Buffering .. buffering

This article first appeared in the now defunct blog “The Kill Chair.” I might write it slightly differently now, but the principle remains the same.

I just found $40 in my coat pocket. Now what should I spend it on?

I hear things like this a lot from people I know who are living paycheque-to-paycheque.  Now, firstly I would like to recommend Gail Vaz-Oxlade’s show Til Debt Do Us Part as required watching for anyone who isn’t squatting in a cave in a provincial park in order to avoid having to participate in the monetary system.  She offers great advice on how to get the budget to balance and make room to save for an emergency fund as well as retirement savings, education savings for children etc.

What I want to talk about, however, is a bit more basic — the buffer.  I cannot speak highly enough about the benefits of having a little money in the bank.  I’m not talking savings that you may use down the road. I’m not strictly talking about an emergency fund.  I’m not even talking about bringing in more money than you spend.  I’m saying that if you bring in $600 every two weeks and spend $600 every two weeks, having your account fluctuate between $700 and $100 instead of $600 and $0.  Sure, that extra bit of money may help you out when you get the unexpected parking ticket or if you have to miss a day of work.  The biggest benefit, however, is that it can save you money in the long-run if you put it to use.

The most obvious manifestation is that it allows you to capitalize on sales.  When canned beans[1] go on sale for half off, you have the funds on hand to buy a couple cases worth rather than just a can or two.  That may temporarily lower your buffer, but over the subsequent weeks when you don’t need to buy beans at the regular price, your buffer will come back up and even grow a little bit.  In other words, you are bringing in more money by reducing your spending but without reducing your quality of living any.  A case of beans may not seem like a huge deal, but if you repeat this with other items that store and that you know you will need, the savings can be substantial.  Your grocery bills, household items, car maintenance expenses and more can all start to drop.

The next way in which the buffer helps is that it allows you to be more efficient in your shopping practices.  If you are living day-to-day and forced to purchase food at the local convenience store when you have the cash in hand, you are paying more for your food and taking more of your time in procuring it.  Once you have that little buffer, it makes it easy to consolidate your trips into one.  Better yet, you can start to take advantage of bulk stores.  Once again, by draining your buffer in the short term in an intelligent fashion, you are saving yourself money in the long-run.

It isn’t just your spending where you can benefit.  Having funds on hand allows you to take advantage of business opportunities that may present themselves without having to accrue debt.  When you find something that is selling at below market value, you have the funds to jump on it for resell closer to market value.  Obviously you need to make wise decisions here and consider your time.  When done correctly, though, this enables you to actually earn a little additional income to help to build up that buffer.

The last area where this buffer can be beneficial comes in banking.  Many banks will waive account fees if you maintain a minimum balance.  Usually this is in the range of $1000-$2000 dollars.  This may seem like a lot to some, but if you can get to this point the payoff is considerable.  If you look at account fees and compare them to interest rates, the saving of account fees will often work out to a higher percentage return on your money than putting it in a high interest savings account.  Until you start talking about stock investment or locked-in investment products, this is often going to be the best way to bring in a return on your money. [2]   Plus, the money remains there and you can take advantage of that next good deal or business opportunity.

So in answer to the quote with which this all started, the answer is to put it in your bank.  A treat might be nice — but better to invest the money in yourself and then build to a point where you are raising your lifestyle on the whole rather than gorging on the odd unexpected treat.

Footnotes

  1. Mmmmm .. beans. ^
  2. Of course this assume that you are already paying your bills on time and don’t hold any credit card or other high-interest debt.  If you can get 3% interest from a high-interest account, the equivalent of 5% in fee savings or pay down money on which you are paying 28% compounding interest — well that last figure isn’t even in the same ballpark. ^

 

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