How Earmarking and Labeling Can Boost Your Savings
A simple research backed strategy to save money that is dead simple
It’s not easy saving money these days.
With the high cost of living — particularly housing — easy and painless ways to pay for things, and a non-stop barrage of advertisements, it’s a minor miracle any of us have money left to save at the end of the month.
That’s why I am focusing a lot of my research and writing on simple ways that people who make an average amount of money can start saving more — even if it’s only a little bit more.
Every step forward makes a difference in the long run.
Read on to the end of this post to learn how some easy sorting and labeling of your money has been shown to help people increase their savings rate.
Understanding Financial Time Travel
The more I research theproven methods for regular people to save money, the more I keep returning to the concept of financial travel, which I cover in depth in my book The Investor’s Mindset.
Here’s the over-simplified version of the concept:
- Saving and investing is your current self sending money to yourself in the future
- Taking on debt is taking money from your future self and giving it to yourself today
Economists have a very formal definition of this concept, which they call the “lifecycle model,” which describes the same concept — how people use savings and debt to maximize the amount they can spend throughout their life.
When you’re in your prime working years — your 30s-50s — you should save money to prepare for times of lower income, such as your retirement.
The problem, as we already know, is that it’s tough to save money these days. That’s where a simple lesson in behavioral economics can help.
The Importance of Earmarking your money
Earmarking is a budgeting technique that involves setting aside money for a specific purpose.
My wife and I are expecting our second baby any day now. Babies are not cheap, so for the past 9-months, we have been putting money into a savings account labeled “new baby fund” to help with the baby startup costs like clothes, diapers, and car seats.
This technique has been shown to increase self-control, making it easier to resist the temptation to spend money on things you don’t need. Financial self-control is one of the most underrated concepts in personal finance — and most people have no idea what it means.
Most people think self-control means having “willpower.” That is not true; self-control means having a plan to avoid being in situations where you might be tempted to overspend.
If you haven’t read my deep dive on financial self-control, read it after you finish this article.
In a 2019 study, researchers found that people who earmarked their savings were more likely to save money than those who didn’t.
The study also found that the effectiveness of earmarking was enhanced when the savings were partitioned into two envelopes, and the envelopes had pictures of the people’s children on them. This made it more difficult for people to spend the earmarked money on other things, as they would feel guilty about breaking the rule they had set for themselves.
Partitioning money + labeling = powerful incentives to save money.
Going back to my “baby fund,” having a separate bank account partitions the money away from my checking account, and labeling it “baby fund” is a powerful reminder that I must not touch this money until the baby arrives.
You can do similar partitioning and labeling for other savings goals:
- House repairs — or downpayment
- Car repairs
- Travel
- Retirement
- Kid’s education
Whatever your savings goal is, having a separate account (partitioning) and labeling that account is a powerful and dead simple way to resist the temptation to spend that money.
Tips for Saving More Money
Based on the insights from this research, here are some tips for saving more money:
- Start early and make saving a habit
- Set savings goals and earmark your savings for specific purposes
- Partition your savings into separate accounts to increase self-control
- Use visual reminders, such as labels for what the money will be used to buy, to make it harder to spend your earmarked savings on other things
- Don’t beat yourself up or get discouraged when you make mistakes with money; focus less on beating yourself up and more on getting back on track
Do you have separate bank accounts earmarked for specific purposes? Has it helped you in reaching your savings goals?
Let’s talk about it in the comments.
A version of this article originally appeared on the Making of a Millionaire Substack, the home of my most thoroughly researched articles designed to help you use money to live your best life.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.