First, let me define my concept of a zero balance account – it’s a checking account that, after all bills are paid for the month, equals out to zero dollars or some very small amount (usually under $200).
This doesn’t mean there isn’t money sitting in a savings account or another type of bank account, contrary to this zero balance idea, there should be an adequate amount of cash sitting in a savings account or daily expense account that’s separate from a bill-paying account.
For clarification, let’s use Joe Schmo was an example. Mr. Schmo’s banking system might look a little like this:
- Bill paying checking account – monthly pay checks are deposited into this account and after all the monthly bills are paid and savings is transferred, the balance is close to zero.
- Savings account – automatic monthly or bi-monthly deposits are made into this account for a rainy day. (Not linked to the main bill paying account).
- Daily expense account – a monthly or bi-monthly amount is moved into this account for meals, groceries, gas, and daily expenses. This account might also be used to pay off a credit card if a credit card is used for daily expenses instead.
Why have all of these accounts with one nearing a zero balance? There are a number of benefits to this strategy as mentioned below:
- Mr. Schmo has complete control over his income and expenses. By automatically moving money into a savings account, it’s money that won’t “accidentally” get spent. He also knows exactly how much his expenses are on a monthly or bi-monthly basis.
- Using a daily expense account, Mr. Schmo can keep track of all expenses without going over budget. Whether he uses the money directly, or uses it to pay off a credit card, he knows if he’s stayed within his limit.
- Safety reasons. Mr. Schmo doesn’t have to worry as much if one of his accounts is breached if he has another one to cover his butt. If a mistake is made on the part of a vendor or the bank, it will eventually be cleared up. Yet, in the meantime, Mr. Schmo needn’t be penniless.
Number 3 – Safety – was the prompting for this post. This past week a local Del Taco store’s credit card machine was accidentally adding three extra zeros to everyone’s debit or credit card transaction. One man purchased $10.00 worth of food, but his debit card was charged $10,000.00. It wiped out his bank account! The poor man was interviewed and stated that he was flat broke, which tells me that he only had one account that he used for savings and daily purchases.
Had this man been socking his savings away in a separate account, he wouldn’t have suffered so greatly.
I personally use a very similar system to the above mentioned. The only difference is that I use a credit card for daily expenses and pay it off out of my bill paying checking account every month (though now that I’ve broken this down, I might begin a daily expense account, too). It works darn well and keeps my cash safe!
What system do you use to protect your accounts? What’s your bill paying system?
8 Comments
I have typically used my credit card for my daily spending. I then have a savings account that is solely for paying off my credit card. As I spend, I transfer the money from my checking account to my credit card savings account. When the credit card bill is due, I transfer the money back to my checking account and pay the bill in full.
@Jon – That sounds like a pretty good system. I use my credit card for daily expenses as well, but my cash flow is still a work in progress. I’d like to get to a point where I have the cash in a daily spending account that is used for paying off the card.
I don’t have anything that sophisticated, just a checking account from which I pay all my bills and a savings account. I make monthly transfers from my checking account to my savings account, the idea is to have a growing emergency fund as well as saving for things such as a down payment on a new car or fund a vacation.
@Paul – I have a few separate accounts for separate purposes, but it’s for various reasons. I think the whole point of separating out savings and spending is to make sure you don’t spend your savings!
I always keep a larger cushion, usually around $1000-2000 minimum. I don’t want any chance of an overdraft.
Since I check my balance every day for the most part, I would quickly notice any errors.
I try to keep a buffer, just to make sure to protect myself in case anything crazy happens. Simple approach, I suppose. Also, have to say that is a wild example about adding zeros!
@Squirrelers – Yes, that Del Taco machine was adding three zeros on to every order and that’s just crazy! It’s just supports my idea of NOT using a debit card for daily transactions.
@Money Beagle – I keep a small overdraft account available for my checking account. But since I don’t really use my checking on a day-to-day basis, I don’t worry too much about overdraft – or someone “accidentally” having access to my bank account.