Should I Ditch The Earmarks?

In our net worth, I have a series of earmarks, and I’m wondering what your thoughts are on getting rid of them.

Here’s a brief rundown of how my ‘system’ works when it comes to earmarks.

We keep money between an ING Direct savings account and an Ally Demand Notes money market account to cover the following:

  • Emergency Fund
  • Future New Car Fund
  • Vacation Fund
  • Electronics / Furniture Fund
  • New Roof Fund
  • Car Maintenance and Repair Fund
  • Escrow Fund (we pay our own property insurance and taxes)

There’s a couple of other funds but they’re too complicated to explain, but I think you can get the picture from the categories above.

What I do is basically ‘write down’ a portion of each of the funds above, since, in theory, they’re allocated already for spending.  The emergency fund is the only exception that has no earmarks against it.

The rationale I used when I set this up is that, because it’s a matter of when the money get spent, not if, writing off part of the amounts would reduce the drastic swings in calculating our net worth.

If I have $1,000 in our car repair fund, I might have a 75% write-down on that.  That means that when I calculate our net worth, only $250 of that amount shows up in our net worth.  It also means that if I had a repair come due that cost me $1,000, we would only see a drop in net worth of $250 for that month.

So, it does exactly what it’s supposed to do.  But, after a few years of running this way, and adding various categories over time, I’m just not sure it’s worth the trouble anymore.  I guess the better question is whether it’s really such a bad thing to have drops in net worth when big expenses come due?

It would certainly make things easier to just drop this.  This would result in a one-time spike in our net worth, but would then be a lot easier to keep track of on a month to month basis.

What are your thoughts on earmarking funds?

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7 thoughts on “Should I Ditch The Earmarks?

  1. I lean toward the KISS principle. The earmarks and the write downs are kinda complex so I wouldn't do it. I look at it like this: The money is there today and the balance is whatever it is today. Whether you spend it on a planned expense or a tree falls on your car, once the money is spent it's spent. In the real world the balance drops from x to y. There's no reason your net worth should not reflect that.

  2. I have earmarks, too. Mine's on an excel spreadsheet. I like knowing how much I have in vacation fund and all the categories I keep track of.

    The percent thing is too complicated to me. Or rather net worth regarding this isn't a big thing to me.

    May be you are over doing that aspect of it?


  3. I think i'd ditch them – I'm with chris – KISS. The money will still be there when you need it, and your priorities could change sometime between now and when your car breaks next (but hopefully that doesnt happen) and you could end up using some of the fund for your newborn or something else.

  4. This might not be helpful in your decision…but it doesn't really matter!

    Unless you are going for a personally secured loan your net worth record keeping is only for you and if it is annoying it…it is probably not worth the headache.

    Why not just erase all the items that were a hassel and add them back in when they are liquidated? Does it matter to anyone if your net worth drops?

  5. My goodness…here I thought I tended to overcomplicate my life.

    I do something similar, using a combination of discrete credit-union accounts (e.g., one for tax and insurance payments, one for discretionary/emergency saving, etc.) and an Excel spreadsheet (breaking out the amounts in one such account dedicated to three specific purposes). It is, in short, about as un-KISS as you can get.

    IMHO, it would be lots less crazy-making to have one account dedicated solely to real emergency savings. Then pour all other earmarked funds into another financial instrument (possibly one that earns a little more than banks pay) and forget about it until the time comes to use a portion of the earmarked cash.

    The actual principal you have in hand is your net worth. Whether you plan to spend it some time in the future is irrelevant. Your plans could change, or a piano could fall out of a skyscraper and land on your head, and so you may never spend your earmarks. Thus going to the hassle of adding up a bunch of earmarks and subtracting them against net worth amounts to migraine-building activity.

    For that matter, WGAS about the net worth? I figure mine once a year and when some proposed lender asks for a spreadsheet. Otherwise, I don't dwell on it because it doesn't really help my life to do so.

  6. Aside from retirement, I only have 2 other official funds..the sky is falling emergency fund (in savings bonds so they're hard to access) and the 'next big expense' fund.

    For the longest time I called that fund "kitchen remodel" but it got spent on about 4 other big expenses (sewer, furnace, mom's rental bathrooms)before it was used for it's ultimate purpose. You can plan for a lot of things, but you can't predict everything.

    I think as long as you know you're saving enough for known big future expenses, the rest will work itself out.

  7. I actually think the earmarks are a smart thing to do. Replacing your car isn't an emergency if you know it's gonna happen. High five for planning for the inevitable. However, you should probably scrap the calculation of backing the earmarks out of your net worth. It doesn't seem like there's a ton of value in that exercise.

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