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This post is from GRS staff writer April Dykman.
Right before our Thanksgiving trip, the AC went out on our vehicle. $600 later, we had a functioning AC. What a way to start a camping trip.
The good news was that we had the funds set aside for that specific reason—auto repairs. We’ve never used one of our targeted accounts before, and now that we have, I can attest that they are a fantastic idea.
Obviously the repair would cost the same whether it came from a big account labeled “emergency fund” or a targeted one called “auto repair.” We’re out $600 either way, so why bother with separate, targeted accounts?
Two reasons:
- By paying from a targeted account, the three-to-six months emergency fund (EF fund) isn’t tapped. We look at the EF as money for major or unforeseeable expenses only.
- Paying for repairs is never a joy, but it’s easier when the money was there for that purpose.
It’s extremely easy to set up targeted EFs, and they’ll save you a great deal of frustration and headaches when faced with irregular expenses.
Step one: Calculate a reserve for targeted EFs
Once you are free of consumer debt and have a comfortable EF, start creating targeted EFs for expenses that are inevitable, but irregular. For example, we have a savings account for property taxes. That’s a regular, yearly expense we can count on having to pay. We also have a good idea of exactly how much we’ll pay. A targeted EF is different because it’s meant for expenses that will hit at some point, but you don’t know exactly when or how much you’ll have to pay.
Here’s how to start creating your targeted EFs:
- Gather your expense history for the last 12 months.
- Calculate how much you spent on irregular expenses, such as car maintenance, medical bills, and home maintenance. You’re looking for expenses that you know you’ll have at some point, it’s just a matter of when.
- Divide the sum for each category by 12.
- Save those amounts each month to build up enough savings to handle the expense. Or, if you don’t have that much room in your budget, save up what you can in each category until you hit your reserve target.
Make sure you don’t confuse the purpose of your accounts. Saving for a car is not the same as saving for an auto repair for a vehicle you currently own. That said, try not to create too many targeted EFs. Make the categories broad, if needed. We only have two targeted EFs right now, and we’ll add a third for home maintenance next year.
Step two: Create sub-accounts
My favorite method for targeted savings accounts is creating multiple accounts at ING Direct, which I learned about here at GRS. Other banks probably offer similar setups. As you set up each account, label it for its specific purpose.
Bonus points: Automate it
Put your savings on autopilot to avoid the temptation to spend the money elsewhere. We started our auto repair savings account by setting up automatic deposits of $100 per month. In no time the account was big enough to cover our recent repair.
This is not a perfect method. Just because we only spent $600 on auto repairs this year doesn’t mean we won’t have a $1000 repair next year, but at least some money will be saved up to help cover the expense.
Peace of mind
One last benefit I want to mention is that when you’ve already predicted and accepted that you’ll have these irregular expenses, and you’ve set aside money for them, it is less aggravating when they occur. If we had to pull money from our three-to-six-month emergency fund, I would have started off our trip thinking about how quickly we could replace the funds, and where we could cut back to do it as soon as possible. Or worse, if we didn’t have any savings to cover the repairs, we’d be scrambling to figure out how to pay for it. Maybe we wouldn’t be able to go on the trip. Instead, I left feeling relieved that the money was there and a car repair didn’t blow our budget.
Peace of mind isn’t a tangible benefit, but to me, it was the best one of all.
Do you have separate accounts for irregular expenses, or do you have one big emergency fund?
J.D.’s note: As I write The Book, I’m amazed at how often I refer back to the idea of targeted emergency funds. I find them useful in Real Life, too. It’s so much less stressful to pull from your home-repair fund to fix a leaky roof than to drain your main emergency fund…
This article is about Budgeting, Savings Tuesday, 15th December 2009 (by April Dykman)
December 15th, 2009 at 5:51 am
Great Article! I have an EF and several targeted funds ranging from House Taxes and Insurance, pet care, money for workshops related to my hobby and a vacation fund. I started these in April of this year and have automatically sent 12-20 dollars to each targeted fund each week since then.
One thing though, I didn’t wait till I had the regular Emergency Fund up to it’s target goal. I just plunged in and started funding the targeted accounts along with the Emergency Fund. I didn’t want to wait forever to start the target accounts, b/c things break or opportunities arise regardless if your EF fund is big or small.
December 15th, 2009 at 5:52 am
I love using targeted accounts! My emergency fund is in a separate account that I don’t even display in my account summary (out of sight, out of mind). I’ve set up targeted accounts for home and car maintenance. I’ve also set up a “fun” account because I’m a recovering cheapskate and need a little nudge spending on things like vacation without feeling guilty.
December 15th, 2009 at 5:58 am
M and I had this discussion a LONG time ago and I was trying to talk her into this targeted account system. Her response was a blank stare and this: “We’re out $300 no matter how you cut it. What’s the point?” She’s got a point, but I like the idea of trickling money into specific accounts each month and then psychologically you feel like these types of things are already “paid for.”
But the more I thought about it, she’s right: the math don’t lie.
December 15th, 2009 at 6:17 am
As part of our family finance strategy we keep the emergency fund for true emergencies. Instead of targeted accounts I just add to a savings account every month. Unexpected expenses will then come out of this account. IOW it is a general account not targeted but serves the same purpose.
It really comes down to a matter of psychology…what works better in your mind.
It should be noted that the car breaking down or your furnace busting up could be considered and emergency by some therefore tapping into the EF fund would be permissible for them.
For me emergency is midnight trip to ER with a child only to find out that event happened right on that one day where you were transitioning to a new health insurance plan and you were not covered for 24 hours so I was stuck with the $550 bill (true story).
I would have gone to the ER room if I had the money or not. I was glad I did.
December 15th, 2009 at 6:24 am
I have two savings accounts, one for what I call “liquid savings,” and the other is “DO NOT TOUCH EVER!!!” I have money deposited automatically out of every paycheck to both of them (last I checked, it was like, 15% of my net paycheck, between the two accounts).
I take things like vacation cash, clothing purchases, unexpected veterinarian bills, car repair, etc., out of the liquid savings. That’s where I stash money for planned future buys, too.
The Do Not Touch savings I let accumulate until it hits a certain amount, then I *have* been buying a CD with it. However, I already have two CDs that amount to my six-month emergency fund, so next time I’m thinking of looking into some other kind of investment - still secure but maybe pay a little better interest. If I don’t have to use any of the emergency funds by the time I retire, they’ll be consolidated and kept in case there’s a major house thing - AC repair, roof repair, etc. If I sell the house, then I’ll have that cash to move with, or use for other expenses (I doubt I’ll buy another house if I sell this one, for a variety of reasons).
December 15th, 2009 at 6:45 am
I’ve thought about setting up targeted EF’s but I don’t really get a lot of unexpected expenses. I’ve only been tracking expenses (exact expenses, down to the penny) since April but I can’t really remember anything major from the last three years.
I do, however, like the *idea*. As someone already said; it’s like it’s already paid for. At the same time though, I can see that it wouldn’t be very practical. I’m already saving for a number of things and if I mix in a few more I may get too easily confused. For these reasons I’d just use my regular EF for costs like that.
December 15th, 2009 at 6:48 am
I have several targeted funds, but only 2 of them are really emergency funds. One is for car repairs ($25/paycheck since my car is less than a year old) and our large Emergency Fund (which is fully funded, but I still put $25/paycheck into it).
I also have targeted savings accounts for travel (that’s been $200/month, but I just paid for most of the big trip I’ve been saving for, so that’s going to change) and I recently emptied the savings account that I built up for my new car purchase. The travel fund will be almost emptied in March when I take a trip to Ireland.
December 15th, 2009 at 7:15 am
I have what I call a “secret account” where I stash money for these purposes. This is how we’ve structured our accounts at our main bank.
http://ultimatemoneyblog.com/how-we-use-our-checking-and-savings-accounts
It’s been working pretty well!
December 15th, 2009 at 7:29 am
Nice article. A couple q’s, though:
- currently we send all “targeted funds” to an interest-bearing checking account that we don’t touch. Excel keeps track of what’s where for us. Redneck Bank makes better interest than ING (by a long shot! something upwards of 3%). Is there anything with comparable interest but also with subaccounts?
- how do I “automate” my funds deposited into a number of different sub-accounts? Do I need to make several automatic deposits from my checking ($26 here, $35 there,…)? Or can ING (or whomever) divide the money up as I request automatically?
December 15th, 2009 at 7:36 am
I have separate accounts at ING: Emergency Fund, Car Maintenance, Car Insurance, and Pet Emergency. I also have set up goals at SmartyPig.com to save for a house down payment, a trip, and a Holiday fund for next year. (I just love SmartyPig!)
If I had to pull money from my Emergency Fund to pay for car repairs, etc. it would be totally demotivating to me. The separate accounts give me permission to spend on the things that come up that I really need without feeling like I’m stealing from my future. If it wasn’t for GRS, I would never have thought to do this, so thanks!
December 15th, 2009 at 7:39 am
Very timely post for me as I’ve made several unexpected repairs myself this month to my 20 year old truck and I’ll be making some more shortly as it took me 15 minutes to start it this morning!
I keep a sub-account labeled “vroom vroom” (I like to give them silly names to keep it fun) which was originally planned as a car down payment fund.
However, I’ve pretty much decided that I don’t want to own a car anymore, so this fund is now my maintenance fund until I can iron out all the details of going car-less.
Of course, I could still afford to make the fixes without using the fund, but it would wreck my monthly budget which has some psychological ties that I enjoy preserving.
To each his own, I suppose, but I’m definitely a fan of the sub-accounts.
December 15th, 2009 at 7:48 am
We have around 10 “sub-account” or sinking funds that we fund on an annual basis. These range from car repairs to vacation to home decoration. We love the feeling of security these provide, and it’s great to not feel guilty buying a few new pictures for the house because you already budgeted for it and funded those expenses ahead of time.
We don’t physically create sub-accounts to accomplish this. All of the money is in one account (well several, but you know what I mean) and we keep track of each category in an Excel sheet that’s linked to our monthly budget.
Nerdy perhaps, but it works great for our family!
December 15th, 2009 at 8:05 am
I like this concept and have been playing around with the idea myself…I think, though, multiple accounts would be demotivating to me at this point (I’d only be able to put a small amount in each, and they’d build up very slowly). I think the two separate accounts mentioned in the comments is a great idea–general savings and emergency fund.
On the other hand, I might feel guilty about tapping the “general savings” to go on vacation, knowing that I wouldn’t have it there anymore for car maintenance…lots to think about.
December 15th, 2009 at 8:07 am
I do this as well. It’s less depressing to take money out of a particular account when you know that is the purpose of the account. It also helps prevent rationalization, so that the funds don’t get used for something unintended.
As a side note, if you don’t want to literally create separate accounts for the various designated funds, you can set up a spreadsheet to separate them.
December 15th, 2009 at 8:10 am
I have two accounts. One is an emergency account that is only for a major emergency (job loss or major illness/disability), and the second is for larger occasional expenses (insurance, pet care, etc.) and also unexpected expenses that I don’t consider to be major emergencies (like having to repair my computer).
I agree with those who said that there is a psychological benefit to having sub-accounts. On the flip side, if you are dipping into your emergency account for things like car or home repairs, then it may not feel like a true emergency account, which may make it easier to dip into it for other non-emergencies–like the boots for sale at the mall that you just HAVE to have! I disagree with those who have said car repairs are an emergency expense. If you own a car that’s a few years old and is not under warranty, it is inevitable that it will need repairs, so it’s best to plan ahead for this.
December 15th, 2009 at 8:12 am
I apply this concept to non-emergency irregular expenses, too, like gifts (in my family almost everyone’s birthday is clustered in two months, so with Christmas and Hanukkah there are only three months of the year where we’re buying gifts that can’t be easily cash flowed) and running expenses (more expenses in the warmer months). Right now I’ve got subaccounts going for travel, a CSA subscription, vet bills, running expenses, professional fees, home maintenance, and work clothing. Maybe one or two more.
Basically it’s the difference between which budget categories operate on an envelope system, accumulating month to month, versus which ones are zeroed out at the end of each month.
December 15th, 2009 at 8:14 am
Great points. I think it a really important part is it to automate it. If we don’t make it automatic, it is way to easy to let it slip by without getting done.
December 15th, 2009 at 8:14 am
Too many subaccounts would make me insane. Something “unexpected” happens every month, but the kind is different. So we took a look at our expense sheet, figured out on average every year what the unexpected expenses looked like (car, pet health, home repairs), and put a sum every month into an account for those expenses, whatever they were. We pull out what we need from that account and don’t worry about what the category is. The big EF is separate.
December 15th, 2009 at 8:16 am
We have two accounts for emergencies: one for property taxes because we recently paid off our house (hooray!) and one for car repairs. My husband is reimbursed for mileage, so we began putting that extra check into an account for fuel and maintenance. We also keep a long term liquid savings account with nine months of living expenses. As money accumulates, we shift it into investment accounts.
December 15th, 2009 at 8:19 am
While I have separate accounts for our next home down-payment and our next car purchase, all other savings gets lumped into one account that I consider “emergency/unexpected” funds. I don’t know if my psychology is just different or what, but having that money there when I need it is enough security to keep me from using on the sale boots (as a previous poster mentioned) without having to go through the hassle of figuring out how much I need to allocate toward irregular or unexpected costs and how much should be allocated to true emergency costs. Maybe it’ll bite me one day, but $200 out of one account sure feels the same as $200 out of another. As another poster said, the math is the same.
But, then again, I’m one of those people who really doesn’t get how someone could choose to pay down a smaller, lower-interest rate debt before paying down a larger, higher-interest rate debt. Doesn’t make sense to me, so maybe that explains the above.
December 15th, 2009 at 8:22 am
Nice article. To combat this particular problem I’ve implemented a couple savings accounts that I never had before. As JD has talked about ING Direct being so great for this, it has made my life so much easier.
I have 2 accounts for these kind of things:
1 - Emergency Savings (If its a really big issue)
2- Non-monthly expenses (Well if its something unexpected ,yearly fees, etc)
I set it up that each month money gets dumped into those two accounts. When an emergency or unplanned expense comes, its there. It wont throw off my entire budget and ruin my goals (or my life.. well not too much).
James
December 15th, 2009 at 8:27 am
Targeted savings funds are the best thing I’ve done for our budget in years! I set up one for car repairs/maintenance, one for property taxes and one for gifts. All are funded by direct deposit right from our paychecks, so we can’t spend it first. Our main checking and savings accounts are at a local credit union (easy to access) and the targeted funds are at an online bank (separate and not as accessible). The money is there when we need it for that specific purpose. I think TOO many small accounts would splinter our takehome pay to a point where it would be uncomfortable, but at this point, it’s a good balance and it’s working really well.
December 15th, 2009 at 8:38 am
Targeted emergency funds and savings accounts have really been about peace of mind for me. My fiance and I are planning a wedding and the idea of having targeted funds for a banquet hall, DJ, florist, etc. has really allowed me to know that we have enough money for such an undertaking. As long as targeted EF’s are in a safe place such a an FDIC insured savings account and not stuck in something like a CD I feel they make total sense.
December 15th, 2009 at 8:42 am
My husband and I are very different in this respect. I like having all my money together. The accounts only differ by how quick the access to them is. Somewhere between $100 and $1000 in checking (immediate access), 1 months pay in savings (a few minutes), 3-6 months expenses in online savings (a few days) (or laddered cds when the interest rates merit it), all the rest in stocks (which I don’t like selling but could in an emergency). It seems like there’s an emergency every month, so emergencies have just become a regular expense paid out of the regular checking for the month.
He’s much better with the mental accounts. Right now that just means he gives himself an allowance, which he keeps track of and divvies up with his own informal targeted saving.
December 15th, 2009 at 8:44 am
I have all of the money in one account, but keep track of these sub-accounts on Excel. It makes a big difference for my psychologically to see that I have money set aside. And when I have to use it, my budget is not wrecked for the month. I have sub-accounts for the car, the kid’s medical, and kid activities (going to the museum or whatever).
I also use my spreadsheet to roll over extra money for utilities. For example, I plan on $170 for electric, but rarely go that high. The extra money rolls over to the next month. By December, I have plenty saved to take care of the sudden jump when I have to run the heat (I live in Florida).
December 15th, 2009 at 8:49 am
Lots of subaccounts is a neat idea, but wouldn’t work for me. Instead, we work on the 2 account system like some other folks do- we have an annual expenses savings account (for irregular expected expenses and unexpected minor “emergencies”) and a very small “do not touch except in case of major emergency” fund account. I think I need to move the major emergency fund to another bank, though, because it’s way too tempting to spend out of that account when it’s right there on my regular online banking with the account I use for my monthly expenses. Out of sight, out of mind works surprisingly well for me when it comes to hanging on to money!
December 15th, 2009 at 8:58 am
More important than the two reasons given (IMO) is that by separating out the accounts, you aren’t able to do shady math, and count the money for yourself twice. If you need 6 months worth of regular expenses saved, and you also need money to repair your car, then you can’t take money from your emergency account to pay for your car. The emergency fund trap is that you take your five target funds that you should be saving for (car repair, next car, house repair, tuition payment, gift fund, etc) and only and save enough for only one or two, because they are all in the same account. There can be no mistake if you’re supposed to have $1200 in your car repair fund, and you only have $800.
In fact, I think counting money more than once is a phenomenon that happens elsewhere too. When people get a $100 bonus, they often find themselves planning on saving some of it, but still go out to dinner, buy a new mouse for their computer, get a car wash, and soon enough there’s nothing left to save.
December 15th, 2009 at 9:03 am
I’m a big fan of targeted savings accounts for home maintenance and car repairs. The other benefit for me is that since you already have the money saved up they free you to really make the right long term decision. Making the “cheap” decision on home or car maintenance in the short term can easily end up costing you more in the long run.
December 15th, 2009 at 9:08 am
I think what works for you depends on how you budget. If you are on a “pay yourself first” budget where you spend whatever is left after savings then this type of subaccount system might not be for you, or perhaps you would only set aside $ for larger expenses.
But for those that budget every dollar it makes a lot of sense. If I want a new pair of boots it has to come from one of my budget categories. And if I have a huge pile of money for all of my savings how do I know how much of it is for clothes, gifts, car repair, etc?
I used to do the single savings account, but I found after about a year I couldn’t keep track of how much money was in there for any one thing. Nor did I know if what I had been setting aside for a category was the right amount.
By splitting it up in an Excel sheet like others here, I found myself spending completely differently. And I am much happier with my purchases and never worry about if I just spent Xmas money on boots, or car repair money on Xmas gifts. The spreadsheet also allows me to go back and review how close my budget guess-timates were to reality.
December 15th, 2009 at 9:08 am
At first, I was going to come on here and say that while I like the idea of sub-accounts, 1. I’d have way too many and 2. I couldn’t afford them until I’m done with a sizable primary EF, which is taking me FOREVER. But….
I kinda sorta do this, just not the way it’s being used. I have an EF, travel fund, “fun” savings (my own personal savings for spending), and one account for each of my two cars. (Not my husband’s, that’s his cost lol.) Regular maintenance costs (basically oil changes) come out of each car’s account, as well as mods and what not. It’s just really, really, really slow funding each account with what I make… (Not a whole lot.)
December 15th, 2009 at 9:08 am
I have just one Money Market account, but in my personal budgeting I have it divided into three parts:1) Known irregular expenses (taxes, insurance, deductibles, etc.), 2) True emergency, not to be touched other wise, and 3) the “Fun Fund” (for big purchases or vacations). I have a “cap” for each one, so that my monthly deposits go into Category 1 until that reaches its cap, then is split between 2&3 until one or the other reaches its cap, then, if all three reach their caps, I raise all the caps a little bit.
I know, it is really all mind games, but it works for me.
December 15th, 2009 at 9:14 am
I have an ING account which acts as my Emergency Fund, and my regular savings account is for everything else, including incidentals like small repairs, weekend trips away, gifts, etc.
I spend whatever I need to for the month, and whatever is left over above what I need for the next month, I transfer to long-term savings. In months where there has been a lot of incidentals, I may transfer over only a small amount or nothing at all.
It is pretty informal, but it has worked very well for me. I would hate to have to keep transfering money back and forth between accounts. At one point, I had set up an automatic savings plan for my ING account, but I found that the amount was never right - some months I was able to save more and others I was able to save less. It just makes sense for me to do it myself once a month, so I can control the savings based on fluctuating expenses.
December 15th, 2009 at 9:18 am
I agree with a few people here about keeping separate accounts. Yes, they build slowly, and sometimes hit zero when you use that money for its intended purpose. But it keeps me from doing ’shady math’ (per #27), and that’s exactly why I keep them all separate. We budget by the week (ex. rent calculated weekly, paid monthly), we get paid by the week, and we save by the week. It all makes so much sense, because we all understand that there aren’t 48 weeks in a year. I have a large EF savings account that is at a completely separate bank (chasing the highest rates). I’ve never touched that account, nor do I really intend to. I also keep a ‘local EF’ at my local bank where my primary checking account is at. That’s just in case I need something in cash that moment. It would take a couple days to get to the larger EF. For targeted accounts, I have several that we contribute to each week, right after our paycheck credits to the checking account. Vacations: we plan the trip each year with this in mind, and transfer most of it into the checking account when we travel and just have a blast not worrying (within reason) about what we’re spending. Offerings: We give regularly also, but also choose to give large missions offerings at our church twice a year, that we plan ahead for. Automotive: This account covers building the funds to buy with cash when the time comes, and is also used to repairs and most maintenance items. Gifts: We hate it when two family birthdays (or whatever) line up on the same week and mess our budget up, so we save for this. It also accumulated enough to handle Christmas time also. Wife: My wife tends to go shopping for clothes only a few times a year, and so we save for that so as to not throw the weekly budget out of whack. Since we’re renting now, we don’t save for things like repairs and taxes, but we are saving for buying a house in a separate account. I also opened a checking account at the same bank I have my targeted accounts at. That allows me quick access to the money there, and the ability to write a check with those funds without going through our normal checking account which is now only used for daily items and to pay off the credit cards before any balance is due (I pay them off weekly).
December 15th, 2009 at 9:27 am
I feel like excessive budgeting is the equivalent of auto enthusiasts putting vinyl graphics or big spoilers or “cold air intakes” on their cars. They don’t really *do* much, but they’re relatively easy and inexpensive and they make you feel like you’re participating. You’re now a “tuner” because you did something to your car, even though it’s not any faster than it was. Same with personal finance — you’re now participating because you put labels on everything.
Whether you pull $600 from a larger emergency fund of from a separate car account makes very little practical difference. You’re probably better off spending time learning a skill that will increase your income or looking for a better job than you are wading through personal finance spreadsheets and perfecting your targeted accounts.
I essentially have a “money for things I might want or need” account. It’s my checking account. I try to keep a few thousand dollars in there for things I might need. Recently I had to pay a $1000 vet bill. Where did the money come from? It wasn’t in a “pets” account — it was in my checking account. I’m about to take my wife’s car in to get the timing belt replaced ($700). Guess where this money’s coming from? My checking account. This works fine — at least, I have yet to end up on the street using this method.
December 15th, 2009 at 9:29 am
“We have around 10 “sub-account” or sinking funds that we fund on an annual basis. These range from car repairs to vacation to home decoration. We love the feeling of security these provide, and it’s great to not feel guilty buying a few new pictures for the house because you already budgeted for it and funded those expenses ahead of time.
We don’t physically create sub-accounts to accomplish this. All of the money is in one account (well several, but you know what I mean) and we keep track of each category in an Excel sheet that’s linked to our monthly budget.
Nerdy perhaps, but it works great for our family!”
This is almost exactly what we do. 15 sinking funds, but they’re all in an ING account and tracked in Excel. I don’t feel guilty buying photos now and then, I’ve got money for car repairs, doctors, etc. We’re currently working on our EF but I feel better keeping it closer to 3 mo than 6 mo because I know there’s a fair chunk of money in ING as sinking funds that we could raid if we were super-desperate. We began these as we were paying off our debt rather than waiting until we had an EF and paid everything off. It probably took longer to pay things because of that, but we were more prepared when sudden bills came up.
December 15th, 2009 at 9:30 am
Great discussion. I like Jeff’s point that there isn’t really 6 month’s of expenses in it if you’ll also be using your EF for other things. I currently have just two ING accounts: 1) EF an 2) New (Used) Car. You all have been making some good points - I want my EF to be for only major crises like a job loss or medical expenses.
So I think I’ll open up some more ING accounts. One for car repairs and one for home repairs. Maybe even more than that, I’ll have to think about it.
December 15th, 2009 at 9:30 am
@Tyler–You know, even as I was writing this post, I knew you’d fall firmly in the “why bother” camp.
December 15th, 2009 at 9:30 am
@Tyler - 34
Yeah, I agree. Personally, I enjoy it, but I recognize there is very little practical reason to super-budget everything.
December 15th, 2009 at 9:33 am
Hi. I think some confusion arises because April calls these “targeted emergency funds” but it’s not actually emergencies she’s talking about.
When DH and I were thinking about whether he’s ready to retire, I looked at several years of expenses, and could easily see that we used our incoming funds in X amount for regular monthly expenses and Y amount was spent every year on irregular expenses — which weren’t emergencies, just irregular.
Some of the categories on which that money is spent will change over time, but I suspect that the amount will stay fairly even — I think people may have a “set point” for spending the way that nutritionists tell us we have a “set point” for our weight, the place at which the body feels comfortable….
December 15th, 2009 at 9:34 am
i know this seems stupid but when i had an emergency, i broke my ankle and was out of work for 3 months i did not use money that was liquid in my money market savings account i used instead money from my overdraft checking account and will have to pay interest on it. the reason i did this is because i HATE to have debts and i know i am more motivated to get rid of this than i would be to put the money back into a savings account
December 15th, 2009 at 9:36 am
We do this a bit differently. We have one account and keep an excel sheet with each irregular expense broken out by estimated annual amount, estimated monthly amount, and “bi-weekly contribution” because we are paid bi-weekly. I sum up the bi-weekly column and have that amount taken from my paycheck and deposited into the account. I like this method because it allows me the flexibility to change things on the fly. I found that I spend more on vet and grooming expenses than I anticipated, so I increased that category. Budget looking tighter than usual? Lower the annual amount for Christmas gift and boom, the bi-weekly amount it automatically recalculated.
This also allows me to see more precisely where my money is going. If I had known Vet & Grooming expenses would average out to be $88 a month I wouldn’t have adopted long hair, high maintenance dogs.
December 15th, 2009 at 9:38 am
@elizabeth
Agreed, these aren’t emergency funds. Buying gifts happens, vacations happens, car repairs happen. No emergencies there, plan for them. We use those targeted funds to create a zero based budget. Every dollar has a place and a function. There isn’t anything extra, and if there is, it needs to go somewhere and do some work. We take out savings amounts each week, and have to live on whatever is left over. We then have very few expenses left (gas and food usually). Other bills and such get paid every month, but we’ve already planned for them, and that money in our system just waits in the checking account. If there is something that we pay or spend less often that once a month, we shove that money into targeted savings and draw some interest instead.
December 15th, 2009 at 9:39 am
Tyler @34 - Keeping a big cushion in your checking account for these sorts of irregular expenses is great IF you aren’t tempted to spend the balance on random wants. It’s exactly what I did when I was single and it worked great. However, hubby is the spender in the relationship, and he is likely to spend extra money at the end of the pay period (iTunes is a big one). But he wouldn’t use the money in the “car replacement fund” to buy a want on a whim. For him and probably many people on this board, sub-accounts are a phsycological barrier to keep you from spending extra cash, when you should be saving. Like JD says, do what works for you.
ChrisD @9 - This is the problem I have. I think if you don’t use ING Direct or another online bank that offers this, you can do the same thing with a piece of paper or an excel sheet. Just write down how much in your savings account is set aside for each goal, and then update it as you take money out or put money in. Every time my bank does a satisfaction survey I always ask them to make sub-accounts!
December 15th, 2009 at 9:41 am
@ Des.
Yeah, Since I budget by the week, it makes the budget really easy to manage over the short and long terms. If we decide to do something expensive for a vacation, then I adjust other savings targets. If gas gets expensive, I need to adjust my Gifts account or something like that. It’s actually a real eye opener when you micro-budget. Take a look at how much you spend each DAY on retirement, gasoline, Christmas gifts, etc, etc, etc. I even know how much that one or two weeks of vacation costs me each day of the year. But again, that might not be for everyone. For me, I really enjoy it, so I choose to do it even though I don’t really need to.
December 15th, 2009 at 10:03 am
I have a different system that works for me (because I don’t like spending anyways). I have my rewards checking which has a floor amount (everything below is emergency, and I get an email when I’m less than that). On top of that is everything else, this months expenses and more, the space between the floor and the current amount covers everything. The floor moves up along a schedule(every paycheck) so I have to keep ahead of it. I don’t recommend this strategy if money is a willpower issue, for me the fear of touching that floor is enough to keep me from splurging on a new TV. Also the floor sometimes holds still because I’ve planned in a “reward” for reaching a point. The rewards checking gives me 4.01% so there is no way I’m moving that money into separate accounts. My End Goal for the floor is to reach the ceiling for that rate, 20K.
I don’t separate because there are two categories things you can plan for and things you can’t. The money below my floor is only for things I can’t. I have to eat through all my “fun” money before I can touch that. There is no sense in still paying for a cruise because “its a different account” when you just spend the same amount to replace your now dead car. Needs first then wants.
December 15th, 2009 at 10:05 am
@Tyler
Yes, some of us want to pimp out our online savings accounts with cool features such as: Automatic Transfers and Sub-Accounts. For Fine-tuning the performance of our budgets. =D
December 15th, 2009 at 10:06 am
I like the comfort of having several sub accounts, although I’m trying to limit them as it was getting a bit ridiculous (and time-consuming) to manage them. So now I have only a couple of actual accounts and I use YNAB to earmark different amounts within the accounts to different spending categories (household, cat, holidays, car registration etc.). YNAB (www.ynab.com) is essentially a virtual envelope system so you can have all the sub accounts you need. It works for me, as long as I don’t let myself get too specific! Yes, I am my own worst enemy!
December 15th, 2009 at 10:09 am
Way too complicated for me. I simply try to have a cushion in regular checking to pay for these sorts of things, since they literally do seem to happen almost every month. Second having an emergency savings account which is pitifully small, but is only tapped as a last resort. I’m sure someone looking at our system would say it’s way lax, but the kind of budgeting that the author speaks of makes my head hurt.
December 15th, 2009 at 10:20 am
I very recently revised my budget and got rid of most of my existing subaccounts. I realized that, for me, having one lump account of ‘irregular expenses’ and then my emergency fund, is what works best for me, psychologically. However, I think it was important for me to clearly define what constituted an irregular expense, and would allow me to access those funds. (For me it’s things like eyecare, car maintenance, my AAA membership, car taxes, etc.) I know I could get more granular with my accounts (and have in the past), but for me at this point in my life it’s just not that important.
December 15th, 2009 at 10:25 am
I’ve gone back and forth between one large emergency fund and then smaller accounts to help out. Because I’ve fluctuated between the two I believe I haven’t been as proficient as I would have liked. Has anybody fluctuated like I have? Does anyone have any suggestions for me?
December 15th, 2009 at 10:30 am
The easiest way to create these targeted accounts are in Quicken, and it doesn’t matter which version you use.
First, create a bank account in Quicken and title it “Targeted Funds” or something of the like. Then, create asset accounts for your targeted funds. “Auto Maintenance Fund” is an example. Once you’ve calculated your weekly or monthly amount to be put into these accounts, create an automatic transfer for that amount at that time interval. When you actually spend the money, reverse the transfer.
This method creates a contra cash account in Quicken. Your “Targeted Funds” bank account balance will always be negative. This way, you know exactly how much you actually have in the bank, as well as the total of all your targeted funds (the negative balance). The difference is your discretionary cash. I even use this method for weekly mortgage payment accruals. I always know my discretionary cash amount.
By using this method, you only have to have one real bank account, which allows you to chase interest rates all over the place without worrying about sub accounts…because you’ve personally created these in your Quicken file.
December 15th, 2009 at 10:32 am
I already have to manage multiple IRAs for my wife and myself, my 401k, the family checking and credit cards, our emergency fund, plus college savings accounts for the kids. The last thing I need is to start separating my emergency fund into multiple accounts targeted for every conceivable type of individual emergency. As already stated, the cost of the emergency is the same regardless of what name I give to the account. How I “feel” about the account name is irrelavent.
December 15th, 2009 at 10:33 am
Great idea! Setting aside money for unexpected expenses and keeping it separate from anything else.
However, just like Infinion mentioned, over budgeting can be an issue as well. At any point of time, the amount of money that you have doesn’t really change if you are able to control your spending habits wisely.
I feel like that if you accomplish all of the essential tasks in the month such as investing, retirement, food, bills, etc, any money left over can be put away for other expenditures and just leave it that.
Best,
Tomas
December 15th, 2009 at 10:37 am
I only have one EF account right now, but can see the value in creating a few target accounts. That said, I would not want to have more than 2 or 3 additional target accounts. I think anything beyond that would be frustrating to manage. The car repair target account is one that I have been considering for a while, but whenever I get a stretch with no repairs I decide it isn’t necessary. However, I now have close to 200,000 on the OD and need to setup a new car/repair account. I think it will make it easier to keep an eye on my progress and as mentioned above, avoid using shady math.
December 15th, 2009 at 10:47 am
We actually started a targeted budget for our car while still paying off our cc debt. It saved our tail because the same month we paid off the last cc, our car wouldn’t pass smog and we went down a long road to try to figure out what was wrong. When all was said and done, we still had $80 left in the Car Maintenance account! Such a blessing not to have to worry about how we were going to pay for it.
December 15th, 2009 at 11:05 am
Indeed, do what works for you. In my case besides my checking account I have a savings account that I labeled “Emergency fund”. Then again, I have used it for a major repair on my car (paid in full), and felt relieved I was able to have the immediate money for it. I had the repair done in part by my trusted mechanic and the other part by the dealer who threw in a catalytic converter at no charge (approx. savings of $1,000.00!) as that part was still under extended warranty. Immediately after the repair I started replenishing the account. This fund could ultimately even be used for a principal reduction on my mortgage in part or fully, which would give me a different kind of freedom! Sub-accounts would probably not work for me, because it would focus me too much on available funds and might have an opposite effect: spending more money! It is working for me now, who knows it might change in the future.
December 15th, 2009 at 11:05 am
@Rob, does Quicken automatically pull the real cash from the bank account into the targeted accounts or does that need to be done manually?
December 15th, 2009 at 11:12 am
Crash budgets often don’t provide for emergencies like car repairs and such. Then people have no reserve for these spontaneous expenses.
John DeFlumeri Jr
December 15th, 2009 at 11:13 am
@Tyler
I understand but totally reject your analogy. First: I don’t spend much time on the system. I spent 10 minutes making a spreadsheet for the account I already had and I spend 2-5 minutes every payday updating it, not much time or energy as far as input.
Second: you have a negative accountability system. As I understand it, once your regular bills and savings are taken care of you consider the rest as completely open to spend. But from what I understand you don’t have an overly complicated financial life. You don’t have kids, you don’t have a lot of people to buy Xmas gifts for, and your rent is well below your means. Some of these are situational and some are decisions, but others have different situations and priorities.
I have a positive accountability system. I know what my income is and every dollar has a name. Our income is high enough to do what you do, but I want my money to work as hard as I do. Plus it’s an effective way to curb the ‘I want’s. If the money is there I can get a new toy. If it isn’t then I have to wait. I own a home and my husband could easily spend thousands of dollars on various projects. Rather than fight about it he has a budget. We have extended that idea to the rest of our spending. Plus for people who are stretched tight due to low income or large expenses your method of keeping a few thousand in reserve for wants/just-in-case isn’t reasonable. One must find a way to achieve balance. A spreadsheet sheet is a logical way of doing that.
It is a different way of looking at things. I understand your thought, but as I said I disagree with your sentiment that it’s wasted time. It would be easy to take to an extreme but it serves a purpose for many of us.
December 15th, 2009 at 11:26 am
Great article!
I aim to do a percentage-based budget: 10% of income for long-term savings (emergency fund), 10% for retirement, 10% for fun money, 60% for regular bills, and 10% for irregular expense savings. (Lately I added another category since I’m saving for my wedding, so some of those percentages have dropped so I can divert extra savings towards the wedding.)
But because of that irregular expense savings account, I can pay my car insurance bill this month without breaking my monthly budget (particularly with the holidays adding to the budget pressure).
I prefer to keep it separate from my emergency fund because of how I think about things. Emergency fund is for emergency living expenses if I were to lose my job, or emergency medical expenses if I were to get very sick, or some kind of major and unforeseen home repair. I don’t want to touch that money unless it’s a true emergency. Irregular expenses are things like Christmas, like my car insurance bill, like minor car repairs. They don’t happen every month, but they’re not emergencies.
It’s easier for me to put that money in a separate pot, rather than just keeping it as cushion in my checking account, so that I don’t spend it. (Also, it earns a touch of extra interest in savings. Not much these days, but hey, a buck is a buck.)
It works for me. It’s all about doing what works for you.
December 15th, 2009 at 11:30 am
I’m not crazy about the idea of keeping separate accounts. Perhaps doing separate accounting for each component of your savings vehicle would make more sense. Seems like the more you spread your money around, the more likely it is you’ll be hit with some sort of maintenance fee for each account, or you might miss out on discounts or fee waivers that you’d get if your account had more funds in it. Plus, I don’t want to get multiple account statements, even if they are electronic. I prefer working with as simple a system as possible - and for me, that means minimizing the number of cash accounts. I guess I’d rather keep track of how much of the account is for emergency fund and how much for targeted funds on my own - but use just one single account.
December 15th, 2009 at 11:56 am
I used to have separate high-interest savings accounts for irregular, but known, expenses, that I regularly put money into.
A bit of a hassle to transfer money, really, so what I do now is to pay those irregular expenses from my paycheck and invest less that month while increasing the investments other months.
December 15th, 2009 at 12:07 pm
@Cashing: the quicken account is just a fancy electronic spreadsheet essentially. According to Rob, no money moves at all. You have one account and use Quicken to keep separate tabs on different amounts. Does that make more sense?
December 15th, 2009 at 12:18 pm
After reading some of these replies, especially Shara’s (#59) I think I realize a fundamental difference between myself and the more compulsive budgeter.
Shara says: “I want my money to work as hard as I do.”
But the thing is, I don’t. Or at least, I don’t care.
“Live below your means” is a phrase often thrown around on sites like this. What I’ve come to realize is that when people use it, what they really mean is “save some of your income”. People like Shara budget every single dollar they make, and they try to squeeze the most out of all of them. Some of them go to savings, some of them go to housing, some of them go to other areas, but they’re all accounted for. Sure, Shara’s living expenses are lower than her income, but her budget is pushed right up against the number that is “her means”. Every dollar is accounted for.
However, that phrase, “live below your means” means something different to me. It means, “live as if you made less than you actually do.” The part of my finances that is budgeted in any sense is probably about 3/4 of my after-tax income. That part is budgeted for retirement savings, other savings, rent, basic utilities, and everything else I need to live and be comfortable. The rest is just extra, bonus money. This is the part that stretches between “requirements” and “my means”. This money has no purpose. I can use it to pay my vet bill, or a car repair bill, or buy myself new toys, or waste it on something that turned out to be a dumb decision, and it doesn’t matter. My budget is set up such that I can live without it, and I won’t miss it if it’s gone. I don’t expect this money to “work hard for me,” in fact, I don’t expect it to do anything, not even to exist, necessarily — if it didn’t, none of my other goals would need to change. This is the money that sits in my checking account waiting for a reason to spend it.
Money comes and money goes, it doesn’t all need to be watched with precision and calculation, at least, not for me.
December 15th, 2009 at 12:26 pm
Well sure, Tyler, I could say the same thing about my finances, but we’re making close to 220K combined. If I’m not mistaken, you’re also up there, too? If so, then yeah, you definitely reach a point where your income is far more than enough to cover your “needs”. What you (and hopefully I) have done that’s unusual is not allow your higher income to create higher “needs”; you still live like we’re making less than 100K. But don’t assume for a minute that your “money comes, money goes” way of looking at it would be at all feasible for a couple (or family) making much less than you are. I’ve been there, and it’s impossible to be carefree about money when you’re working with a normal amount of it.
December 15th, 2009 at 12:30 pm
Very good article — April at least made me consider whether it would be a good time to make this kind of change.
We generally don’t target accounts to specific expenses. We have rental properties, and we try to keep the rent money separate from the other accounts. We also keep custodial accounts for the kids that we fund to cover their activities, since those are often cash-only.
We define our accounts more by long-term vs. short-term. The harder the money is to access, the “safer” it is from being misused.
– The regular cash-flow money is in checking with debit card access.
– The short-term savings is in a money market account at a different institution, but with check access.
– The long-term savings is in a savings account at a 3rd institution that takes several days to transfer to either of the other accounts. We don’t have debit cards or checks for this account.
Retirement is a different animal, with Rollover IRAs, Contributory IRAs, Roth IRAS, after-tax IRAS, 401(k)s, . . . (No wonder I don’t want any more accounts!)
December 15th, 2009 at 12:30 pm
@64 Tyler
When we were in graduate school we had a lot less money and really did need to watch it with precision and calculation.
But we also had a lot fewer emergencies– no car, no reimbursements taking months to come through, no housing expenses, positive rather than negative surprises at tax time (mostly)… we didn’t even have unusual utilities bills because they were included in the rent. A much smaller emergency fund was needed. (We were also only paid 2x a year, other than the occasional stint as an experimental test subject, which made consumption smoothing really important.)
But we still did the save first thing with slush in savings and laddered cds, because it was easier (with husband giving himself a smaller allowance… if he didn’t have me he would benefit tremendously from April’s advice). I think there are just different types of people. We satisfice or optimize over different mental equations.
December 15th, 2009 at 12:33 pm
Scott, you definitely make a good point, but I also think a lot of it depends on how you define “need”, even at lower incomes than ours. When I first started with this philosophy I was making a lot less, and it worked for me then, too (I was single at the time). I also see a lot of people making less than me and driving fancier cars, living in fancier houses, watching $2500 televisions, etc. What if these people cut back? Lived in smaller places, with older cars, no new electronics every three years? I think a lot *more* people could see it the way I do, even on a lot less money, if they were to change their status quo.
Certainly there are also lots of people who make barely enough to survive, and for who cutting back isn’t an option. These people don’t have the luxury of being able to live on less and say “money comes, money goes”. However, I think that the majority of people with three-month emergency funds and $1000 car repair funds could probably do things my way if they really wanted to.
December 15th, 2009 at 12:34 pm
We’ve just finished paying off our CC debt, and targeted savings is how we’re avoiding CC debt while building our savings. We didn’t have an EF, so anything irregular or emergency used to go on a CC. Now it comes from the targeted accounts.
We keep a small savings account at a local bank where our checking account is. It’s easily accessible for last-minute emergencies (would be refunded by targeted account if ever used) and we use that account to build our targeted accounts. We deposit any extra money, over-time pay, etc, into that account. When we reach a certain goal in that account, we wipe it out (transfer it to ING). Then we feel really broke again and it motivates us to build that account back up. Moving the money is a mental game, but it works for us!
We also have money sent right from each paycheck to our ING targeted accounts: college savings and EF. That money is saved before we see it.
We’re just too good at spending money. So when we send it away to be saved, it’s like we’re spending it. It’s all mental and may seem silly to those who have mastered their money, but for us, the mental games are helping us getting ahead.
December 15th, 2009 at 12:37 pm
With the quicken approach, no real money is moved. The fake bank account acts as a contra cash account…meaning it is always negative. It looks like this in Quicken.
Cash
Real Account - $5,000
Target Funds Account - ($2,000)
Total Cash - 3,000
Assets
Auto Maintenance Fund - 1,000
Property Tax Fund - 1,000
Looking quickly at your bank accounts, you know that you have 5,000 of real dollars in a real bank…but of that 5k, 2k is already allocated for something. Looking further down, you see where it is allocated.
December 15th, 2009 at 12:50 pm
I am on the fence about this. Right now I have several subaccounts, but I’m about at the limit of what I can keep track of. I have a property tax account, a general savings account, a couple of CDs and a few others. I don’t have a fully funded EF yet and that’s my next focus.
As far as having one EF and one variable expenses savings account, that makes a lot of sense, but I think for me it would be harder to remember how much of it is in there for what. However, since I’m not there yet in terms of the EF it doesn’t really matter.
December 15th, 2009 at 12:52 pm
@ Tyler #68
Oh, I definitely agree… I’ve heard many folks who earn much less than we do talk about buying brand new cars every few years as though it’s a “need”…. that driving anything other than a brand new car is unsafe and something only the poorest of the poor should do. And yet here I am, the fourth owner of an ugly, “quirky” 12 year old Volvo, wondering if us owning two cars is too extravagant.
At the same time, though, I’ve been on the other side of the income fence, and once you get down to a basic level of “needs”, it gets really hard to cut back. Would you want to move back into a cheap apartment complex in an “iffy” neighborhood to free up “fun money”? With neighbors upstairs and down who have regular 3am domestic disputes? I was at a point not too long ago where “cutting back” meant considering options like those, and chose to keep our dignified, quiet rental house and budget every penny instead.
December 15th, 2009 at 12:52 pm
Great real world example of the importance of emergency savings.
We have the ING emergency fund, but need to divide it into target accounts and automate saving. Some of the Target accounts I’m thinking of are:
Auto Repair Account
Housing Repair Account
Medical Emergency Account
Pet Emergency Account
and the didn’t see that coming account
-Dan Malone-
December 15th, 2009 at 1:01 pm
I think some people are missing the point here with the terminology. These targeted funds aren’t for emergencies, that’s what the EF is for. Car repairs happen, house repairs happen, medical expenses happen. However, these are the things that we don’t normally know when they will happen. That doesn’t mean we can’t save for them. So, when your roof starts leaking, you have no excuse for freaking out because you don’t have any money to cover it. And no, that really shouldn’t come from your EF, because you knew it would happen eventually. There is a very limited range of circumstances that your EF should be tapped for. Most, if not all of those circumstances start with the loss of one or more forms of employment. When you don’t have money coming in, and you can’t find more work, that is an emergency, and you need to use your EF. Aren’t you glad you planned for that happening though? Guess what, people lose jobs sometimes. Maybe we better start planning for that to happen BEFORE we need that extra cash. Sound familiar?
December 15th, 2009 at 1:10 pm
Yes, yes, and yes, we have lots of funds at ING, our emergency fund, our escrow funds for each property we own (for taxes and insurance), travel/vacation target fund, home repair/project and furniture fund, holiday fund, fun fund, etc.
Some of these funds are targeted and some are more aspirational. We need to start saving for a new truck for Mr. Sam but have not yet set up that fund.
December 15th, 2009 at 1:15 pm
We move the money off to ING because out of site is out of mind for us. I prefer the sub account sytem because having a set goal amount that I’m working towards is helpful, keeps me motivated. One big pot of money isn’t concrete enough for me but would work for Mr. Sam (he wants to know how much total we have in ING and I’m more focused on how much we have to go on a specific ING account goal.
December 15th, 2009 at 1:18 pm
Some kind of reserve is an absolute necessity for these things.
I also always try to work out a pamyent plan whenever they arise. I know hospitals will do it for emergency room visits, and most plumbers and auto repair places too.
That way, maybe you can just trim your budget for a few months and not even have to touch your emergency fund.
December 15th, 2009 at 1:51 pm
I agree that psychologically speaking, it’s a lot better.
Spending money you didn’t really plan on spending is never a great feeling, but knowing the money was there for that… Well it helps.
I also think that if you have a single EF that covers everything… Well how do you know when to stop?
To me, the regular EF is mostly an “unemployment fund” rather than “emergency fund”. It allows to have money to survive if one loses his or her job. That’s the main thing, as far as I’m concerned, although it can be used for other things of course.
I have a fund for vet expenses, and one for clothes… most people wouldn’t consider clothes to be an “irregular expenses”, but we only buy clothes when one of our old ones doesn’t “work” anymore (ripped and unrepairable, shoes losing their soles, etc) so it’s rare. But it can be a high expense, depending, and if we didn’t have a set budget for it, it would dig a whole in our budget.
Saving for everything that could possibly exist might be overkill, but I agree that saving for the more likely ones (car expenses if you have a car, vet expenses if you have a pet, etc) makes a lot of sense.
December 15th, 2009 at 1:53 pm
This is a great idea and I do this already. We have a vacation fund, a car fund, a home fund, and a church fund. Recently when our church built its new $35 million building, we were able to contribute towards the building fund in an awesome way because of this fund!
December 15th, 2009 at 2:04 pm
Everyone has a story where “everything seemed to break all at once”. It happened to me this year so I decided to take an inventory of my breakable stuff and put an expiration date on it. (based on ‘average life’)
If you do the same, you’ll be amazed at how many items are running on borrowed time, and don’t forget electronics. Most average 5 years and when they break you think..I just bought that, but in fact, it was 5 years ago.
Somehow I feel more in control knowing that 6 things in my house could break at any time. I felt much less in control when I said..”no more major purchases this year” and my washer, tv and camcorder broke.
December 15th, 2009 at 2:05 pm
The only targeted fund that I keep separate is my travel fund–I wouldn’t ever dream of touching that money for car repairs or other irregular expenses.
December 15th, 2009 at 2:10 pm
I guess I am in the minority here, but to me this seems pretty silly. You have your savings, why the need for sub-accounts? If you combine your “emergency fund” with your “targeted” fund, you have the same amount of money. I guess I just don’t understand the psychology of some people.
To me it just seems unnecessary, but to each his own. At least it isn’t actually harmful like that idiotic debt snowball idea. That is just retarded.
December 15th, 2009 at 2:15 pm
I’ve tried targeted savings funds, but I found them eventually too difficult to manage. I instead go with an extra large emergency fund. I recently got into a car accident, and paid for the deductible out of the EF until my insurance company reimbursed me since it was not my fault.
December 15th, 2009 at 2:25 pm
@ Tyler
One issue with compulsive budgeters (which freely I admit to being btw) is often a question of efficiency. I could never have an “easy come, easy go” philosophy for two reasons:
1) most of my dollars AREN’T ‘easy come’. Like I said I want my money to work as hard as I do. That implies that I work hard for my money. If I didn’t, if they WERE ‘easy come’, then I wouldn’t watch them as closely. If I won the lottery I wouldn’t watch those dollars as closely as the ones I can track back to the hour I spent earning them.
2) I love money. Not greed, I love your dollars almost as much as I love my own. Watching people abuse them (not set different priorities but just throw them away) horrifies me. It’s just WRONG *sob*!
I understand how you do your accounting and respect it. Some days I wish I could have such a hands off attitude. But I can’t. I get fidgety if I don’t know the balance of my mortgage or how much money I have set aside for propane. I nearly fainted when I asked a friend how many years are left on her mortgage and SHE DIDN’T KNOW!
@ Scott
I agree with your statement about lower income people. But I would like to point out how many lower income people budget exactly like Tyler, without nearly as much thought as he has. They blow through money they can’t afford to simply because they don’t know how or refuse to budget themselves.
December 15th, 2009 at 2:28 pm
@Rob, makes perfect sense. Thanks for the example!
December 15th, 2009 at 2:29 pm
I have a handful of targeted accounts. I put $85 each pay check into each: Automotive (auto insurance paid twice/year and repairs and AAA membership), house maintainance (big and small house repairs. Last January I was able to pull $8k of the this when my furnace died), Vacation, Extra (I can dip into this if I overspend on day-to-day stuff but try not to, this gets used for things like Christmas or other non-vacation expensive events).
December 15th, 2009 at 2:32 pm
The choice to separate accounts for me came when my husband and I had only one “Emergency Fund” and he needed to buy some car parts. He asked how much was in the account, and I told him, and he went out and spent every penny because it was “free”. Having labels on things helps him (and me) decide when something is a need or a want at the moment.
I think to assume everyone should adopt one lifestyle is pretty extreme. I live better and with less worry because of the choice to label and separate accounts.
December 15th, 2009 at 2:41 pm
HEY JD!
I’m sure you’re on top of it, since you’re the great and terrible OZ around here. But I just wanted to highlight what Tyler said wrt “do what works for you”. “Living below your means” is something we throw around, but it means different things to different people. And there are a number of ways to implement it.
And Tyler,
I’m curious about your wife’s attitude about money. Do you do things separately, or is she in on your super cushion? Part of the reason my budget is set up the way it is is because my husband and I have negotiated it. If we had money without a name we would fight over what it should be spent on/invested in. It’s much better than it was when we got married and he was a spendthrift and I was a miser. But it still prevents conflict this way. When Xmas gift $ was in with everything else he always wanted to be far more generous. Now that I can point to exactly how many dollars we have to spend things are a lot more peaceful.
December 15th, 2009 at 2:42 pm
Ah, those irregular expenses! We laugh when my husband tallies the monthly spending and says, “Well, we would have been doing well if it hadn’t been for that (car repair, trip, broken dishwasher, weird tax, etc.).”
Unfortunately they are a way of life, even though they often don’t fit in neatly in our daily spending categories and they always seem to destabilize us, at least psychologically.
I like the idea of targeted accounts, and especially, for what you say: peace of mind.
You mentioned tracking monthly expenses so that you can go back and estimate how much you need to set aside.
Here is the easy, printable chart our family uses: http://www.frugal-mama.com/2009/10/never-ask-again-where-does-all-the-money-go/
December 15th, 2009 at 2:55 pm
I think this is largely a matter of what works for you. I handle it like tyler@ 34. In my case I usually have 5K in my checking account after monthly bills are paid. That cushion takes care of most emergencies and irregular costs. If its less than 4K then I make a point of cutting back. When it hits 10K I transfer to savings, fund an IRA or 525 plan, etc. and get it back to 5K.
As someone noted, this only works if you aren’t a “spender”. It doesn’t tempt me at all.
December 15th, 2009 at 3:21 pm
@Shara:
My wife and I have pretty similar attitudes about money. For the last few months, she hasn’t been working, I’ve been the sole breadwinner in the house. We don’t have joint accounts (that may change someday, if we get around to it), so if she needs money, she asks me for it. She doesn’t ask me for money for frivolous things (beyond a reasonable amount), and I don’t refuse her money for the things she asks for.
I know she’d like to be able to spend her own money and feel a little more independent, and that should be the case in a few weeks as she’ll start bringing in her own income again, but I don’t think her spending habits will change significantly.
December 15th, 2009 at 3:39 pm
I love targeted accounts. We have one for car expenses, one for vacation, one for gifts/charity and a slush fund for those expenses that don’t fit anywhere else. It’s definitely the way to go.
December 15th, 2009 at 3:47 pm
I’ve been thinking about getting away from Emigrant Direct because I can’t find a way to label accounts, and keeping track by numbers is a PITA. Do other companies besides ING offer alphabetical labeling of accounts?
December 15th, 2009 at 4:30 pm
This is truly the way to do it. The problem that I’ve come across with some is that when they see the money in the account they think it is okay to spend it. It is a tried and true method that works!
December 15th, 2009 at 4:39 pm
I only have one EF but we don’t have a car or our own house to take care of. I do, however, keep targeted accounts for non-monthly expenses like home insurance and union dues. It’s done very easily in YNAB (v3 :p) so I thought why not just do it?
I guess I will have to also set up a dentist fund when I finish the master’s thesis and my (wonderfully helpful) mom stops paying for this. Is dentist expenses something you can have insured in the US?
December 15th, 2009 at 5:23 pm
This sounds like a great idea. However, I already manage 6 bank accounts (3 business and 3 personal!) I’m thinking that maybe setting up different accounts in my Quickbooks program would be a better method for me, instead of opening another account or figuring out how to separate my main savings account into sub-accounts. I guess I should look into the sub-account thing.
December 15th, 2009 at 7:40 pm
I have quite a few “targeted” accounts with ING, do a bi-weekly automatic electronic on payday, and the money goes whee it’s supposed to go. When all the money is divvied up, if I want to clean out my chequing account, I can, because the money that I needed to save has already been saved.
I’ve got a car account (for maintenance - brand new car so not saving for a new one yet), gift account (I’ve got 8 neices and nephews, so bday presents happen pretty much every month of the year!), “big vac” account (for my best friends 40th birthday trip in 2011), regular vac account (for the annual spa trip or long weekends away), emerg savings account, etc. They’re all nicknamed (that’s one of the beauties of ING!) so I can see at a glance how much is in which specific account. It may sound extreme and confusing, but it works for me and my brain, and that’s all that really matters. After years and years of being a financial idiot, I finally feel organized and SMART!
I think that no matter what we all do, if our specific plan works for each of us, and makes sense to us, then it’s good.
December 15th, 2009 at 7:47 pm
No sub-accounts because it feels like you’re making it complicated for the sake of making it complicated. My budget spreadsheets have categories like Home M&R, Vehicle M&R, Insurance, Property tax, et cetera so sub-accounts are not required. The only cash sub-accounts I require are for savings because my chequing account has 0% interest and for RRSPs and TFSAs because of tax rules.
ETA: M&R = maintenance and repair
December 15th, 2009 at 7:51 pm
This is a great idea. Of course, my car is always breaking down so I will most likely never have any money in my targeted account…
December 15th, 2009 at 9:06 pm
Car repairs, vet bills, copays, etc come out of our spending money, just like groceries, short trips, & new clothes. If I have to, I can cut *all* that spending for at least a few weeks, and put it toward something unexpected.
But more than that, if we don’t have cash on hand we just put most stuff off - I have a very small cash stash that would cover an emergency room copay or a snow emergency car towing, and I can’t imagine anything else that couldn’t wait a payday or two. A broken car could sit in our driveway a few weeks; we actually did live with no water for several weeks one time (not for financial reasons, because it took that long to get it fixed).
I guess if the heat went out this time of year that couldn’t wait, but since we invested in a new furnace a few years ago, I’d consider that an actual emergency worth dipping into the emergency fund for…if we couldn’t scrape together at least the first payment by cutting back the variable-expenses part of our budget that month.