Losing Half Our Buffer
Keeping a certain amount of money in a checking account to prevent overdrafts/denied transactions is a pretty common practice among moderate PF’ers. Beginners haven’t yet figured out that they can avoid fees, interest, and embarrassment by keeping such a buffer. Ideally, you wouldn’t overspend the amount of money you have available for that month, but we are all capable of making mistakes. I personally like to play chicken with a zero balance, though – I think it keeps my spending in check.
We don’t currently have a monetary buffer in our checking account. When I say we zero out our budget leftovers at the end of every month, it means that I literally look at the account balance we had on the first of the month and make sure that we spend, save, give, or transfer every cent. However, we do have what I’ve taken to calling a “time buffer.” We are paid on the 25th of every month and don’t start our budgeting period until the 1st of the following month, so our paychecks are sitting there theoretically untouched for several days at the end of the month. We also don’t pay all of our bills before the 25th so there is always at least a few hundred dollars in the account waiting to be spent right up until we are paid. The time buffer works the same way as a cash buffer, though it only appears when the account balance is dwindling and isn’t tied up all the time – if we had some random transaction slip through that we forgot about and it would have put us over for the month, the next month’s money is there to absorb it and we can figure out how to refill the money from savings later.
Honestly, I can’t remember the last time we used our time buffer. I’m pretty on top of the transactions that occur in the latter half of the month and if we are ever about to go over budget I can instantly transfer over some money from our general savings account to bring us up to zero. But as I’m more opposed to paying fees for banking than keeping money around as insurance, I’m fine with the presence of the buffer.
However, this month we’re losing half of our time buffer. Remember when my compensatory pay went to zero? One of the differences between the comp and non-comp payroll systems is that non-comp is paid on the last day of the month. So as of today, we’ve received Kyle’s paycheck for September but we don’t expect mine until Monday. (And actually I’m not sure if my direct deposit is set up yet, so I may have to deposit it myself. It feels a little strange to use a smartphone to deposit $2,000, but that’s where we are!) Now we have no time buffer whatsoever on my paycheck, only Kyle’s. Since we don’t ever use the buffer I guess this won’t change anything practically, but it does give me a tiny shiver of anxiety that I’m used to around this time. I supposed I’ll get accustomed to it in a few month and realize that for us a $2k time buffer is just as good as a $4k time buffer.
Do you keep a buffer of some kind in your checking account? How often do you use your buffer? How much time elapses between when you are paid and when you start using that money?
photo from Free Digital Photos
Filed under: checking, income · Tags: buffer, checking account, zero out
How to Make an Irregular Income as Regular as Possible
Six Years of Internet Banking
Losing My Graduate School Funding
Pulling Back the Veil on Our Daily Money Management37 Responses to "Losing Half Our Buffer"
Leave a Reply
Recent Comments
- Adam on Home Equity Is Funny Money
"Hi Emily - I just stumbled upon your blog. Great post! Up in Canada this is a…" - Emily on Home Equity Is Funny Money
"I agree that an appraisal is the best number to work with. I can't think of why …" - JL on Home Equity Is Funny Money
"I only note it as round numbers, in $50k or $100k estimates. I also usually upda…" - We Maxed Out All Our Retirement Accounts for the First Time! - Evolving Personal Finance | Evolving Personal Finance on Avoiding an Expensive 401(k) Plan through Self-Employment
"[…] was the first year that we contributed to Kyle’s expensive 401(k…" - Business Goal Tracking for Week 8 of 2022 - Evolving Personal Finance | Evolving Personal Finance on Business Goal Tracking for Week 6 of 2022
"[…] Done as of two weeks ago! […]…"
I get paid on the 15th and the 30th, with rent due on the 1st, so no real buffer there. I am the same as you, I play chicken with my balance – and it made me realize I had free overdraft on one of my chequing accounts.
When I was a student I got paid on the 27th, or that last weekday before that which I found daunting (this was pre-financial organization on my part). The worst though was at Christmas-time. Because the university closed down around the 20th, you’d get paid a week early. And at one of the busiest (read expensive) times of the year! January 27th couldn’t come fast enough for many of the grad students I knew.
Do you start using your paycheck from the 15th in the second half of the month? I’d keep it untouched to use it to pay the rent on the 1st, no? Two week time buffer!
I dunno, I guess I’ve never been tempted to use our paycheck before the period our budget starts. Probably that was because when I started out I was paid on the last day of the month so there was no time buffer, and now that there is a 5-6 day one we still don’t touch it until the month rolls over.
Christmas is definitely rough without savings. Gifts, travel, socializing, throwing parties… It’s a crazy season.
No, the way I do it is I pay rent, one auto-debit, a personal loan repayment, and the first half of our monthly spending (gas/food/cat supplies) out of the 30th pay-cheque. The second pay-cheque pays the remaining debt-repayment/bills/savings and the second half of our monthly spending.
If for some reason my pay didn’t come when it was supposed to, I have money to dip into, but I hate keeping a buffer in the chequing account because it gets eaten away $2 at a time I find.
We keep a cash buffer of about $5K in each of two checking accounts pretty much all the time. It’s just a safety and security feeling and for at least one of them it helps us keep out free checking with excellent service. I’d rather sacrifice $3 in interest than pay a $15 fee every month.
Mrs PoP @ Planting Our Pennies recently posted..Hedonic Adaptation to Savings?
I wouldn’t like my bank dictating where I keep my money just to avoid fees. My standard is that their services should be provided based on all the money they’re making by holding our deposits. I hope it’s worth it to you to keep that money locked up in those accounts! $10k would be a ton for us but I guess it’s just part of your EF?
Yup, we ave never called a specific fund an “EF” the way most pf people tend to. We just call it a “buffer” and it’s what we have in cash in banks at the moment.
“My standard is that their services should be provided based on all the money they’re making by holding our deposits.”
– But if you’re clearing your account to 0 every month, your average balance is probably quite low and they’re not able to utilize a whole lot of that in terms of providing loans to other people (which would bring in revenue to pay for your services)… I think?
Definitely, but we also have like $25k in savings and CDs at the same bank linked to checking. I’m not a high services user so I don’t want to pay for personnel/buildings that I would rarely use – that’s why internet banks are perfect for our lifestyle. Low-cost for them, low-cost for us.
We have a pretty significant buffer. Like Mrs. Pop said, the interest sacrifice is worth knowing we won’t pay fees. We haven’t had to use it yet, but we don’t try to make our checking account 0 out like you do. We’re just not that precise on a month to month basis, and I do keep track of our projected cash flow so I should know ahead of time if we’ll be under balance anyways.
Matt Becker recently posted..Disputing Credit Card Fees Really Works!
I think the cash flow projection budget is an attractive one. We’ll probably switch to that in coming years when our income is higher and can weather irregular expenses more easily. Definitely keeping a buffer is necessary for that budgeting method.
We keep a cash buffer constantly in case anything pops up. Then, every payday we empty our account to the set amount we want to keep.
Lance @ Money Life and More recently posted..Should We Destroy Our Debt Or Create A Consistent Payoff Plan?
What you do is what I think of as that classic buffer combined with “zeroing” out where the zero is that buffer amount.
We always keep about $6k as a buffer in our checking account. We can also write checks from our brokerage account if the need for a very large payment comes along.
Bryce @ Save and Conquer recently posted..Carnival of Financial Planning – Autumnal Equinox
How did you arrive at $6k?
It’s just an amount that’s worked well over the years. Monthly spending, including mortgage bill, has been just under $4k/month. So $6k gave us a pretty big buffer over that. We no longer have the mortgage, so I sometimes drop the checking account to something lower, although $6k is still sort of a comfort zone amount. (Lots a hedging words in that last sentence.)
I don’t think I’ve let the checking balance go below $1000 for a couple of years. When I wasn’t so good with finances, I forgot about an auto debit bill that came out while we were out of town. I was using my debit card until it got denied. It was the worst feeling in the world, and I think it’s just mental now that I don’t ever like it to be low just in case. Probably silly, and I’ll get over it someday.
Using credit cards also gives us a buffer – if we ever had a problem and couldn’t transfer savings for some reason, we just wouldn’t pay off our credit cards for a few days until we could sort it out. Playing chicken was definitely more dicey back when I used exclusively debit cards. $1,000 sounds to me like a very reasonable buffer.
I love the idea of a time buffer! I’m paid bi-weekly so I’m not entirely sure how that system would work in our household, but there may be a way. For now, we use a cash buffer ($1k, likely larger than we need) but the opportunity costs are pretty small, since that 1K is part of our emergency fund and would just be earning around 0.8% in a savings account if it weren’t in checking.
Yeah, that money wouldn’t be doing much for you in cash no matter where you stash it right now. I’m glad you like our system! I haven’t thought much about biweekly pay budgeting so I’m not sure how you could apply it. Do you hold your two paychecks from a single month to pay for the next month’s expenses and bank the extra paychecks? Or do you have it more fluid each month depending on the date you’re paid?
So, it gets a little complex, but here’s how we do it. Before the start of the year I’ll look at my payday schedule (26 biweekly paychecks) and assign two paydays to each month, marking them January #1, January #2, and so on. Ideally January’s first paycheck comes in sometime right before the month (Dec 31st) and the second comes in sometime mid month. The pattern’s pretty reliable so that we’ll have two paychecks each month…but twice a year we get this extra paycheck & do something different with it (like throw it at the mortgage, invest extra, put aside some money for Christmas or a trip, whatever).
I think the only difficulty with a time buffer, even though it seems way more efficient, is that our time buffer would be constantly fluctuating. Some months we’d have ten days, others we’d have one or zero days. If we could plan everything out though, it may still work…
I initially had trouble convincing my wife to set up a buffer, I seem to have created a monster! She gets upset if we dip into it for any reason. Once, we needed it to cover a shortfall until payday the next day. But for the 12 hours in between she was anxious about being “broke” with only $800 in the account!
Edward Antrobus recently posted..When Making Travel Arrangements, Take Nothing for Granted
Haha it does sound like you created a monster! I would be to afraid of going the other way, which is why I don’t like having a buffer there for 5/6 of the month.
When I was younger, my dad suggested that I add a buffer amount to my checking account, but not to add it to my checkbook. He suggested $500, so when my checkbook says that I have $0, I would really have $500 in the account. Interesting psychological trick. Kind of like the “set your clock ahead 10 mins” to be on time. Surprising how effective it is, even though I know the clock is fast!
That’s a really good analogy!
I don’t allow any direct debits from my account. I stay in control, paying everything manually. This way, I feel safe with a totally tiny amount the day before pay day (as I move any excess to savings). I do sometimes think about having a buffer (just last night), but it just seems a waste, when it could otherwise be in a high interest savings account. I start ‘spending’ as soon as my weekly pay comes in on Wednesday lunchtime, paying the credit card, then the mortgage, then rent, then bills (if I’ve not done during the week from the available balance, or moving money from the bills account), then I withdraw my own ‘walking around’ money when I next get the chance, sometimes Wednesday, sometimes later in the week. I tend to pay for most things with cash then – aside from big items like doctors bills etc.
Thanks for sharing your money management habits! It’s so interesting to see how other people run things. I prefer to not allow direct access to checking and will use a credit card when possible, but I don’t want to risk forgetting to pay a bill manually so we have one auto-drafting from checking. 🙂 It sounds like you should try to get a little ahead, though… Using your paycheck to pay off credit cards feels dangerous if that paycheck is ever late!
See I only occasionally use the credit card where the bill might not be budgeted for (ie a $200 medical expense). But seeing I’m paid weekly, and my credit card is due monthly, I’m never too worried, seeing my habit is to zero the credit card weekly. I don’t think I’ve ever paid interest on the credit card so I must be doing something right!
SarahN recently posted..Why I think I’m a non-driver
Interesting, I’m definitely not organized enough to use a time buffer. I don’t actually know when all of my bills are paid throughout the month. I mean, I can look it up, but I don’t know off the top of my head. I just try to keep a few thousands in the checking account, and that way I don’t have to worry about it. Have you ever lost the game of chicken?
Cash Rebel recently posted..Is ObamaCare good for Early Retirement?
That buffer does allow you to not worry about it!
Hm, I sort of lost once, right at the beginning when I had 0 buffer. It was back when I was banking partially with BoA. I had some transaction coming out that put me into overdraft, but I had my paycheck pending, which according to their policy would cover the transaction I made. I asked them to reverse the overdraft charge and they did. After that I stopped using BoA so much.
i’m wondering how much or what percentage of your money should be put as a buffer? Any recommendations?
Marissa@Thirtysixmonths recently posted..Why I Spent Twice My Budget on My Car
Very individual. I’d say at least twice the size of a transaction that you might forget about. Obviously that level is different for everyone – for us it might be $300, if we kept one.
[…] Do you keep a buffer in your checking account? Emily from Evolving Personal Finance discusses time buffers. […]
I have always kept a buffer in my accounts. It gives me peace of mind – it would drive me nuts not having it, even if I knew there was nothing to be paid. I would get nervous losing half of it, but if you’ve never had to use it, you’ll be fine. I never use mine.
Tushar @ Everything Finance recently posted..Three Tips to Save Money on Halloween This Year
That’s funny that you never use the buffer but would go nuts without it! How big a buffer do you keep?
[…] @ Evolving Personal Finance writes Losing Half Our Buffer – We have a “time buffer” in our checking account instead of a fixed monetary […]
[…] I submitted the paperwork for the new direct deposit in August.) So now I grab my paycheck on the last workday of the month and use my smartphone to deposit it to our Ally checking account. But it can take several days […]
[…] I was doing the math on May 24, we were in our between-paychecks period – Kyle had been paid for May but I hadn’t yet. Here was my thought […]
[…] money we spent was a bit more difficult that what we’ve done in the past. I’m still trying to zero out our account balances at the end of the month, but I also wanted to make sure that our spending matched our money puddle. Essentially this is the […]