Happy New Year!
As I look back over the little things we did last year to enable us to pay off all of our consumer debts, I realized one of the most important things we did – and have always done — is pad our checking accounts.
This little tip I picked up from my dad when he was teaching me how to manage my first checking account. It has served me so well, I’ve made it a permanent habit.
Kirk and I have two different checking accounts. One we call our “spending account” and use for things like groceries, gas and entertainment — basically any variable expense. The other checking account we call our “bills account” and use for all of our fixed expenses like our mortgage, insurance, utilities, water, cell phones and Internet service.
Our spending account usually has a low balance. We transfer $250 each week into the account to cover all of our food, gas and anything entertainment related we would like to do. We plan to use most — if not all of the balance each week. Because of this, we always keep an additional $250 padding in that account. If we dip below $250 in any given week, we spend less the following week in order to bring the starting balance back up to $250.
In our bills account, we keep a cash padding of $1000. The cushion is higher in this account because the transactions that clear the account are typically higher. Keeping an extra $1000 in the account ensures our mortgage payment will always clear — even if we’re in between pay periods.
It’s kind of like having built in emergency funds in our checking accounts.
Having this padding doesn’t mean we never dip below our $250 and $1000 zero balances. It just means we have the cushion available that allows us a little more flexibility from week-to-week and month-to-month.
As you know, no two months are the same when it comes to money spent.
How to Pad Your Accounts
To build your own checking account padding, select the amount of padding you would like to achieve and then try spending $20 less each week or pay period until you reach your padding goal. Eventually, you’ll have a nice little safety net for those unexpected smaller expenses.
If you want to build up your padding faster, or if you’re still not sure where you could come up with the extra money needed to pad your accounts, here are a few ideas:
- Call your insurance company and ask for a lower rate on your car and home owners insurance. If your current insurer can’t offer a lower rate, shop around.
- If you’re expecting a tax refund, use the money received to pad to your accounts.
- Sell something you no longer want or need on eBay or Craig’s List.
- Did you get some things you don’t really want or need for Christmas? Return them and use the money to pad your accounts.
- Skip eating out for a month. (Pack your lunches, eat dinner at home, etc.)
- Kill your cable.
- Have a smart phone? Opt for a smaller data plan for a few months (or no data plan at all).
- Make your own laundry detergent and fabric softener. It will be a little slower, but you can use the money saved to pad your accounts.
- Wash your dishes by hand or make your own dishwashing detergent. Again, a slower technique, but a way to find extra money!
Having padded checking accounts also helps on those months where your pay check comes a few days after some of your bills may be due.
If you’re afraid you’ll be too tempted to spend the extra padding if you see it sitting in your checking account(s), see if your bank offers a free service that offsets any checking account overdrafts by automatically deducting the overdrawn amount from your savings account. Check with your bank to see if this service is available and ask whether it’s free. Some banks charge a fee for the service and most require some kind of setup to activate the service.
Building some padding in your checking accounts will give you a safety net that can help you reach your financial goals this year. Once you reach your goals, you’ll likely want to keep the extra padding in your accounts.
Do you pad any of your accounts? If not, are you planning to this year?
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My dad does this, with one minor difference – he zeroes the account *at the pad level*. So if he has $250 in his account (to use your example), his balance in his checkbook reads $0.
It’s a goofy mental trick, but it very accurately reflects your intent.
Just a thought.
Hey Robert – my dad does the same thing! I prefer just making a mental note that $250 and $1000 are my zero balances.
I used to zero out my check register and leave the padding in the account. I had a little post-it note in the back of my check register where I would list a running tally of my padding and any extra funds I was saving towards. Over the years I’ve just streamlines the process.
We pad too…I’ve just always done it. The Hubs NEVER did it and subsequently had lots of overdraft fees back in the day. Thankfully, I’ve been given control over the finances (ok, I took control because he never showed interest/still doesn’t). The padding is also great in case of emergency. We’ve had quite a few vet bills come up in the last month, and since we had the padding, I didn’t have to rush home and transfer funds in case of overage. It’s really comforting to have that safety net!
That’s great Megyn. So far, I’ve never had an overdraft on my checking accounts in the 17 years I’ve owned them. So I’m a huge believer in the power of some padding!
Having a cushion in the checking account is a great strategy for avoiding banking fees and something everyone should do. Good stuff Jenny.
Thanks Matt. It’s a simple strategy, but so effective I thought is was worth a mention.
I’m also an account padder. I always use part of my tax refund to pad my interest bearing checking account. I don’t ever dip below $2,000 because you never know. I also have a money market account for ER savings. That’s my 3 to 6 month in case I lose my job or have to skip town right away or something. LOL. Padding gives me security. I am married, but I was once in a bad relationship I stayed in because I was so broke. Older and wiser I know to pad.
Using your tax return to pad you account is a great idea Sage. And I love your backup plan in case you have to skip town. Hey, you never know!
It really does offer security to have that padding. Having enough cash on hand can turn a major crisis into a stressful transition.