Today, it’s common to hear someone say they are doing a good job managing their cash flow or budget as long as they never let their chequing account balance drop below a certain level. I refer to this as False Big Bank Balance syndrome! False big bank balance people keep a minimum in their chequing account at all times for emergencies and pride themselves on never going below that level. I am not suggesting there is really anything wrong with this strategy, as long as we all recognize it for what it is. A spending strategy, not a savings strategy. Just to be clear, there is a significant difference between people who ACTUALLY have a big bank balance and those who have a False big bank balance. For starters, ACTUAL big bank balance people, have both a large chequing balance together with savings or emergency funds and no outstanding credit card or consumer debts. Often their account balance is actually growing each month. That would be a saving strategy!
A spending strategy on the other hand, is where you keep spending on non essential things until you hit your limit or till your account hits $0. The problem with the False Big bank balance syndrome, is that people have this false feeling of being financially better off than someone who actually hits a $0 balance each month. But in reality, if you don’t have an emergency fund in another account or have credit card debt, and are spending to the your minimum balance, you are potentially worse off financially than those that hit $0 each month.
Here are 3 examples of why this thinking is hurting Canadians.
1) If you have credit card debts of $10,000 @ 19% interest and you keep a minimum chequing account balance of $10,000 @ 0.25% you are actually worse off than your friend that has $0 credit card balance and $0 in the bank. You both technically have $0 saved, but you also pay almost 19% interest each month. That's just bad math my friends!
2) If you have $10,000 in your chequing earning 0% interest and your friend has $10,000 in savings they are potentially earning 1-3% more in interest ($10-$30 per month). This is not helping you get ahead!.
3) If you keep $10,000 in your chequing account and don’t have an emergency fund, and your friend has $10,000 in an emergency fund and $0 in their chequing account, they typically feel more pain about having no money left over each month, then your you do. But, who is more likely to try to start saving or changing their spending? Probably them!
My point here is not to judge, but educate and help! When I see clients who are NOT being honest with themselves about their financial situation and spending habits, it's not hard to see why even with a high income they are still feeling so financially stuck!
Jodie Stauffer, CFP is a wife, mother and Certified Financial Planner. "Being CHEAP has always been in my DNA. But let me tell you, juggling my business, household finances, financial goals with the needs or more accurately WANTS of my daughters, while staying on a budget has not always been smooth sailing." Cheap by Choice is about finding what's