Updated on 05.15.11

The Hidden Emergency Fund

Trent Hamm

In a small independent bank several hours from where we live sits a savings account. That account is in our names. It earns a solid interest rate but does not have an ATM card associated with it. It has about a month’s worth of living expenses in it.

In order to access this account, one of us would have to actually go to the bank and present identification to make a withdrawal.

Why do we have this account at this point? It’s simple. It’s our “hidden” emergency fund for when things go deeply awry.

Why? Here are some reasons we have it.

It’s convenient, but with an obstacle in the way. At any time, one of us could drop in at that bank, pull out the cash, and do with it what we wish. No questions asked. At the same time, there’s a pretty significant obstacle to overcome: getting to that bank. It’s about four hours from where we live.

This is a much different obstacle than that blocking some of our other savings, such as retirement savings. I could get those with just a few mouse clicks, but I’d be paying a steep financial penalty for that opportunity. On the other hand, I could retrieve this money without financial penalty, but it’s tricky to get to. I would have to basically make a special trip (or take a side journey on another trip) to access that money.

That obstacle keeps us from wasting the money. Because we’d have to go out of our way to get it, we’re naturally prevented from wasting this money on a spur-of-the-moment thing. We can’t conveniently get it with a few mouse clicks or a stroll to the ATM or even a trip to the local bank.

This emergency reserve gives us peace of mind. If all else fails and we manage to get through everything we have on hand easily here, we still have that month’s worth of living expenses in the hole if we really need it. Not only is it cash, it’s also security and breathing room. It’s the ability to sleep a little better at night.

Here’s how we set it up.

My wife had a savings account in high school, to which she later added a checking account. This account was in a city not too far from where she lived during her junior high and high school years.

When she went to college, she never closed the accounts. In fact, she used them for her primary banking during her college years. When we eventually combined banking, she closed the checking account but left the savings account intact with the savings in it, intending to eventually pull it out and move it to our own accounts.

We never truly needed it. That cash remains from what seems like a lifetime ago, when my wife and I were both still single and both still childless.

In our minds, it’s something of a loan from our past selves. That money was socked away during a completely different time in our lives, left there for a time when we would need it. That time hasn’t come yet, but when it does, our past selves will have done us a big favor.

This exact same plan could work for anyone, really. Just open an account not too far from a place you regularly visit, like your hometown. Fill it with a bit of cash, then walk away. Keep the account information somewhere safe and let the money quietly build there, waiting for a moment when your life is really in a pinch.

Consider it a loan from your past self, one that you can cash in when you really need it.

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  1. George says:

    Traveling salesmen (think 1850s to 1950s) used to employ a similar tactic by opening a savings account in each city they’d visit. Deposit money in the account so that they had an emergency fund when they next arrived in town.

    The downside is that their estates usually couldn’t uncover all the little accounts and the money didn’t end up in the hands of the heirs.

  2. Adam P says:

    I’m more a fan of consolidating and simplifying my savings and investments into as few accounts as is necessary. This seems like your wife had an old account and you haven’t bothered to move it. If the interest rate is decent, then it’s not a big deal I suppose. But is this lazyness validation or financial planning?

    I recently wrote a blog post about my thoughts on emergency funds when inflation (3.3% in March 2011 in Canada, last numbers available) is significantly below the going interest rate (1.25% before taxes, so about 1% net). It’s really costing money to keep five digits worth of money in these things and you should examine how much you need. Everyone is different.

    But I would say that if this leftover emergency savings account from your past life is not really needed because your regular emergency savings is enough, then you’re better off putting it into something keeping up with inflation.

    Again tho, it’s very personal and some people benefit from that extra peace of mind that comes with extra emergency savings.

  3. Jonathan says:

    I think this makes sense in some situations, but question its benefit in Trent’s situation. For someone without a lot of financial discipline who runs a real risk or spending their emergency fund this could really help out. I’m surprised that Trent’s using it though. I suspect it might be his way of justifying why the account was never closed, but I could be wrong about that.

  4. Jackie says:

    In Texas, if you don’t touch base with the bank once a year, they can put the money in unclaimed funds.

  5. John says:

    I would be very careful about unclaimed funds laws in any state. Every state has unclaimed property laws which declare money, property, and other assets to be abandoned after a period of inactivity of three to five years.

  6. I’ve heard about this, and I think it’s a good idea for people that have trouble with keeping saved money in the bank. I don’t have that problem, so I would never do it, but it’s a good idea for others.

  7. Izabelle says:

    This approach requires careful research: I have a friend whose son “forgot” money in an account for a few years (this is in Canada). The inactive account fees ate everything up.

  8. Steve says:

    This might make sense if you really couldn’t stop yourself from spending your own money. Otherwise, I would never put my money somewhere where I would have to waste 4 hours of my life to retrieve it.

  9. Des says:

    Hmm…driving 4 hours away (assuming 60 mph) is 240 miles each way, or 480 miles. Toyota Prius gets about 45 mph highway, so you’re using 10.6 gallons of gas, or $42.40 at $4 a gallon. If one month’s worth of expenses is $4,200, that is still a 1% “penalty” you are paying for those funds (assuming your time is worthless, and you pack meals for your trip).

    Another method might be to give the money to someone you trust and admire to hold for you in cash (or money order, or whatever). You would then have the social barrier of needing to admit to that person you were in a financial hardship to get it back.

    Or, you could dig a really really deep hole and bury it, maybe even with some gravel on top. That might take you 8 hours to dig back up. That would be totally without financial consequences, no inactivity fees, and since digging is harder than driving, would be an ever greater barrier to frivolous spending.

    Or, you could just keep it in a regular savings account and agree not to spend it.

  10. Gretchen says:

    This reminds me of the “don’t go into the store with your credit card” series.

    What’s wrong with just not spending money?

  11. AnnJo says:

    I can’t imagine any “deeply awry” emergency where it would be helpful to have to drive for eight hours to retrieve badly needed money (or wait a few days while the bank mails it to me). And with the price of gas today, I think if I didn’t trust myself to keep the money more convenient, I’d put it into a CD locally. The penalty for early withdrawal in case of emergency would probably not be more than the wasted gas I’d otherwise be using, but it would be equally discouraging of casual withdrawals.

    On the other hand, I do think it’s an excellent idea to keep some funds in more than one institution, preferably not both headquartered in the same geographical area (as well as some money in cash, as in $ under the mattress or in a home safe). A bank closure or localized disruption of service will not completely cut you off from all your funds at once. During Katrina, one of my banks headquartered in New Orleans was unable to process any transactions at all for several days. And in any localized emergency that involves a power failure, ATMs and credit/debit card readers won’t be available.

  12. Deb says:

    I have an account like this in my hometown (a few states away). My bank has decided that if I don’t touch that money at least once every six months, they will charge me a fee for inactivity. The bank manager alerted me to that about two years ago. I have also heard of banks deciding that accounts that are untouched for a long length of time are abandoned funds. I do not know the criteria for that. It is worthwhile checking in on those accounts every few months or so, just to prevent penalties like these. (My approach is to obtain deposit-by-mail deposit slips when I visit my parents, and then mail home a $3 check every so often to deposit into that savings account.)

  13. Des says:

    RE: Deb

    Banks don’t decide the criteria for abandoned funds, the government does. It is 3 to 5 years, depending on the state laws. After that time, the financial institution is required to turn the funds over to Unclaimed Property.

  14. valleycat1 says:

    It’s very easy to check on whether you have unclaimed or abandoned funds – just search for that with your state name, or go to the state’s Secretary of State’s page.

    When Trent said ‘when things go deeply awry’ my first thought was “‘when?’ – why isn’t he saying ‘if’?” Since he says ‘when,’ I imagine a catastrophic personal or societal event. (Not simply running out of money.) Would you really want to have to drive 4 hours one way in a catastrophic situation just to collect some cash? And if you were that bad off, would you be able to afford to, still have transportation, assume the roads are in good shape, etc. I think you’d be better off having a CD in a local bank & just let it roll over if not used.

    I also assume they’ve added his name to the account – if it’s still in his wife’s name only, he won’t be able to get to it.

  15. jim says:

    Seems to me that if someone lacked the self control not to spend their emergency fund in the first place then they probably would have never built an emergency fund to begin with because they lack the self control to keep from spending it. See?

    Or are there many people who are self disciplined enough to build an emergency fund of significant size without spending it yet can’t trust themselves to not spend their emergency funds?

  16. Mark says:

    This may work for someone who cannot control their impulses, but seems like a silly setup for an emergency fund. I think any situation that would arise where you would need this money would be a situation where you would NOT want to drive 4 hours.

  17. Christine says:

    Re: Deb and Des

    While banks don’t decide the criteria for abandoned funds, they can and do decide what constitutes “inactivity” and then proceed to charge a fee for that “inactivity”. I work at a bank, and as the comments above pointed out, I have seen accounts that have slowly been drained by inactivity or monthly maintenance fees. I have also seen the account structure be changed so that minimum balances are changed or introduced and an account that would not have been getting fees could start getting fees.

    The bank I work for sends out letters to alert the customer that the account has been inactive for x amount of time and if a deposit or withdrawal is not made to re-activate the account, an inactivity fee will be charged. As long as people read all the mail from the institution where the “forgotten” bank account is held, there should be no problems with inactivity fees or abandoned property.

  18. lurker carl says:

    To be successful at hiding money from yourself is the same as losing it. Either you have the maturity to keep an emergency account for it’s intended purpose or you don’t. Making money hard to access in the best of times may make it impossible to access in the worst of times.

    Being hundreds of miles away from an emergency fund when things go deeply awry is a horrible idea. You don’t want an emergency fund so remote that it is unaccessible during a crisis. A better choice would be a nationwide banking institution with local branches so the cash would be easily and quickly retrieved from just about anywhere in practically any emergency.

  19. kristine says:

    I think the “deeply awry” refers to a personal catastrophe. If it referred to a societal catastrophe, I can think of few that do not hamper travel. And I can think of few personal catastrophes in which being away for 8 hours is a good idea.

    For a true emergency:
    How about a couple of money belts- one for the husband and wife (or per family member when the kids get older), each with about 500 dollars (or more), in twenties. Buy a small safe, and put them in it, somewhere not easily accessible in the home. Also include xeroxes of ID documents.

    It’s a grab and go in the case of a true “bug-out” emergency. I have had this idea for a while, but have not done it. I will when I have the funds to spare!

  20. kristine says:

    Trent, have you heard of A.N.T.S.? What do you think of alternatives to government emergency management? I wonder if they were around before Katrina.

  21. Elaine says:

    One could also keep a large amount of money under a mattress. Put it in a ziplock bag if you have no self control and might spend it.

  22. Jennifer Wear says:

    We used to have our savings and checking account at the same bank but it was just too easy to get at that savings every time we felt like being careless and got a case of the wants. So, we moved our main savings to another bank and it has helped soooo much.

  23. almost there says:

    If things went “deeply awry” I would want to have a wall safe to access ready money.

  24. ysabet says:

    I just keep my rainy-day fund in a separate bank, which I can only access online. True, I can transfer the entire balance to my main bank account whenever I want – but it requires me digging up a letter with my account number, remembering my PIN, possibly phoning the bank to reset my PIN, and then finally transferring the money. Altogether too much trouble for a non-emergency, but trivial enough so that in case I needed that money today, possible.

  25. deRuiter says:

    Think this is more money not being used properly. The rate of interest is less than the rate of inflation, plus the money is taxed by the government. Trent is losing money here. Since Trent’s goal is to pay off his current house and sell it to move to a large piece of land and dream house in the country, it would be better to cash out this account and apply the money to the balance on the current house, thereby saving a large chunk of interest on the mortgage which would not have to be paid. This seems like a silly game and the time and money required to get the cash in case of emergency is considerable. I feel the money is not being utilized to advantage.

  26. Diane says:

    It sounds like the account was never closed for sentimental reasons. I like the idea of burying the money in the back yard.

  27. Bay says:

    If something catastrophic happened to you, the last thing you’d want to do is drive 4 hours! You have the self control to not touch this money, you’d be better off doing something a little less inconvenient.

  28. marie says:

    This could make a pretty good end-of-the-world type of novel or movie. Premise: after a “insert disaster here” that wipes out most of the population, Trent’s descendant remembers that his dad/grandpa mentioned an old account at that bank 4 hours away. Now comes the journey to go get that money to survive. Along the way many unfornuate incidents happen, and when they finally get to the town, you can spin it either happy (the money is there) or sad (the money is gone!) or just let your reader decide if the money was there or not in a cliffhanger (he got to the bank, walked in, and knew his future would never be the same. The End)

    *if anybody uses that idea for anything please give me credit* :P

    I don’t think its such a bad idea, as long as the money is safe and that you are keeping on top of fees or abandonment issues or whatever.

  29. Steve says:

    I have the exact same thing. I live in the west but was raised in the east. When my mother passed away, what little money she had in her checking account was transferred to a 12 month CD in the bank back east. The CD was placed in my name and it just sits there, renewing every 12 months. It is a small emergency fund but I have peace of mind that if things ever get real bad I can always make a pilgrimage back home and recover the funds. And yes I know that CD’s are paying really low rates, but if you take the long-term view of things…

  30. Suzanne says:

    I have a similar account. When I graduated high school in 98 I had a few hundred dollars in scholarship money. 10 years later it had grown to about $2500 and we used 90% of it towards our house downpayment. Now it’s got $250 in it that I’m going to let sit and grow for a long, long time. (Fortunately we have a solid emergency fund so it’s not an issue to do this.)

  31. Tracy says:

    “It’s convenient, but with an obstacle in the way.”

    Heh. I think a 4 hour drive (so 8 hours round trip) is the complete opposite of convenient and in a real emergency where you actually need the money, it will probably be a bad idea.

    I think having a separate account that’s not linked to checking and that you don’t carry an ATM card for is a great idea, but this kind of weird, artificial barrier is just silly.

    My question is, how much of this was an active decision and how much is just coming up with a reason why it wasn’t closed?

    Although, in light of your past when you were panicking and deeply depressed by how in debt you were – did this account come up for discussion as a way to start paying off the debts? I’d be a lot more interested into how it factored into that discussion … how it factored as a safety net back when you had a lot further to fall, maybe, than what I personally thing is extremely bad advice for most people (opening up accounts hours from where you live)

  32. lurker carl says:

    Suzanne – Set up an automatic deposit that adds $10 each week to that account. Think of it as a regular dose of fertilizer on a sprouting acorn so it grows to become a mighty oak.

  33. Johanna says:

    @Tracy: That’s a really good question.

    Trent, why didn’t you use this money to help you out of your “financial armageddon”? If that wasn’t a time of things going “deeply awry,” what is?

    And as I recall, you *did* take money out of retirement savings at that time as a way of jump-starting your debt repayment. So apparently you preferred to take the financial penalty than the four-hour time penalty? (Sounds like something out of The Amazing Race…) Why wouldn’t you have the same preference if things go deeply awry in the future?

    Or is it that you’d forgotten all about this account at that time? (And if *that’s* the case, how do you know you won’t forget all about it again in the future?)

    It really sounds to me like this is just a half-forgotten account that you haven’t gotten around to closing, and you’re trying to spin it as some brilliant bit of financial planning. I don’t buy it.

  34. Kathryn says:

    My original comment is still caught in moderation. Sigh.

    When Trent & his wife first began this new journey to live more responsibly with their money, this account may have made sense. It would have stemmed impulse use, etc. and given them peace of mind.

    Now, some five years later, they have proven that they are able to manage their money well. Four hours’ drive away for an emergency fund no longer makes much sense.

  35. JS says:

    My husband and I have a similar set up at a nearby credit union. When he was deployed, he set up a joint account with his parents at their credit union so they could help him handle stateside financial issues. We kept the account (and changed the names) when we got married because the rest of our savings are at an online-only bank and it takes a few days to get them. We deposit $10 or so every few months to keep the account active, but other than that, we don’t touch it.

    We’ve thankfully never had to use it, but we came close once. The night before an expensive car repair, I lost my wallet and had to cancel both my individual credit card and our joint credit card. The transfer from our online savings account to pay for the repair hadn’t come through yet, and we didn’t have enough in checking to cover it. We were able to use my husband’s individual card, but if it hadn’t happened on the one day he didn’t have class in the morning, I would have needed to go to the credit union to be able to pay for it. I know we could have done the same thing with a savings account at our primary bank, but the credit union has no fees and pays more interest. We also like that we can’t easily touch the money. I might not have as much self-control as I should, but at least I’m wise enough to recognize that fact and take precautions. It’s like keeping junk food out of the house so you have much fewer chances to eat it :)

  36. Sam says:

    I have debated on the doing this. There’s a bank in my Dad’s home town that’s still totally local & stable…

    What I keep finding is that as a single parent, I keep having to play catch to cover the most recent thing my son broke (and is necessary for daily life) or this year, we’ve had triple the amount of medical expenses… lots of colds & such that just wouldn’t die.

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