Let me first say that I believe that every healthy financial household will include an emergency savings account with at least 9 to 12 months of living expenses. If one is still in debt, I usually recommend having about $2,500 in emergency savings until the debt is paid off (then boost that up to 9 months).
However, many people are not in a situation to make that a reality. So, this should be the first step toward financial freedom.
It is very common for people to not keep much money in their checking account – writing checks the moment that their pay hits their account (or, if you are like me, you set up online payments to come out on the same day that your direct deposit hits the account). However, having little to no money in your checking account between paychecks can be very dangerous to your financial well-being.
This is because there are various “unexpected” transactions that can occur from time to time that may bring your account into a deficit. This is why you should have at least $500 in your checking account at all times. This money should remain unspent and only be used if one of these aforementioned transactions occur.
Why We Need a Financial Cushion:
The purpose of this money is to serve as a cushion for your day-to-day or monthly spending. This protects you against any charges that may come up for which you are unable (or simply forgot) to plan. This could include bank charges, automatic withdrawals (annual memberships or subscriptions for instance) or just plain forgetting to reconcile your checking account periodically.
It is very easy to forget about that Auto Club Membership that automatically renews every May 15, but trust me, the Auto Club will not forget. And so, while you were expecting to have $100 in your checking account until payday, Auto Club deducts $150 from your checking account and you are now faced with overdraft charges as well as a negative balance! The same can easily happen with semi-annual or quarterly insurance payments, or any other bill that isn’t due monthly.
Once the payment terms for these agreements are established, you need to set up reminders to avoid surprises – however, it is a good idea to prepare for something that may slip through the cracks.
Also, if an emergency arises and you need money immediately, having a predetermined amount in your checking or savings account set aside for emergencies would be essential. This would reduce the amount of times you have to turn to your credit card or payday loans to bail you out.
The list of charges that can catch you by surprise can range from a deductible on your medical/dental insurance, to sitting on your glasses and needing an immediate replacement. The list can be endless, but the point is for you to begin to take steps to protect yourself from financial setbacks.
Some of the consequences of having an empty checking account include:
- Overdraft Charges – Also known as NSF (Nonsufficient funds) charges. These can go from $25 to $40! This charge will occur every time a transaction hits your account, and you do not have enough money to cover it.
- Negative Balance Charge – Some banks will charge you for each day that your account balance is negative. This can be $5 or $10 per day!
- Below Minimum Balance Charge – Many checking accounts are assessed fees once the balance drops below a predetermined amount – say $100. These charges can go from $10 to $25!
- Overdraft Protection Charges – If you have a savings account or credit card with your bank, they will allow you to link your checking account with it. This way, if you ever have too few funds in your checking account to cover a transaction, they will draw money from your savings account or credit card to cover the charge. This way, you can escape paying those ridiculous NSF fees! However, this “privilege” will cost you an extra $5 to $10 every time you employ it!
- Being Forced to Take Out Payday Loans – Typically, these are extremely short-term loans that you promise to pay back on your next pay day. These loans carry interest rates anywhere from 300% to 900%!!!
- Using Credit Cards for Daily Expenses – This is one of the worst things you can do, especially if you are trying to get or stay out of debt.
Okay, so now that you are thoroughly convinced that you need to have at least $500 in your checking account at all times, how do you go about doing it?
Reduce Discretionary Spending:
Look at small areas where you can reduce spending. Even if this is a temporary cut, it can be enough to get you towards your $500 goal. This could mean taking your lunch (and morning coffee) to work a few days a week – do this 3 days/week and save $10/day and it’ll take you about 4 months to reach your goal!
Instead of dining out twice a week, you can reduce it to one (could potentially save between $30 and $50 per week). Cut back or quit some costly habit (i.e. smoking, buying lottery tickets, etc). The point is to look at every area of your spending and identify where you can cut back.
Scale Back Services:
Similar to the first point, except now you should look at the various services that you subscribe to and make adjustments. Look at your cable bill and eliminate the channels that you don’t need. Or GET RID OF THAT GARBAGE ALTOGETHER!!! cancel the service entirely – it’s not as hard as you may think (read about Paul’s experience with eliminating TV service at ProvidentPlan.com).
Another easy way to find extra cash is to check your Wireless phone bill and reduce your plan to one that fits your needs. For instance, an Individual Plan with 900 minutes costs $60 with AT&T; if you only use 400/month, why not drop down to the 450 minute plan for only $40, or better yet, get a prepaid phone.
You could also get together with a few people that you trust and establish a Family Plan and split the bill! If you are out of your contract, use a service like Billshrink to compare your options and get the best price. If you have a landline and a cell phone, cutting the landline may be the best way to go.
Of course there are a myriad of options when it comes to cutting expenses (which we will cover in depth in a future article), such as shopping around for insurance or cutting coupons, you just have to examine your situation to see what is best for you.
Give Your Income a Boost:
There are a number of (legal) things you can do to earn a few extra dollars. Remember your initial goal is to establish a $500 cushion in your Checking Account, so don’t get discouraged if you can’t free up or earn thousands of dollars at once!
You can try to get a few hours of overtime at work, or take on a second job temporarily. Consider cleaning out your closet/attic/garage and sell a few things (find out how to conduct a yard sale). You can even start making money using the internet!
By combining a few of these expense cutting and income generating tools, you can be at your goal in a month or two!
Of course, cutting expenses and increasing your income does not only apply when you need $500. This should be a way of life, no matter what financial level you are on; from building the cushion we talked about today, to paying off debt, saving for retirement or even if you are already retired!
Do you have any questions about banking fees? Have any great ideas on cutting expenses and saving money? Any advice on earning extra income? Please share your comments below!
photo credit: David Cesarino
© 2010 – 2011, KNS Financial, LLC. All rights reserved.