Posted by Tim Stobbs on December 10, 2009
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?