Bouncing a check or over-drafting an account has always been a bad idea, and in the current economic environment, it may be more costly than ever. Because of that, it's understandable if you want to keep a little bit of a cushion in your checking account. Still, is there such a thing as keeping too much of a cushion? Doing so means shortchanging your savings account, and this can cost you in more ways than one.
The Rising Cost of Overdrafts
Given the challenges being faced by banks, some are increasing the penalties you will pay for overdrafts. These charges can be very steep, often exceeding the amount of a typical accidental overdraft. Even if you have overdraft protection, you may face high interest charges on any overdraft balance. If you don't have this protection you might bounce checks, in which case you'll find creditors particularly unforgiving in this economic environment.
The Hidden Opportunity Cost of Shortchanging the Savings Account
While those are all good reasons to keep a healthy balance in your checking account, you don't want to shortchange your savings account. Savings account interest rates are almost certain to be higher than checking account rates, if you earn anything at all on your checking account. Also, besides not wanting to miss out from savings account interest, you'll probably find that you spend less if you don't keep as much ready money in your checking account.
Finding a Balance
Clearly then, the right balance involves keeping just enough in your checking account to avoid overdrafts, while making sure any excess amounts are routinely transferred to savings. Here are some ideas for doing that:
- Balance your checkbook conscientiously. This means doing it precisely, promptly, and without exception.
- Avoid joint accounts. Even in the best of marriages, communication isn't 100%, and so there is always a possibility you and your spouse will draw on that last $100 at the same time.
- Analyze your spending patterns. Look at how you've used your checking account in the past year, and make a distinction between routine expenses and unusual expenditures. In particular, figure out which of those unusual expenditures were time-sensitive, and which would have allowed for some advance planning.
- Build a budget around your time-sensitive expenditures. For the purposes of figuring out how much you really need in your checking account, you have to figure that for any long-term purchases there should be time to make a transfer from savings before you have to write a check.
- Compare your time-sensitive expenditures to your monthly income. Any excess amount should be earmarked for a routine transfer to your savings account. If you can arrange with your bank to have this happen automatically, so much the better.
- Leave an appropriate safety cushion. Assuming you are living within your means, your monthly income should be covering your routine expenses. Even so, you should still leave a little bit of a cushion in your checking account. This should be somewhere between the amount of your single biggest monthly expenditure, and the total of one month's worth of routine expenses. Anything beyond that is dead money that should be earning savings account interest.
Following these steps should allow you to keep a healthy checking account, while also making sure you don't miss out on the opportunity to earn savings account interest rates.