I have come to another stage of reflection regarding our targeted savings accounts. When we first set them up right after we got married, they were a great way to plan for irregular expenses and to motivate us to defer spending. More recently, I’ve realized that as our next year is so uncertain, the role of our targeted savings accounts may become diminished. As I’ve thought through what money we might be willing to shift around, it has occurred to me that while all of our targeted savings accounts are earmarked, some of the earmarks are “hard” and some are “soft.”
Hard earmarks are for specifically dedicated accounts – we know when the expense is coming, we know what the amount will be, and it is more of a ‘need’ than a ‘want.’ We would only shift the money in the case of an emergency that is big enough to disrupt the plans we had for it.
An example of a hard earmark in our money management is our Cars account. We have a regular schedule of insurance, registration, and fee payments that come up one to two times per year, plus we have a good idea of the amount we need on hand for future repairs. The only way we would repurpose this money is if an emergency comes up that disrupts our plans for Kyle moving away from Durham and we don’t need to get the second car running.
Soft earmarks are for purchases that are well-defined wants or purchases that we can only vaguely anticipate. Because this money is largely discretionary, we can repurpose it as our priorities change. As for the “needs” that are not well defined, we have to base our savings on past spending or reasonable estimates, and if we over-or under-save we will have to shift some funds.
The purple boxes in the diagram above are the easy purchases to categorize and the teal boxes are ones that are more difficult to categorize as hard or soft.
Of course it is only useful to earmark to the extent that it helps you reach your goals. If your goals change, it makes sense that your earmarks would change – but don’t be capricious! For us, the earmarking is helpful to encourage savings – we are more motivated to save when we have a clear picture of how the money will be spent, especially for “fun” savings like Travel.
It may be useful for us to have just 3 accounts – hard earmarks, soft earmarks, and our emergency fund. We don’t need to break the hard earmarks into multiple accounts like we have them now if we keep track of the purposes and expenditures well. A system like this could help us clarify accounts like “Cars” that contain mostly hard earmarks but also some soft ones like anticipated repairs.
Do you have targeted savings? How set-in-stone are your allocations? Have you repurposed savings in the past?