Labelling Money

It’s an interesting fact how we tend to label our money and treat it different.  Using some savings for a trip is fine, but using emergency savings is a horrible way to pay for a trip.  What’s different? Just one word on the label.

It’s like putting the money in little jars and being scared to borrow from another jar when we are short in another.  The reality is there is no difference about a $1 in a chequing account and a $1 in a savings account.  We assign that difference as to our intention on what we are going to do with that money.  So for me chequing is the holding account for our usual spending money while savings are for longer term items.  The money is the same, but the intent is different.

This particular effect even extents beyond our different accounts types.  This is the reason why when you win some money or get find a $20 on the street it’s hard to put it in savings.  We tend to think of it as ‘found money’ that we were not expecting anyways and therefore give ourselves permission to spend it.

Yet when you start to  remove labels money something interesting happens.  Your money management get a bit simpler since you don’t have these emotional attachments to where the money came from or where it is going to.  It also means you can cross borrow money from different sources without feeling so guilty about spending your money.  So for example, then if you know you are getting a bonus once you get back from a trip does it matter if you borrow the money from your emergency savings for a week? When you remove the label from your money the answer becomes obviously: no.

Like all good things, removing labels on money does cut both ways.  By removing your intention from some of your money you might lose focus on your long term goals.  After all you need to still keep track of your money to know if you meet a goal or not.  Also you can risk starting to overspend your savings by too much cross borrowing of money if you don’t keep track of it well.

So far my experiment with removing labels from my money has gone well.  By creating my Super Fund I have removed many different saving labels that I used to worry about.  So far I’ve noticed that I do like things being much easier overall, but I do occasionally miss knowing the sub-amounts that I use to track.  Yet at the same time I still use some labels.  For example, anything I deem for retirement is strictly off limits for any other use.

So how do you use labels for your money?  Does it help you or perhaps is it holding you back or making things more complex than they need to be?

5 thoughts on “Labelling Money”

  1. I’ve got a few labels on money I suppose.
    Chequing Account – this floats all the household bills.
    Savings Account #1: This is part of the e-fund, and siphons excess funds from chequing account. Equivalent to your SuperFund I suppose.
    Savings Account #2: This is the car savings account – takes money every month from SA#1.
    TFSA: another component of the e-fund.
    RRSP etc: retirement of course.

    So very simple really. The only real labeled account I have is the car savings account. This expense is one that a lot of people forget to save for, and it’s a big one, so I find it helpful to keep it separate from my true emergency funds. In 3-5 years I know I will need to replace a car, and treating the entire pot of cash as an e-fund is blinding myself to the reality that the money doesn’t really belong to me today – it’s already been spent on the car in 3-5 years.

  2. Have to say I love reading your blog. Still catching up on your archived articles, but thought I’d throw my 2 cents in here.

    It is an interesting phenomenon, but I don’t see it as complicating my life. I think the guilt of removing the funds from one group to another is healthy. It keeps me on track for my goals.

    If I really need to borrow money from one fund or another then I consciously need to recognize that my goals need to change or I need to replace the borrowed money.

    For example, I have a car fund to purchase a new car in a few years. If I was to borrow from that now I’d have to adjust that plan.

    I actually only see benefits from this labeling. So I’m not even sure what the issue would be.

    Although I do have a small “fudge factor” in my budget that I can draw from and not feel guilty about. Basically just a fund that has no specific purpose.

  3. The term for having separate intentions for money in your head is “mental accounting”. It causes people to make some funny decisions, like spending driving time and gas money to save a few pennies on groceries.

    The ultimate “super fund” is my Manulife One account. It holds my short-term debt, investment debt, emergency savings and longer-term savings. There are other banks that offer a similar setup. But it could also cut both ways, as you described.

  4. I now subscribe to the Super Fund idea. But I do think it is for people that have their financial houses in order.

    Those who are struggling with debt/spending would be well served by budgeting more closely until they can comfortably manage. It’s just not a game I’m personally playing (and why I don’t read the Simple Dollar anymore…too penny wise, time foolish for me)

  5. Super Fund is a great name for it. This is how we manage every cent not allocated to basic expenses like gas, groceries, mortgage, utilities, insurance, property taxes, etc. Our salaries and all these basic expenses are the same every week/month so we plan out every expense for the year in advance and everything else is considered unallocated excess. Every Friday on my spreadsheet I have a row labelled “Transfer to_____” and a blank amount. After adjusting all the planned amounts for the week with the actuals, I test amounts to determine the maximum I can skim off (without screwing up subsequent weeks) and decide whether the excess is going toward RRSPs or an extra mortgage payment. Because we generally live on 55% of our income there is a healthy excess most weeks. Whenever a large expense is anticipated, I simply don’t do the transfer and let the excess pile up for the required number of weeks. I’ll need new summer tires for my car in early April, so I’ll skip the transfer for a couple of weeks in late March. When my husband was ready to replace his truck last year I stopped transfers for nearly 5 months while he looked around for the replacement.

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