Financial Planning for Women | Leah Manderson Save for the Future, Enjoy Today

One Tool To Prevent Overdrafts

Remember the old story about the princess and the pea?

Here’s a 30-second recap:

A prince decides he’d like to take a princess for a wife, but he’s having trouble determining whether the ladies he meets are actually princesses. (What’s the princess version of a “frog”? I’m going to say a mouse. I think the prince was kissing a lot of mice and was getting tired of it.)

One day, our bona fide princess stumbles into the prince’s home and has to stay the night. To test her “sensitivity” (because somehow sensitivity implies royal-ness–or something), the prince’s mom decides to place a pea under the princess’ bedding. The prince’s mother covers up that pea with 20 mattresses and 20 feather beds.

The next morning, the prince’s mom asks how the princess slept. The princess replies that she had a TERRIBLE night of sleep. The princess actually feels that little pea through all the cushioning!

Can you believe it?

Well, you can if you’ve ever overdrawn your checking account!

Think of it like this: You’re the princess, your paycheck is the bedding, and the pea is a small overage in your month to month spending. 

When you get your paycheck, it feels like a cushion. It “fluffs up” your bank account, and you think it’ll prevent feeling any little peas lurking below.

A “budgeting pea” can be any small increase in spending. For example, maybe…

  • The cost of gas goes up a few cents
  • The seasons change and the heating bill shoots up
  • You buy a (totally reasonably priced) wedding gift
  • You’re hosting some friends at your house and have to buy some extra food

These aren’t really emergencies, so it’s not a proper time to use savings. But in encountering this little pea, you may overdraw your checking account.

How do you end that cycle? What’s the fix? 

Consider building a better cushion in your checking account.

To my mind, a good “checking cushion” could be anywhere between 25%-100% of your monthly income. (Of course, when deciding if the checking cushion is a good tactic for you, you’ll want to choose an amount that helps YOU sleep well at night!)

This checking cushion does a couple of things:

  1. It helps take care of the month-to-month disparities in budgeting. Even the best-planned budget can leave something out, or over-account for something else. The checking cushion will grow a little when you’ve under-budgeted, and it’ll decline a little when you’ve over-budgeted, keeping itself somewhat ‘in-check’ over time.
  2. It allows for easier automation of your bill pay. If your basic bill pay & monthly savings are less than your income (and boy, I hope they are!), you won’t have to worry about over-drawing due to funny timing differences between getting your paycheck and paying an automated bill.

BUT! There is a catch…

In order for the cushion to work as planned, you have to separate the idea that what’s in your checking account is what’s available to spend.

When you have a checking cushion, the cushion amount is the new ‘empty.’

If you get below the cushion, you have to build it up again.

To get started building your cushion

If you already have a healthy emergency savings account, simply transfer a small amount from emergency savings into your checking account.

If you don’t already have emergency savings, buckle down for a couple of months to build up your cushion. Check out my post on How to Make Financial Changes that Last to get tips on making the change.

For my overachievers

I work with a lot of very ambitious women who value putting their money to work–i.e. saving, paying down debt, and investing.

To them, the idea of leaving money in checking seems wasteful.

If that’s you, I totally get it!

You may want to try being more hands-on with your finances, checking things daily and monitoring the flow of money through your various accounts. You’ll likely spot an overage quickly and be able to adapt your monthly spending around it.

However, if that sounds like an unsustainable plan, or you want the benefits of automating your finances (fewer financial to-do’s, eliminating the fear that a check will get lost in the mail, more focus on bigger goals), a checking cushion can provide some much-needed relief.

To me, the cushion eliminates some money anxiety, and limits the amount of time I need to be poring over my bank account each month. To me, that’s worth a small sacrifice in potential returns.

In conclusion

If you’ve ever overdrawn your checking account due to non-emergency budgeting overage, consider building a cushion in your checking account.

This could be a great first step for someone who is just starting to get a handle on their finances, but it can also benefit the “intermediate” person who would like to fully automate their finances.

No matter where you are, you can get started today by either cutting back for a few months, or by just taking some of your existing emergency fund for your checking cushion.

So now to you–do you have a checking cushion? Want to build one? Sound off in the comments below!

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14 Responses to “One Tool To Prevent Overdrafts”

  1. Angela says:

    Leah,
    Awesome post! I hate overdrafts and when you are allocating every dollar telling it wear to go and there is no cushion in the checking account – even a few cents oversight can really cost you! Trust me it happens to me more than I care to admit…

    Thanks for the great advice and I love your adaptation of the Princess and the Pea!

  2. Mara says:

    I so need to do this…my budget and money available in my account is quite close specially in the first two weeks of the month. My strategy is to take my next commission check and use some of that money to build my cushion and not even account it for it in my budget (it usually goes to savings anyway).

    Thanks Leah – so tru that the right messages come when most needed (open up my computer today to realized I overdraft for $5! because I paid my gas/electric in the first half of the month rather than second half which is what I normally do- I saw money in my account so I thought I could do it…dumb dumb

    • Don’t beat yourself up about a small overage! Instead, take a step back, put on your scientists’ cap and ask yourself–What went wrong here? What were the circumstances that led up to this? What do I want to happen next time? What do I need to put in place to assure that happens?

      And do this for everything that trips you up. You’re no dummy, Mara :)

  3. J. Money says:

    Yes! Very helpful indeed… We keep $1,000 in ours for the exact same reasons. I’m cool with losing a cple dollars of investment $$ for piece of mind and avoidance of worse nasty fees!

    • Yessss…I overdrafted a few too many times in college, and know those stupid fees could have been put to better use–either saved, invested, or just on a few nights out with my girlfriends. Ugh!

    • Same deal. We like to have $1,000 or more at all times. It has saved us a few times. The small loss in investment return on that sum is a small price to pay for piece of mind.

  4. Rachelia says:

    Leah, did you know that I just got an overdraft fee notification from Mint this morning?!? I actually have had a chequing cushion for numerous years (I didn’t realize it had a term/concept name though, haha!) and it has served me well. This month though I bought a new cell phone so I had an increase in my monthly plan, plus numerous expenses for work and I forgot to bump up my cushion so I went into overdraft. Luckily my bank only charges $5 (not $25, thankfully!!), but it still sucks knowing I could have prevented it! I’m going to bump mine up by another hundred to make sure it doesn’t happen again!

    • Why yes I did know of your overdraft!

      (JUST KIDDING!)

      I don’t know if “checking cushion” is a formal term anywhere, but I thought it worked for the little metaphor I put together. You can call it whatever you like–like a buffer or padding or Rachelia’s Awesome No-More-Overdrafting-Checking-Pillow. I like the latter ;)

  5. Great tip! I use to have a buffer of $500 when I was single now my husband and I have a buffer of $2k. It is SOOO nice to no longer live paycheck to paycheck. I swear having this buffer helps me sleep soundly at night.

  6. Mr. Grump says:

    100% cushion in the checking account? Whoa! I like the idea as we usually keep $1,000 buffer but that seems huge!!

    • Hey Mr. Grump! It depends largely on the person’s income and tolerance. At one point shortly after college, I earned less than $2k per month and I only got paid once per month. At that point, it made sense to me to keep an extra month of salary in savings at all times! Not saying that’s IDEAL, but it helped me sleep at night :)

  7. Barbara says:

    I like the idea of a cushion, preferably being 1 month ahead of your bills. Currently, we have our overdraft turned off. So if we swipe the debit card and the funds are not there, it will get declined. No use letting a purchase go through if we don’t have the money. :)

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