Do you know what a zero-based budgeting system is? Basically it is a budget where you track every single dollar of income and each single expense down to the penny. This is a great system for someone who is trying to get a good handle on their spending since they will be able to see where every dollar goes and act accordingly. It also helps with spending decisions since it doesn’t let you spend money you don’t have. I did a You Need a Budget review recently which is a great example of zero-based budgeting software.
I don’t use this kind of system, in fact I pretty much do the opposite. I like to keep an extra couple thousand dollars in my checking for two reasons:
- I avoid transaction fees if I keep the minimum balance over $1500.
- I don’t have to track bills, ATM withdrawals etc since I always know that I have enough to cover them.
I do look at the balance fairly frequency to make sure it is more or less where I’m expecting. But otherwise the only time I actually do any kind of “budget” is when I want to make a large purchase or debt repayment. In that case I’ll take my account balance, subtract any upcoming expenses, subtract my $2,500 “float” and that tells me how much extra money I have that I can put into my mortgage or continue my plan to buy a big screen tv for every room in my house. (I’m still working on the first room).
But how do you avoid overspending?
This system might not work for some people because they need some sort of spending restraints in order to not buy things with money they don’t have. I don’t seem to have this problem although I did in my younger days so it works great for me.
You could put that $2,500 into your mortgage and save 5.2% interest each year.
Yes, that’s true since 5.2% is my mortgage rate. But 5.2% of $2,500 is $130. I value my time quite highly and the idea of spending a lot of time and hassle tracking every penny just to save $130/year is not at all appealing to me. For someone who has a tighter budget, more time and has high interest debt where they can put the $2,500, the payoff return might be different.
What kind of budgeting do you do? Are you a strict budgeter? Loose like me? Somewhere in between?
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