Avoiding Impulse Spending By Naming Your Money

by MB on December 21, 2007

I don’t agree with everything Dave Ramsey espouses, but one thing we definitely agree on is that you have to give your money a name. First off, I think it is extremely important to have a fully funded emergency fund of three to six months of expenses set aside in a savings or money market account. After that, I believe that any additional savings should be given a “name” such as: new car fund, new computer fund, etc.

The reasoning is that it helps you avoid impulse spending. Let’s say that you are in Best Buy one day and see a beautiful flat screen HDTV. If you have a few thousand dollars sitting in an account anonymously called “savings” you may be tempted to pull the trigger and bring that puppy home. If, on the other hand, that money has a “name”, like house down payment fund, you will think differently. In fact, you will probably start a new HDTV fund when you get home.

How do you set this up? I suggest keeping a list or a spreadsheet that tracks the value for each item. For instance you may have $3,200 in a savings account separate from your emergency fund broken down as follows:

New Car Fund $2,000
HDTV Fund $500
Christmas Fund $700

Remember the point of all of this is control. Retail stores are designed to get you to impulse buy. If you already know where your money is going, it will be much easier to resist.

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