Should your rainy day / emergency fund be in the same account as general savings?
There is no accounting reason that it should be different, there are likely psychological reasons that it should be, however.
Assuming that you live in a western country with good banking regulation, you likely have deposit insurance or a similar scheme. Here in Canada we are covered up to $100,000 in a single account with various limitations. At least my rainy-day account plus savings is nowhere near that, so I'm good to go.
That said, however, having a large lump of money in an account you regularly use may tempt you more than you can stand. That iPad, car, home improvement, etc., might be too easy to buy knowing you have relatively easy access to that money.
So it really becomes a self-discipline question.
I see two ways to look at it:
- Discipline: If you keep your emergency fund in a separate account, you will be less likely to dip into it when tempted by a big purchase or investment.
- Maximize Earnings: If you keep your emergency funds in the same account as your general savings, then the higher balance can sometimes swing you into a higher interest earning rate bracket (depending on your banking institution and balance).
I keep several savings accounts. I use an online-only bank that makes it very easy to open a new account in about 2 minutes. I keep the following accounts:
Emergency Fund with 2 months of expenses. I pretend this money doesn't even exist. But if something happened that I needed money right away, I can get it.
6 6-month term CDs, with one maturing every month, each with 1 month's worth of expenses. This way, every month, I'll have a CD that matures with the money I would need that month if I lose my job or some other emergency that prevents me from working. You won't make as much interest on the 6-month term, but you'll have cash every month if you need it.
Goal-specific accounts: I keep an account that I make a 'car payment' into every month so I'll have a down-payment saved when I'm ready to buy a car, and I'm used to making a payment, so it's not an additional expense if I need a loan. I also keep a vacation account so when it's time to take the family to Disneyland, I know how much I can budget for the trip.
General savings: The 'everything else' account. When I just NEED to buy a new LCD TV on Black Friday, that's where I go without touching my emergency funds.
We put our fund in a local credit union that we only use for the emergency fund. We have a savings account that sweeps all funds into a 6 month CD that automatically renews upon maturity. We pretty much don't think about it, and make a deposit with our excess savings after we pay our property taxes in January and school taxes in September.
Why? When my wife and I set it up the emergency fund, the purpose is to have a cushion against emergencies, not earning money or having convenient access. We wanted access to the money to be onerous enough that neither one of us could pull money out of without calling someone or driving over to the branch. We even opted not to take an ATM card.
In the event that we need the money, we can terminate the CD early and pay a 3 month interest penalty. With $10k, that translates to about $25.