I know you’ve probably heard this before, but my wife and I can’t get ahead. We struggle to save money, we struggle to stay disciplined, and we are getting angry. We make great money, nearly $130,000 per year, yet at the low point of the month, we have $3,900 in our checking account and only $1,500 in savings. It makes us nervous when are checking account dips below $4,000. We are educated professionals, and it drives us crazy that we can’t figure this out.
Mark (Not my real name. I’m too embarrassed to have it printed.)
Sorry, but I'm going to have to call you by your real name Dan. The reason is, you need to take ownership of your financial life, the good and the bad. Don't worry though, there are millions of Dans, I think you are safe.
Alright Dan, let's get into it. What troubles me about your email is not what's bothering you, but what's not bothering you. I'm much more concerned about the amount of money you're keeping in your checking account than how little you've saved.
Let me use an example to explain what I mean. Let's say you're trying to watch your weight so when deciding between the big bag of M&Ms and the little bag you choose the little bag even though, per unit, it's more expensive. Why? Because you don't trust yourself with the big bag. This is a smart move on your part because no one can be trusted with a big bag of M&Ms. No one. By this logic, you should do the same thing with your checking account.
"You’ve got way too much money in your checking account. On your worst financial day (your low checking account balance of the month), you can afford to buy $3,900 worth of stupid. That’s not exactly a incubator for financial success. You are misdirecting your financial stress. While you should be concerned about how you're not accumulating savings, you are concerned about preserving your ability to spend at your whim’s delight. There’s absolutely zero reason to have $3,900 in your checking account, at the low point of the month. Your increased account floor is causing you to feel more confident than you should feel. Basically, you’ve given yourself too much slack, and it’s made you a slacker." (courtesy of the Indy Star)
You said having a checking account below $4,000 makes you nervous, but I want your checking account to get down to $200 at the low point in your month. Will this cause an anxiety-induced panic attack? I sure hope not, but if it does, you'll recover. Transfer $3,700 to your saving account, actually, better yet, get your savings out of the same bank as your checking account. Savings needs to be out of sight and out of easy transfer range. Your next move is to focus on saving more.
"Now, setup a $200 automatic transfer from your checking account to your new savings account, on your next payday. Schedule this to happen, every month, matched-up with one of your paydays.Two things are about to happen.You are about to start saving money, with force. And you are going to stop spending so freely. After two months have passed, take note of your current new low balance. My gut tells me your new low balance will be in the $800-$900 range. Clean it out again. Take it down to $200, and then increase your automatic transfer from $200 per month, to $400 per month. Wait two more months. Note. Repeat. Things are looking up, Daniel!" (courtesy of the Indy Star)
No one wants financial stress, but financial wellness doesn't equal easy street. A low checking account balance because you don't have enough to pay your bills is bad financial pressure, but a purposefully low checking account balance is good pressure. Good financial pressure keeps you on your toes and helps you to continue to make smart financial decisions all the time. How do I know all of this? Because I came to the same conclusion myself in 2009 and I haven't looked back since.