I use to save for multiple things (life ins., car ins., vacation, etc.) I find it difficult to keep track of the amount allocated to each thing. If you or anyone else has any ideas about how to keep track of allocated fund in a multi purpose accout I would love to hear them.

  10. Marvin

    I think its better to have one multi purpose savings account, to steer away from fees from having multiple accounts. But we have been guilty of dipping into the account for “I wants” instead of “I needs”. It takes a lot of discipline, I agree with Ken.

  11. Sharon

    I use INGs accounts to divide my money into travel,insurance, and tax savings and have a separate emergency fund. It’s obviously really all the same money, but I can see there’s money to cover expenses and savings for emergencies. I have automatic monthly deposits to each account. Works for me.

  12. Betsy @ ConsumerFu

    While I have targeted savings goals, I don’t have a lot of multiple accounts. Longer term savings goals are invested in long-term instruments. The one category that is kept separate is any savings for my daughters expenses. It is just a mental thing.

  13. Susan

    I use multiple accounts for budgeted items i need to pay annually. It works great! Setting up automatic payments on a chequing account that costs me nothing in service charges the 50 cents it costs me to withdrawn from these annually to pay property taxes, car insurance, and any other annual payment is worth it. So simple. So recommend.

  14. Musa @ My Personal Finance Journey

    I have an emergency fund which I treat as a multipurpose savings account because whenever an urgent need crops up and I don’t have adequate amount of money then I have no choice but to withdraw and meet the need. I agree with you that this account serves those of us who don’t have a lot of “financial independence.”

  15. TeleTrade

    This is really a new take to solving of expenditure problems efficiently and prudently. This blog really helped me to decide how to use a single fund for may purposes, which essentially decreases the risk factor too.

  16. Bryan Jaskolka

    I personally find that owning an automobile can greatly eat into your expenses. Even if you hardly ever need repairs, there’s still the cost of putting on snow tires every winter, oil changes, gas, insurance, payments (if applicable), etc. I keep one account for things car-related ONLY. That’s everything from insurance to payments to gas. Then I also have an emergency fund that’s for all the other “what ifs” in life. If those “what ifs” include things like new brakes,or a new car, it comes out of that car fund. That’s just me though, having terrible luck with cars throughout my life and finding that they’re just far too costly to upkeep.

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