Tight Budget Or Keep Some Extra Cash In Your Account?

by Mike Holman

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:

  1. I avoid transaction fees if I keep the minimum balance over $1500.
  2. 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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{ 19 comments… read them below or add one }

1 Jambo411

I like the looser style. I have three bank accounts that require minimum balances to provide free service. This amounts to $4000 but saves me $12 per month in service fees. I could pay down my LOC by that amount but I consider these as level one of my emergency fund. We also keep several hundred in cash in small bills and coins because of the frequent blackouts in our area, recently one lasting three days. Some stores have generators so you can still do cash purchases but of course all the ATMs in town would be dead. I would rather not have to have the cash fund but as long as your plan is on track why sweat the small stuff?

2 Michael James

I’m like you with a few thousand extra in my chequing account. I don’t have a problem controlling spending, and I like to have a buffer.

3 Mr. Cheap

I’m like everyone else from the sounds of it – I always keep a buffer of cash (in part, like you, to avoid fees). No need to explicitly budget (if anything I need to force myself to splurge every now and again).

4 Alexandra

I keep a buffer of between a thousand and two thousand in my regular account – just to avoid having to transfer money over from another savings account if I happen to splurge on a trip or a big gift and spend more than usual that month.

I don’t budget – I seem to have an inherent ability to “know” how much I can spend each month without spending more than I have. I guess this comes from years and years of extremely strict budgeting back in my student days. Now that I have way more money to work with, there always seems to be a bit of a surplus each month that grows. Every once in awhile, I dump a few thousand of this surplus into ING. I guess I am naturally just not a big spender.

5 Dave

Wow, a $2,500 buffer? That’s huge!

I keep about a $250 buffer in our main chequing account. This is more than enough for my mental peace that my wife will not do an extra large groceries, write an unexpected cheque, etc.

That’s not to say that the account balance is usually that low — in general I leave enough in the account after payday to cover our bills and all outstanding cheques. In practice our accounts usually range from $500-$3000 depending on the day. I am sure that the average balance over a month period is well over $1000.

All that said, I do have a no-fee chequing account. The entire idea that you need a minimum balance to avoid fees drove me away from the big banks pretty quickly. If they would make it an average balance, it would make more sense to me…

In the past, I have also looked at accounts like Manulife One. If only they could reign in the fees on that style of account, I would love it.

6 guinness416

I’m a zero budget person and just checked – I have about $200 in my chequing account. My investments, savings, insurances, mortgage, charitable donations, almost everything is out automatically on the 1st and bills follow manually very soon after so I’m usually down to a few hundred by the 5th of the month. This is made easier by the fact that my better half pays all the petrol and most of the groceries I suppose, most of what I spend is somewhat fixed.

7 2 Cents @ Balance Junkie

I try to keep a low balance in my chequing account because I would rather get 2% in interest than nothing on that money. We have a no fee chequing account. Like Dave, I haven’t had any interaction with the big banks for years. The rules and fees drive me crazy.

A buffer of $200 or so is plenty for us. I try to pay for as many expenses as possible using my credit card to get the PC Points. I don’t have a problem with overspending and I track things pretty closely so I never pay credit card interest. Every month we get free groceries with our points. That’s a big deal at my house.

8 Kathryn

I need a good amount of financial margin to feel secure. That means, like you having a good amount of buffer in the chequing account and budgeting with some extra in mind every month. I would find zero based budgets way too stressful and restrictive. Having financial margin makes me feel financially free.

9 Sean

Um, why not just get a PC Financial checking account and you don’t have to keep ANY minimum balance in order to pay no fees?

10 Mike

Sean, getting a PC Financial account wouldn’t really help. I just don’t want to spend the time necessary to run a tight budget.

11 Sean

It would help because it wouldn’t require you to have $2,500 in an account and lose the 5.2% (ie $130 interest savings on your mortgage if you used the $2,500 to pay it off as you mention in your post) every year, right?

12 Superbad Advice

I prefer to have a buffer as well. I don’t have a problem managing my cashflow, but for those that do, I would use the pay yourself first method where you set up your automatic payments and savings/debt reduction contributions for the day after you are paid and then feel free to spend what’s left until next paycheck. People always reign in the spending when the account balance is close to zero. Caveat being they don’t borrow to spend (credit card, line of credit, etc.)

Gordo

13 Mike

Sean – the problem is that if I put the $2500 into my mortgage then I have to spend all kinds of time watching my spending and making sure the account balance is high enough to pay the cheques/bills etc. I don’t want to do that.

Even if I had a PC account I would still keep a $2500 minimum.

14 The Rat

I tend to budget pretty closely (but not to the extreme) throughout most of the year and live a reasonably frugal lifestyle. When we go on vacation, my wife and I loosen the ropes a bit. I’m not a big fan in having a buffer – I try to put whatever I can as soon as it’s available for investment purposes. My line of credit (4.5%) is in place in case I need it, which is on rare occasions.

Nice post.

15 Matt

Interesting post, thank you Mike.

Myself, I am a zero-budgeter. A while back, I had extra time on my hand and built myself an excel spreadsheet to track my money. I’d save my receipts and once in a while would input my expenses. The inputs were sorted into categories and a monthly report is automatically created which visually shows if I stuck to my budget (black, yellow, red). I don’t particularly care if I go over budget, but I like to know where I’m overspending on the long run and adjust either my behaviours or my expectations accordingly.

But, then again, my system isn’t for everyone. I have to be very organized because I make less than my peers and have larger expenses than most now that I own an investment property and am pursuing a very active hobby which costs me in the hundreds of dollars a month.

I’d be interested in sharing my system with interested parties. Especially if they can refine it or otherwise adapt it to other uses.

Matt

16 jo

My partner and I seem to follow the same approach as the article for the same reason. We both have our own acct and a joint checking for shared expenses which we both have a set amount go into automatically from our own accts. We do keep an eye on the balances and have monthly expenses and income days setup in our shared Google calendar. We also pre-plan any new big expenses like a new car. As small biz owners we learned by the need the importance of cashflow and knowing your base operating expenses per month. I do agree this may not work for everyone though. Happy early Spring everyone!

17 jo

BTW as a side note I do think it’s still a good idea to reconcile accounts each month to catch any possible issues from banks or cc providers. Ive found it’s fairly easy with software like Quicken. Once your up and running it should take only about 5-10min to do.

18 Doctor Stock

Again, a topic every college student should take in year one!

19 JMK

I have a spreadsheet that plots out all our planned spending on the essentials for a year in advance. Where possible I enter the set monthly or weekly amount (phone, cell, internet, mortgage, property tax, insurance, both paydays) and for the rest I put in a plug number that is our average based on prior year history (gas, groceries, cash for small misc spending). Each week I replace the estimated amounts with the actuals and confirm all automated payments have been processed. Every Friday after all the week’s updates are done and everything is balanced I pay off the CC transactions posted that week (yes weekly, I like to be on top of it and never pay interest). I keep the balance of our bank account above $1000 to ensure we pay no fees (this cash is also phase 1 of our emergency funds, the rest is slightly less accessable in a high interest savings account). Once the spreadsheet has been updated for the week I determine how much excess is in the account buy testing different amounts to see how much I can skim off without sending a future balance below the $1000 level. The spreadsheet with all future expenses mapped out allows me to predict the future very accurately. We live on about 55% of our take home so there is normally excess every week. If we have an unusual expense that we don’t include on the spreadsheet because it happens so infrequently (clothing, restaurants, replace household items) we simply don’t transfer out the excess funds that week, or for several weeks in advance of the anticipated purchase. Normally we do transfer something out every week to either retirement savings or extra mortgage principal payments. This system means we are constantly on top of our expenses, can predict spending well in advance, and maximize the amount we skim off for savings and wiping out the mortgage. Killing the mortgage ASAP is key to our early retirement goal.

We live massively below our income so managing the details this closely isn’t really necessary. I do it because I feel it allows us to maximize our savings as soon as possible. Without the detailed tracking I would probably leave the excess sitting there longer before feeling I could move a chunk out to our retirement accounts or mortgage. Knowing precisely where we stand at all times mean I can move the money out weekly and get it working for us. Because it’s not moved out automatically we always have control and can skip a week if necessary to fund some unusual expense.

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