Money Myth Number Two – My Bank Account is the Best Indicator of My Money Situation

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I remember an old comic strip where a boy tells his sister, “Hey, we’re rich! Mom just got a whole box of checks in the mail.”

We may laugh at that, but I’ve actually adults who seem to believe the same thing. As long as there are checks in the checkbook, they act as if they have money to spend. I’ve known many people who base all their spending decisions on what their current bank account balance is.

It seems that this is a natural tendency. As bills, expenses, and wants come up, if there’s enough in our bank account, we spend it. If we happen to have extra income, then great! We treat ourselves to a reward of something new.

The true principle behind myth number two is this: Your bank account balance cannot predict that which you are not prepared for.

There are three types of things, in particular, that your bank account can’t predict.

First, your bank account can’t predict variances in income. Many people who are self-employed or paid on a commission basis have incomes that vary widely from month-to-month. My first year as a tax accountant, I earned my entire annual income in the first four months of that year. I had to manage my money well for the remaining eight months of the year, or else November and December became very lean months.

Second, your bank account balance cannot predict periodic expenses. Many regular expenses don’t come every month. Those expenses that come once a year or once every six months tend to be some of our largest individual expenses. The bank account alone does a poor job of preparing us for these types of expenses.

Third, your bank account balance can’t predict when Murphy will strike. You’re probably familiar with Murphy’s Law: The worst thing that can happen will–and at the worst possible time. When Murphy strikes you may find yourself faced with having to replace the furnace, make major car repairs, pay an unexpected hospital bill, or deal with other similar financial crises. People who rely on the bank account balance as their sole money management tool often find that the only option they have to deal with these crises is to go into debt.

During my first year of college, I lived about forty-five minutes away from campus. I worked on campus, and once I got to campus in the morning, I tended to stay there until 8:00 or 9:00 at night. So, I tended to buy two meals a day at the student union or at one of the fast-food restaurants that surrounded the campus. The cost was a little expensive, but I made enough money to afford the two meals, and it saved me a lot of time.

Then, about halfway through my first semester, I received a notice in the mail reminding me to pay my tuition for the second semester. I had completely forgotten about when tuition was due, and I hadn’t made any particular plans to pay the tuition. I began packing a sack lunch and a sack dinner each day, and was barely able to squeak my tuition in by the deadline. By using only my bank account balance to manage my money, I nearly lost my ability to continue my education.

Even more important, managing your money by your bank account balance alone cannot help you build your financial prosperity. Building financial prosperity requires two steps. First, you must have an income that comes in whether you are able to work or not. Second, you must eliminate your debt.

Each of these two steps can be readily accomplished by anyone. There is no particular requirement of income level, profession, or academic degrees. But, following these two steps requires an ongoing discipline and focus. Managing money solely by the balance in your bank account does not give you the tools you need in order to exercise that discipline and focus.

A bank account is an important money management tool. But by itself, it is not enough. A full set of money management tools includes tools such as a financial plan, a spending plan, and reporting tools. Together, these tools can take you toward your own picture of financial prosperity.



Source by Kent Stuver

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