Do Emergency Funds and Targeted Saving Really Matter?
Ever since I started reading personal-finance blogs and educating myself about the more advanced aspects of budgeting and saving, I immediately took to the idea of targeted saving. It goes something like this: instead of just saving whatever is left over at the end of the month and adding it to one big pile, you save a consistent amount each month and you place certain amounts into specific folders meant for specific things. For example, if I had a trip I wanted to go on and there was a new computer I wanted, I would automatically save a certain amount to my “Travel” folder and to my “Computer” folder every month. When I hit the amount I need, I buy the thing.
Emergency funds should work the same way, the theory says. You take X amount and drop it into the emergency fund. Whenever something unexpected comes up (like new tires), you don’t have to destroy your budget for the month. Instead, you take the money out of the emergency fund and it’s business as usual.
M and I have recently set up a joint bank account and now we’re budgeting as one entity, which has its challenges. One of them is how we treat things like emergencies. This month we had another big car-related expense and I was espousing the traditional emergency-fund view that I described at the top of this post. She stared at me and asked, “What does it matter if we do all that maneuvering? It’s still the same amount of money.”
I tried to tell her about the virtues of setting up this kind of system: it allows your budget to continue to work month in and month out, it gives you a “cushion” when bad things happend, etc. But the more I thought about it, the more I realized she was right — when it comes down to the bottom line, it doesn’t make a single bit of difference.
Let me explain: we save a certain amount of money every month and deposit it into our joint ING account. So we are saving — the difference is that right now we’re just adding it to our one, large pile of money. No sub-folders or any of that, it’s just “the pile.” So this month we have to pay $300 for new brakes — we can either take it out of the pile or we can take it out of the monthly amount of money that we save, we’re still “down” $300. No matter how you slice it, you’ve lost $300 of your money. If you had an emergency fund and a travel fund and a computer fund in a nice, organized system — you’d still be down $300.
I realized I didn’t have good enough arguments to convince M to adopt the targeted-saving system. Not only that, the more I thought about it, the more I realized it’s not totally necessary. Another clarification: if it was my budget and only my money, I would do it. The screenshot up top is from my own personal ING account. I’m a fan of the system. I like having a folder for my travel and a folder for my emergency fund — it makes me feel organized.
But these are the challenges that come with managing money as a couple — you can’t be selfish. You have to figure out what works best for the combined entity that is “us.” I hear that usually one person in the relationship handles all the money issues and reports back to the spouse occasionally. That would allow me to do whatever I want budget-wise, but I like our system better — we both participate and we both direct how we want our money managed.
But back to the question at the top: if you were sitting across from M, how would you try to convince her to use targeted saving? Maybe I missed an argument or two…