Why keeping a high checking account balance can hurt you

Written by
Peter Dunn

My main goal is to get you thinking about your money and how you use it. But I also want to teach you that behavior is just as influential to your financial wellness as reading every book on finance ever written. Earlier this week on The Pete the Planner Radio Show, I talked about the checking account "buffer". No idea what that is? No worries, I'm going to explain it to you. Clip courtesy of 93 WIBC.

A checking account "buffer" is keeping your balance high. I know, a high checking account balance sounds like a good thing, but let me explain why it can be dangerous to your financial health.

Let's use toilet paper as an example. If you go into a bathroom and there is a full roll of toilet paper you aren't even going to think twice about it. You are going to use however much you want and then get out of there. But if you go into a bathroom and there are only a few precious squares left, you better believe you are using those squares as wisely as possible. It's the same with your checking account.

If you keep your checking account balance high, you are more likely to spend money and spend it more often. If that is true, then why do people continue to keep a buffer? There are two reasons.

1) It's the 'just in case' money (not to be confused with an emergency fund). This fear-based reason keeps money in your account to support any purchases deemed necessary outside of normal purchases.

2) Refusal to budget. Whatever the reason behind the refusal, having money in your checking account becomes your makeshift budget. If there is $1,500 in your checking account, you have $1,500 to spend on whatever you want.

For example, let's say you have $1,100 in your checking account and you are getting paid tomorrow. You are probably not going to be super careful today. You already have enough money and you are about to get paid so you aren't cautious. But what if you only had $95 in your account? Even with the knowledge that your paycheck is coming, you are going to be more careful. You most likely won't have any reckless spending today.

The point is this: if you have a lot of extra cash in your checking account (outside of what is already allocated to budgeted expenses), then you need to move that money to savings. 'Just in case' money = an emergency fund, which should be in a savings account. I personally keep my checking account balance super low. Even as low as $50 sometimes. It tricks my mind into making better spending decisions. If I see a $3,000 balance, I'll get careless. Keep your account lower, and you'll spend less. It's really pretty simple.

Step up your financial wellness game.

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