When do you need targeted saving?

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?

32 Responses to “When do you need targeted saving?”

  1. First Gen American Says:

    I’ve only ever done it when I bought savings bonds for our emergency fund. I have a separate “savings” account but it never was used for saving. I always managed to find a reason to spend it on home improvements sooner or later. I’m actually horrible at just “Saving” unless the money is really hard to access.

    If we end up implementing operation live with Babci, I’ll probably make one up for our mortgage and 1 time annual expenses (annual insurance premiums, taxes, etc).

  2. feMOMhist (@feMOMhist) Says:

    right now we don’t have one, but I’m thinking of starting a vacation one, mostly to teach the kiddies about savings (they want to do the sleep at Disney experience), but also because I was a Euro trip for my 10th wedding anniversary and I’m really really bad about taking money out of the “big” savings account. I hate hate hate to do it unless forced. So I figure if I have separate account for Europe trip then that $ won’t seem like savings for anything OTHER than Europe. Right? :)

    • Leigh Says:

      This is EXACTLY why I use targeted savings accounts :) It’s totally a mental barrier and it so works for me. The money labelled “reserves” is not spent at ALL. Labeling money “vacation” or “down payment” makes me feel less guilty about spending it on that purpose though, which is awesome when I’m terrible at spending money!

      • nicoleandmaggie Says:

        When our slush fund gets over a certain amount it’s easier for me to spend on big things like travel (or a new mattress). So a good way to moderate my spending is to put that extra money in longer term savings… and a good way to increase it is to deliberately not do that. So generally those big purchases (or big lump sum mortgage payments…) come at set times– like after I know we’re going to get through the unpaid summer and we still have money leftover, or when our taxes are done and we don’t owe as much as we’d thought, etc.

  3. Leah Says:

    We’re still working on combining accounts. Right now, we each have one separate pot of money that is our personal emergency funds. As I’ve grown and saved (and sometimes made more money), the amount I keep in that fund has grown. When I first graduated college, I just needed $3k to be comfortable. Therefore, I had to save at least $6k for my three week trip to New Zealand because I figured the whole thing would cost about $3k, which it did. Now, my benchmark is higher. Once I get a job next fall *fingers crossed,* I imagine that benchmark will continue to go higher at a rapid clip. Or maybe we’ll finally get to use our passports again!

    • Debbie M Says:

      I have a friend who was able to decide that he didn’t feel comfortable unless he had a million dollars in the bank! And he has it, now, too. So, there’s no telling how high your benchmark will go!

  4. Linda Says:

    Yes, and yes. I started using targeted savings accounts a few years ago right after I was divorced and needed to rebuild my savings. When I started with targeted savings, I established an account for every goal: emergency fund, vacation fund, house maintenance fund, etc. Last year I consolidated some of those accounts. Now I have an emergency fund with six months of living expenses in a completely separate online bank. In the main online bank, I just have a vacation fund, and a Big Goals fund. The latter is for things like replacing my car (which I may not do for a few more years, or may not do at all if car sharing really does come to my neighborhood) and for any major house fixes that pop up (sewer line replacement, new roof, etc.). I realize that some people use an emergency fund for those house fix issues, but I like to look at my emergency fund more as an unemployment fund. I’ve accumulated quite a tidy sum in that Big Goals account and need to do something better with the money than just letting it sit in a savings account. I sometimes think that I should also break the emergency fund down (such as putting a chunk of it into a CD) and try to find a slightly higher return on it.

    • Debbie M Says:

      I went a long time without having a separate unemployment fund because I worked for the state where you could always have a job so long as you didn’t mind doing the work of two or more people during hiring freezes. It didn’t occur to me until very recently that I might be the one who wanted me to stop working at that job! Also, it turns out we weren’t immune to lay-offs after all. I’m currently calling that fund my early retirement/sabbatical fund.

  5. Debbie M Says:

    I love targeted accounts. I have the money wherever (mostly an online savings account, but also sometimes CDs and/or I-bonds, plus $500 in my brick-and-mortar savings account which can be transferred to my checking account in a matter of seconds). I keep it all separated in a spreadsheet, which I update each month. I add a certain amount each month (regardless of how big the account currently is) and re-evaluate that with each change in pay.

    Over time I have added more and more of these accounts. I now currently have the following:
    * house upkeep (taxes, insurance, maintenance, repairs)
    * house renovation (a fairly new one)
    * car upkeep (gas, taxes, insurance, maintenance, repairs)
    * next-car fund
    * medical savings (started when I realized that one day, my medical costs might not always be so cheap)
    * long-term fun (expensive stuff, usually electronics and vacations)
    * early retirement/sabbatical fund

    (And I have separate retirement funds.)

    The great thing about this system is that I can spend anything I want within a category guilt free–if I have enough money in my long-term fun fund for a vacation, I can safely do that without risking any of my other goals. Another great thing is that if I don’t have enough money in one account, I can re-evaluate my priorities and either take money from other accounts or borrow money from other accounts. One thing about spreadsheet accounts is that you can go negative in one account (for free) so long as your total savings stays positive. It also keeps me from seeing the big pile of money I have as all being up for grabs for whatever single goal I’m fantasizing about at the moment–because excited as I might be about that goal, I do also want a car-driving, house-dwelling, healthy and injury-free lifestyle.

    If I see one account getting too big or going negative for too long, I can think about whether I made a mistake in deciding how much to contribute, shuffle money around, and change up the contribution rates.

  6. bogart Says:

    I’ve sometimes approximated long-term savings and short-term savings and been between reasonably and excellently diligent about leaving the former alone until whatever constituted the long-term arrived. Not in awhile though. Of course there are the retirement accounts. Savings now falls in 3 categories — (a) my retirement savings — about as close to completely untouchable as it’s possible to get (taxes, penalties — though a sizeable chunk is Roth contributions and thus not susceptible to either taxes or penalties, common sense); (b) DH’s retirement savings — accessible at any moment (he is past 59.5) but preserved (so far) by common sense (mine more than his); (c) other savings (currently woefully inadequate, but said inadequacy mentally justified by efforts to maximize (a) and by the knowledge that (b) is available if a true emergency arises).

    I have recently restarted a tiny savings account I’m calling “long term” but it is so pathetically small it isn’t funny. More than a pizza dinner, but less than a one-night vacation away from home (unless it’s just me sleeping in the back of my car in a state park, which actually has been known to be in my vacation repertoire). But I put (tiny!) drips and drabs in there when they show up and don’t touch them.

    This year’s been particularly expensive, so we’re stretched, but I’m cautiously optimistic that some of what has been whacking us (more preschool expenses than ever before, horse surgery, stepkid wedding, Roth conversion — that will whack us again next year, but the others won’t) will dissipate, though of course who knows what the future holds?

  7. Courtney Says:

    We do, and have had them for a number of years. Aside from regular slush fund savings, we also have accounts for: car maintenance, vacation, gifts, yearly expenses (things that only crop up once or twice a year), insurance, and taxes (we used to have to pay estimated taxes quarterly, and now we elect to pay our withholding shortfall quarterly instead of having extra withheld from our paychecks).

    I was thinking the other day whether we still needed all these accounts, but the nice thing is that each account has its own 6-transaction limit each month. If everything were lumped together into one account, we would have months where we exceeded 6 transactions and start getting the nastygrams from ING.

  8. scantee Says:

    This is a very timely article for me. I do use targeted savings but I’ve just decided to move to the slush fund model instead. We don’t save any more or less with the targeted savings so it just ends up being more accounts to track. With the new model we’ll have our emergency funds in an online bank and then a spendable savings account at our main bank that is easily accessible.

    One of the main reasons I’m getting rid of the targeted savings is that I never wanted to spend the money. So I have an account for car maintenance but when the car needed fixing I’d be thinking, “oh, I really hate to spend the money in my savings account, let’s just use our regular monthly income instead”. So the whole thing is pretty pointless for us.

    We have a nanny and I will continue to keep her employment taxes in a separate account because it is useful for me to think of that money as separate.

  9. Leigh Says:

    I like targeted savings because it helps to mentally separate the money for different purposes.

    I’ve realized that a yearly savings account, separate checking accounts for bills/variable spending, or a separate account for vacation spending. (I transferred the money from my vacation savings account to my normal budget aka checking account last week and will talk about that on Friday.)

    So for me, targeted savings is just more of a pain and creates more stress when it’s for budgeting, but for things like emergency reserves and non-immediate goals like replacing my car or putting a down payment on a condo, it helps since I can more clearly see the goal.

    I tried the one savings account thing around supposed-closing time and it was really confusing. Some of it was reserves and then some of it was down payment money and some amount of money would have been left over after closing, but I wasn’t completely sure how much… I’m so glad that’s over.

    When I was in college, I was actually in the one big slush fund category. During an internship, all of my income except for expenses (which were usually super low) went into my one savings account. At the end, I would calculate how much I needed to get me through the academic term(s) before my next internship, plus the first month on the job and throw that in a CD for N months. Some of the money went into a retirement account instead of into a normal CD.

    I suppose in college I had just one savings account since my only goal was to get through the next academic term(s) and onto my next internship, but now, I am thinking more to the future and have more goals.

    • nicoleandmaggie Says:

      We used CDs a lot in graduate school– I was only paid 3x/year and it was a good way of making a little extra money and not running out before the year was over!

      • Leigh Says:

        Agreed! I found it a great way to re-iterate and really instill in me that I shouldn’t spend the money and I didn’t need it. Of course, there was one time that I ran into a crazy situation and really needed to break the CD, but couldn’t, which SUCKED. My parents thankfully lent me the money that I needed until the CD matured, but maybe I should have been keeping more savings in cash… Oh well! I have plenty more in cash now and things are quite happy. I don’t use CDs nearly as much anymore.

      • nicoleandmaggie Says:

        We had so little money and rent was so high that if we’d been in that situation we would have just been SOL even if we had broken the CD. (We might have had to take on *gasp* credit card debt.)

  10. nicoleandmaggie Says:

    This info is all really interesting! I’m enjoying reading about what people do and why and when.

  11. MutantSupermodel Says:

    I have a weird set-up but it works so I’m not complaining.

    I have two checking accounts– one that gets my salary and pays my bills and the other that gets my child support and pays everything that’s not a monthly bill.

    Then I have two savings– one mini emergency fund and one slushy big expenses fund. This is where I’m throwing the money for the summer camp and the private school registration and the christmas and the trips and the stuff.

  12. femmefrugality Says:

    I don’t. Just have one, and then it’s split up in my head.

  13. bethh Says:

    I have separate accounts:
    – bills
    – day to day/weekly spending (this is hooked to my debit card, used for groceries, movies, eating out, etc)
    – other spending that occurs monthly or so (clothing, hair cuts, co-pays, gas)
    – short-term savings (every time this hits a certain level I send half to a less-accessible place)
    – long-term savings (this receives the money siphoned from the above account
    – mad money (25/paycheck goes here, and I use it to splurge on expensive meals mostly)
    – car fund (50/paycheck goes here)
    – travel

    The main problem I have now is that my car fund is over 1k, but I don’t anticipate needing it for years (knock on wood), though I’ll keep contributing to it. So what the heck should I do with it? I dunno… any advice? I guess I can put the money over in Vanguard so I can’t see it at least, but it IS targeted spending money, so I don’t want to invest it or lock it up in a CD, though I would if the rates were decent.

    The mad money fund is great – I live in a place with TONS of expensive restaurants, but paying ~$100 for dinner never fits in my day-to-day spending budget. This lets me do something splurgey a couple of times a year without feeling pinched by it.

    I’m a one-person household. I don’t know how well this would work with another person in the mix. But in short: I love targeted accounts!

    • nicoleandmaggie Says:

      If CD rates were worth it, laddered CDs would be a good place, but they’re not… so who knows.

      • Debbie M Says:

        Yeah, in the olden days, CDs were so good that even if you had to break them and pay the penalty, you’d still be ahead unless you had to break them within 6 months.

        Now I’d go with an online “high interest” savings account.

  14. Cloud Says:

    We have one slush fund, but it is scattered across a few accounts. When out net worth was less, we sometimes did the separate mental accounts thing, but not that much.

    On the problem of not wanting to touch your savings and instead paying expenses out of your “regular” money- we do that and always have. I’ve always considered that a sort of good thing- it saves the savings for the big things!

  15. Michelle Says:

    We don’t have targeted accounts. But I have definitely thought about this. We need to do this and I think it would greatly help!

  16. rented life Says:

    We have a checking and a savings. However for the savings instead of using the ledger I have a master sheet that dictates where the money is “earmarked” for: moving, bills for next month (long story), bills I don’t pay monthly like car insurance, water, etc–so that when I get the bill I can pay it in full–any trips or holidays or anything along those lines. My mother does something similar. We both love it–it really has made a difference for us. While mom could be someone to have one large slush fund, it’s easier for her to see that everything is set up for a proper thing, and that any leftover goes as “extra” to their retirement (they already have that taken out). Or most recently extra went to a new fridge.

    My problem right now is that I can’t pay off credit cards in full, so I’m doing less targeted savings than I’d like.

  17. SP Says:

    I used to have much more detailed funds, but now I just have:
    “short term savings”, designed as a slush fund for insurance bills and vacations such, but actually, very under used lately (been cash-flowing most things like this
    “long term savings” – 1-5 year timeline, a big 1 month vacation then a house fund
    “emergency fund” – self explanatory

  18. Carnival of Personal Finance – Ted Talks Edition Says:

    […] from Nicole and Maggie: Grumpy Rumblings presents When do you need targeted saving?, and says, “Nicole and Maggie discuss when targeted saving helps over a slush fund (or two […]

  19. Miiockm Says:

    I don’t really consider these savings, just planning ahead.

  20. Nicole and Maggie discuss budgeting (both individual and family) and link a lot | Grumpy Rumblings (of the formerly untenured) Says:

    […] accounts and others will include all short-term savings into one general fun.  We talk about when to use targeted savings in this […]

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