Do Emergency Funds and Targeted Saving Really Matter?


By Carlos Portocarrero

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.

Right?

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…


7 Responses to “Do Emergency Funds and Targeted Saving Really Matter?”

  • Jerod Says:

    Your exactly right. It doesn’t make one single bit of physical difference where the money comes from. That’s not the point of targeted savings or emergency funds. It’s the mental aspect of the idea that makes it work. Take losing weight for example; it’s the simplest thing in the world to do, exercise and eat right, but why are so many people overweight? In my opinion it’s no willpower or goals. By setting a goal of “I’m going to lose 30 pounds before vacation” or “I’m going to save $1500 before vacation,” we have the mindset to succeed. If the money is thrown into a lump sum then its all to easy to forget you already have so much saved out for this or that. I think targeting savings and emergency funds are the best options for those that have trouble saving on a regular basis.

  • josh Says:

    The emergency fund is for when you do not have income and you have 3-6 months saved up. The emergency fund is not for unexpected costs. That should just be added on to your budget for that month. If you take money out of the emergency fund and do not have enough savings and you can not work for some reason, than you may not have enough savings to live off of for the time when you need it. Than again im sure your parents or in-laws would help, so there is no real need for an emergency fund.

  • feminist finance Says:

    The benefit of dedicated savings sub-accounts for me is that they encourage a balanced approach to my money. Right now I have subaccounts for (1) emergency fund (2) wedding expenses (3) travel savings and (4) IRA contributions (since I have a high salary and I frequently don’t know if I can contribute to a Roth or not until the end of the year when I get my W-2s that include bonuses). I have savings targets for each of my sub-accounts. I am, of course, free to reallocate the finite amount of money I have in savings at any time, but putting more money in the wedding pot means taking money out of the emergency pot; putting more money in the emergency fund means delaying my next trip because I have to take money out of the travel pot. It forces me into the position where my choices about what to spend on are very deliberate. It keeps me from saying, “I want X, X costs $2,000, I have $20,000 in savings so obviously I can afford X, and I will have a whopping $18,000 left over!” when truly I cannot afford X without coming out short on the wedding budget or the travel budget, etc. It is another way of ensuring transparancy with myself.

    Another way it encourages balance is that once I do reach my target for a frivolous savings goal, like a vacation or a piece of furniture, I can use that money relatively guilt-free for that purpose without stressing out about the fact that I still need $10,000 in savings to consider my emergency fund fully stocked. I can make progress toward all my financial goals simulataneously in a measurable way and reward myself incrementally without jeopardizing the progress I’ve made elsewhere.

    It’s a psychology trick to make me feel more abundant, though, not a math trick that actually gets me more money, and in that respect M is quite right.

  • Nut Says:

    I agree with all of this. Up to a point I was kind of playing devil’s advocate really. It’s a psychological thing, and that’s why I had trouble making a solid case to M. To her it makes no bit of difference numbers wise, and I guess the psych aspect of it doesn’t mean much to her.

  • RBJ Says:

    I like to use the targeted savings for any annual expenses as well, such as vacations, holiday/bday gifts, property taxes, club memberships, etc. This way, I have a more accurate representation of my actual income/expense flow each month. Rather than thinking I make $XX-monthly expenses, I actually make $XX-monthly-annual expenses, which is a more accurate assessment.

    RBJ

  • chidofu Says:

    You have phrased the question in a way that makes the target savings system moot. As feminist finance points out, separate savings buckets is a tool for deciding whether to spend money and what to spend it on. In your scenario, you have already decided to spend $300 on tires. You are already past the point where separate buckets are helpful.

    Separate buckets is not going to magically create more money or change the bottom line for spending or savings you would do anyway.

  • What Marriage Has Taught Me About Money Says:

    [...] the point? It’s all the same amount of money either way.” She was right and I started to question how useful the whole system was. In the end, it didn’t make the cut — we didn’t [...]

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