This text is borrowed directly from my book 60 Days To Change: A Daily How-To Guide With Actionable Tips For Improving Your Financial Life.
Whether intentionally or accidentally, many people experience manufactured-financial tranquility as a result of keeping too much money in their checking accounts. While this may sound like a good problem to have, it can be a very dangerous one for a couple of reasons. For one, a checking account has a very low yield, meaning your money only gains a minimal amount of interest when it could instead be working for you. But more importantly, and less obviously, it can ruin a perfectly good financial situation.
Let me explain by using my favorite resource, toilet paper, as an example. As unpleasant as it is to think about, we’ve all been faced with the very alarming prospect of being stranded without the appropriate amount of toilet paper. It may sound humorous now, but it’s extremely unfunny in the moment. The point is, faced with the cardboard, you will survive in any way possible, and you’ll learn two lessons because of it: 1) Check supply levels before you use the bathroom!, and 2) be resourceful. It’s easy to be wasteful when you have a full roll, and to forget what you went through when faced with an empty one.
The same thing can happen when you have a relatively large roll, er, balance, in your checking account. This feeling of financial abundance can occur with as little as $100 or $200 “extra” in your checking account. The amount of money that causes this strangely damaging phenomenon is different for everyone. It all depends at what amount you start to be relatively complacent. Think about your checking account: at what point do you stop checking the balance in your head before making a purchase? When you have a cushion of $100? $200? $500? When you become comfortable with your cushion, your economic stress eases, and you start making spending decisions that aren’t always prudent or even practical. This is what I like to call “abundance spending” and it can manifest itself in several ways. A feeling of financial comfort can lead you to buy items normally out of your price range for one very simple reason: you know you presently have the money to cover them. (So why not?) This is why a feeling of financial abundance, whether manufactured or legitimate, can be dangerous. The larger the cushion you give yourself, the larger the financial mistakes you can make. After all, think about all of the celebrities and once-well-off public figures who you’ve heard went bankrupt. When you hear these stories, you wonder how someone who once had so much could now have next to nothing. I’m not a betting man (but you probably already knew that), but I’d guess that in 99% of these cases, abundance mentality played a very large role.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.
Completely agree! I take this same approach with managing my checking vs. saving account. I keep enough in my checking to cover regular expenses but push a portion of paycheck to my savings account with an “out of sight, out of mind” mantra. I’ve trained myself to not even consider that money when making purchases. And I do find that if I have extra in my checking account, I’m more likely to spend it on things I might want, but don’t necessarily need.
Great post!