I don’t like to keep much money in my checking account. I’ve automated a lot of my financial life, and prefer to move money out quickly into different savings accounts for specific goals. I’d rather have the bulk of my cash in high-yield savings accounts where I can earn interest and am less tempted to spend it until I need it for a specific purpose.
But, despite my distaste for maintaining a large checking account balance, I always make sure to keep $1,000 above and beyond the amount that I expect to need. Here’s why.
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The $1,000 cushion can save me from financial disaster
There’s a simple reason for that extra $1,000 in my checking account: I don’t ever want to overdraft.
Overdrafting happens when you try to take more money out of your bank account than is in it — usually by writing a check or using your debit when you don’t have enough to cover it.
My bank charges a hefty fee for overdrafting. And if my balance goes negative because the bank allowed a purchase to go through that I didn’t have the money for, I’d also owe a fee for each day my account was below $0. While my bank does have overdraft protection — which enables moving money from another account or a credit card to cover an overdraft — there’s also a fee for this service.
I don’t want to pay a fortune in fees because I have too little money in my bank account. Having an extra $1,000 in my account means I would have to miscalculate my available funds by a lot to overdraft.
It’s definitely possible to avoid overdrafts without a cushion in your account if you check your balance regularly, keep track of outstanding checks, and never write a check or use a debit card unless you’re certain you have the money to cover it.
I try to do those things, but I also know I’m not perfect. I’ve forgotten about payments that debit from my account every few months, for example, and I’ve written checks from a shared account without letting my husband know (and vice versa).
My $1,000 cushion ensures these kinds of careless mistakes aren’t a big problem. It’s saved us several times from ending up with an overdraft fee and a negative balance, and I highly recommend it when possible.
If you can’t put an extra $1,000 in, then anything extra, maybe a hundred dollars, could make the difference for you. The key is to avoid keeping your account balance so low that a minor misstep leads to a financial hole it’s hard to climb out of.
View more information: https://www.fool.com/the-ascent/banks/articles/why-i-keep-a-1000-cushion-in-my-bank-account/