Targeted savings is when you have separate accounts (or separate mental accounts) for each of your savings goals. For example, you may have separate accounts for annual expenses and emergency funds. You could have separate accounts within that for your car fund, house fund, insurance fund, etc., and these can either be annual expenses or targeted emergency funds depending on the nature of the savings.
Some people get a lot of use out of targeted savings, with it helping them with their budgeting and their goals. We don’t do it, and neither do many folks who are doing just fine but no longer formally budget (according to a fantastic Liz Pulliam Weston article, “When to ditch your budget” that no longer appears to be available from MSN Money).
When you don’t have very much money, you can probably only afford one emergency fund ($500/$1K, etc.). You’re more likely to have to do the monthly billing for large purchases even though it’s more expensive, or you are more likely to have to rely on debt (credit card balances or late payment fees) rather than your emergency fund when you make a mistake.
When you have a high income and relatively low fixed expenditures you only need one emergency/slush fund because your income next month will refill emergency funds with very little sacrifice. You’re never in danger of not being able to pay off the balance of your credit card. (Obviously even high income people can over-extend themselves with fixed expenses, but they don’t really do so well with the saving idea whether targeted or not.)
For the folks in the middle, the mental accounts must help a lot with planning. They have enough money that they get to make choices (unlike lower income folks) and the targeted savings account help to prioritize those choices in advance (unlike prioritizing on a paycheck-to-paycheck basis as the higher income might do).
For the most part, we’re in the one large slush fund category. But, when deciding how much we need in savings each summer (since we’re on 9 month salaries), even though it’s one account I have to mentally tag it: 3 months regular spending + 1 month “emergency” + school tuition for next year (because there’s a discount if we pay upfront, but we don’t get paid until October). So I guess that even though most of the year our income is high enough not to need those separate tags, when regular income isn’t coming in, we do.
Do you have targeted savings accounts? Has your use of targeted savings accounts changed over time and over life circumstances?