The Money Mastery system of personal financial management teaches that savings is actually just “delayed spending.” What this means is that all money is to be spent — some will be spent now, and the so-called “savings” we create will be spent later for future events.
So what kind of “delayed spending” accounts should we create? There are three:
The Long-term account is obvious — we need the most money here for the end of our life, when we stop working and hope to retire so we can do so comfortably. I have written extensively about how to create this delayed spending account and I urge you to check out some of those posts here.
The Four C’s of Retirement Planning
How to Determine Retirement Needs Accurately
How You Define Retirement May Mean You Actually Get to Retire
The Emergency account is also obvious — problems crop up all the time and as I have tracked the emergencies my family has encountered it adds up to an average of $383 every month. Because I have a historical picture of what life has been like for our family through tracking, I just go ahead and set the $383 aside each month so I have this money to spend later when these emergencies arise BECAUSE THEY WILL HAPPEN JUST LIKE CLOCK WORK. What about your family? Do you know what you need to set aside each month to plan for the inevitable?
The last account, Emotional, gets overlooked or in most cases has not even been considered as a needed delayed spending account. But just like emergencies, the need for impulse spending for the sheer fun of it is bound to happen TO ALL OF US and if you’re not prepared for these events, you will spend money you do not have simply to fulfill an emotional need. And let’s face it, there’s absolutely nothing wrong with spending money impulsively, for no other reason than because you want to have fun and enjoy life — that is unless you have not prepared for it. Then spending money this way is what gets people into debt and keeps them that way for a long time.
My advice? If you don’t think you have much to set aside for emotional spending, start with a small amount like $25 for example. Put this away every month and then work your way up a little. That way, in a few months you have money that has been set aside only to be used when you want to do something fun on the spur of the moment. You can still pay your monthly bills while not depriving yourself or family members of the fun and enjoyment in life. Or let’s say you get a tax refund (which is something I suggest you not be getting every year but that’s a post for another time), but if you’ve gotten a recent tax return, I suggest you take a portion of that return, at least $500 of it and put it aside into a savings account to only be used when you want to do something fun on the spur of the moment.
Now let’s spend this $500. Let’s suppose that your spouse comes to you and tells of friends who went to a resort with natural hot water swimming pools. He or she is sad and wishes your family could do something like this. You spring into action and say, “Honey, let’s check our emotional account and see how much money we have.” WOW, you have $500 and it would only cost $235 to do this same trip to the hot water pools. All of a sudden your family gets to put some excitement back in life and together you have a wonderful family-bonding experience that provides happy memories for your children.
Not having money saved for emotional spending needs is like going on a diet and expecting to never eat another cookie or indulge in another ice cream cone again. Those kinds of diets do not work because they are too strict to give you the motivation you need to stay on them. Eating right is fine so long as you can splurge occasionally. The same goes for proper financial management. Fun times are needed every once in a while if you expect to stay on track. But, those fun times need to be properly funded, in advance. Plan for emergencies, plan for retirement, but don’t forget to plan for emotional activities either. Learn how by going to www.moneymastery.com.