Overdrawing your account is the worst. Fees and penalties pile up, especially if you’re just trying to make ends meet and pay the bills. The “buffer method” can help you always keep the right amount in your account to pay all the bills, and know how much you can spend or move out to savings.
The right money buffer protects you from overdrafts without holding funds up that you could be putting in accounts with a higher return. All you need to do is ask yourself three simple questions:
- What’s your monthly income?
- What’re your monthly bills (rent, utilities, groceries, transportation)?
- When do you pay your bills?
It may seem simple, but if it were, no one would overdraw. The last one is key as well, since it removes the potential for bank-related errors, where they deduct funds in a different order so you do overdraw, or by amount instead of date, or vice versa. Even if you can only estimate some large expenses, it will help make sure you always have enough to cover them. Once you know how much of your income will be dedicated to bills and when those bills need to get paid, you know how much to leave in your checking account. Add a buffer on top of that proportionate to your spending habits. For example, I rarely use cash and put most of my purchases (even emergencies) on my credit card, so my buffer hovers around $200. I always leave the amount for the bills I’ll pay before my next paycheck plus the buffer in my account.
How Much You Should Keep in Your Checking Account to Follow the “Buffer” Method [The Financial Diet]