Never Overdraft Again: Safe Accounting Tips!
It’s a horrible feeling when you overdraft your checking account. Have you ever done that? Dread comes over you as you scan your transactions looking for that nasty overdraft fee. The penalty can be high even if the overdraft amount is low. What are some ways you can avoid an overdraft on your account? Here are some tips I have implemented to ensure I never overdraft.
Maximizing Two Accounting Methods In Budgeting
In business, there are two general types of accounting methods: cash and accrual basis. What are the differences? The cash basis methodology includes income when it is received and deductions when they are paid. The accrual basis methodology includes items when they are earned and deductions when the expenses are incurred.
These two accounting methodologies are great for businesses, but what about our personal finances? Without really realizing it, I’ve been combining the two accounting methods for my personal budget to maximize safety. Here’s how.
When an expense is incurred in our personal budget, for example when we write a check, we deduct it immediately from our budgeted money based on the accrual method. When we earn income, for example when we receive a check, we wait to add it to our budgeted money until it shows up in our bank account as in the cash basis method. The net result is a very conservative approach to personal accounting. By following this hybrid method you’ll have more cash in your checking than usual, and are much less likely to overdraft.
Creating A Month-Long Buffer
One of the most useful tips I use to never overdraft might seem daunting at first but it’s easy to maintain. The rule is to always spend this month’s income next month, not this month. It may take you a long while to get to that point, but once you do, you’ll be so glad you did.
For many people, having a month-long buffer means you’ll have somewhere between $2,000 and $7,000 in your checking at all times. This number will fluctuate depending where you are at in the month, but ensures enough money to get all the bills paid. The month-long buffer has additional benefits:
- Freedom from bill-payment timing. Do you ever had to coincide your paychecks with your payments? You know . . . wait until payday to make that mortgage payment? Well, no more! When you have a month-long buffer you will always have the money to pay your bills – no matter what time of the month it is!
- Dramatically lower risk of overdraft. Because your checking account will have thousands of dollars, your risk of overdraft plummets.
- Less fees, more choice. You won’t have to pay overdraft fees, and can even afford to ask your bank to turn off overdraft protection. Some banks encourage you to sign up for an overdraft credit card which can lead to more fees and interest. Avoid this by shutting down your overdraft option altogether!
I remember talking with someone who looked at me as if I was alien when I suggested to keep thousands of dollars in the checking account. They didn’t think it was a wise investment or safe. First, it is not intended to be an investment in the first place! Instead, it’s an investment in your peace of mind. Second, it is safe as long as you practice sound financial habits and avoid identity theft. Remember, the eBillme payment option is the safest way to pay online and will give you assurance that your debit card isn’t going to be fraudulently used on the internet.
Say Goodnight To The Overdraft
You’re now equipped with the tools you need to avoid overspending on your checking account. The question is, will you put what you’ve learned to good use? I promise you it’s worth the extra effort. Keep more cash in your wallet and avoid those overdraft fees!
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