Overcoming a Routine of Bounced Check Fees, Overdraft Fees, and Payday Loans

PayDay Loans by swanksalot at Flickr!“Max” is a friend of mine (I don’t like to “out” friends on this site, so I’m being pretty careful about what I say here and a few specifics may be blurred). He’s had a significant number of challenges in his life, including a few minor criminal indiscretions related to drug use in his early adulthood, but now he’s raising two kids on his own and trying very hard to make it.

One of Max’s biggest challenges is simply getting his financial life straight. Because of his background, he has a very hard time finding work beyond minimum wage – employers won’t trust him with more complex work, even if he’s up to the task. As a result of that and also of having two young kids at home (as well as a long history of debt and poor credit), he’s often riding the fine line of having enough money to make it through a month, even with some state assistance – and sometimes he falls short.

Falling short when you have no credit to help you get through can be extremely painful. In Max’s case, his bank usually covers relatively small checks but sticks him with an overdraft fee – somewhere around $20 for each one. If it’s a larger check that happens to exceed his balance, the bank will reject it and charge him an insufficient funds fee – around $10 – plus the place to which he wrote the check will charge him a bounced check fee, ranging anywhere from $10 to $75.

Luckily, Max realized from day one that payday loans are a poor idea, but many people in Max’s situation sometimes turn to such loans. They’re bad news – avoid them at all costs. The interest rates charged there are absurd.

Such fees are not things that Max can easily afford in his budget. Quite often, then, one bounced check will cause a ripple into the next month, triggering another overdraft. In the end, Max is caught in a vicious cycle that can be really difficult to escape from.

Here are ten ways that Max can start turning things around.

1. Keep a careful account register.
Whenever you write a check for any reason, make an ATM withdrawal for any reason, deposit any money, or pay any bills online, record that in your register immediately, and update your balance as you go. Not only will this help you keep an accurate balance on your account, it will also force you to keep more in touch with your spending. Your account register becomes something of a spending diary, making you take a deeper look at what you’re really spending, subtly pushing you to tighten down the screws.

2. Learn how to use online banking.
Online banking is incredibly useful. It gives you access to your account balance and recent bank transactions at your fingertips, and if you have online bill pay, it also gives you the capacity to handle many of your bills right there at the computer – no stamps, no checks to write out, no envelopes to address. This not only saves a bit of money, but lets you handle all of the math right there, ensuring that you have enough to cover the bills you’re paying.

3. Keep a careful eye on your account balance.
The first two ideas lead straight into the third: keep an extremely careful eye on your account balance. Don’t trust what you “think” is in your account; know what’s in your account. Keep a ledger. Use your online banking to check it. Call your bank if you’re not sure about something. Knowing what you actually have in your account – and knowing that it’s a line you simply can’t cross – is vital.

4. If you’re afraid of overdrafting, contact the group you need to pay, explain the situation, and pay late if you have to.
Don’t put the cart before the horse. Quite often, people are so worried about being late on their bills that they pay the bill without being sure that the money is in their account to cover it. Then, when the check bounces or the overdraft fee is charged, it ends up being much more than the late fee on their bill (usually just a few bucks). If you don’t think you can cover a bill, call that company and ask about the late fees. Explain your situation and ask for that late fee to be waived. You’d be surprised how often that fee will get waived if you just ask.

5. Ask for help.
If you’re still having problems, ask for help. Tap your family first. Don’t ask for money – just ask for some help getting your finances straight. Allow someone you trust and respect to go through your finances and help you come up with a plan to fix the problem. Don’t ask for loans, though – loans between friends and family members rarely end well. Just tap the common sense advice of someone you know, trust, and respect. If you know and trust and respect someone, they’re quite often glad to help you.

6. Be frugal.
There’s really no better time to be ultra-frugal than when you’re trying to escape a vicious cycle of overdrafts, bounced checks, and payday loans. Have a period of lean living while you get through this – stop your cable service, get rid of your cell phone (if you need one, get a prepaid one and strictly limit your use), eat at home (and eat simple meals), kick your vices (smoking, drinking, drug use, lottery tickets, gambling), and don’t go out on the town. When you’re in a vicious cycle like this, every dollar you spend will cost you two or three more in the very near future, so hold onto every penny for several months until you start to get a bit of breathing room.

7. Don’t let windfalls fall through your fingers.
If you come into some cash all of a sudden, don’t celebrate and spend the money frivolously. It’s great to feel good about your windfall, but take that money and put it in the bank, giving you some breathing room against overdrafts. If you go spend it for fun, you’ll be right back where you were before, scraping to make ends meet and losing a lot of cash each month to the bank and other businesses paying fees and interest rates that are simply a waste of your money. Blowing it might give you a little rush right now, but the constant pain of paying those fees over and over and never feeling like you’re getting ahead will add up to much, much worse.

8. When you start to get ahead, make a deposit but don’t record it on your register.
One effective way to use your windfall is to simply put much of it in your checking account, but don’t record it on your register as a deposit. Instead, you have a buffer in there now, so that if you silp up and go below $0 on your ledger, you’re not actually overdrafting your account. The pain of the overdraft and bounced check fees go away because of that buffer. Another tactic? If you see a healthy balance building up in your ledger, write yourself a check and record it, but don’t cash it. Tear up that check. The amount of that check has become your buffer.

9. Start establishing an emergency fund to deal with unexpected expenses.
If you start going for months without these fees, you’ll start to see yourself getting financially ahead. Don’t let that be an excuse to slack off. Instead, start putting some money aside each week (or month) into a savings account so that when a real emergency occurs – you lose your job, your car breaks down, etc. – you have the cash to do it. If you used to be spending $30 a month on overdraft fees or payday loan interest, there’s your $30 a month to start building an emergency fund. Give it a couple of years and you’ll have $750 in that emergency fund – enough to handle a car repair or a week without work without skipping a beat. That’ll take a real load off your shoulders.

10. Work to establish positive credit for yourself.
Once you’ve begun to escape the routine, the next strong step you can take for yourself is to turn around your credit. Likely, if you are leaving behind a pattern of missed and late payments and lots of bounced checks, you have a poor credit history. Now’s the time to turn that ship around. Pay all your bills on time. Get a little credit and use it effectively. Here’s a great guide on building your credit up that I wrote recently.

Will Max use this information to his advantage? I certainly hope he will, but the change he needs is up to him. Fortunately, I think he has enough character to make it happen.

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  1. Matt R. says:

    This is one of those vicious cycles that is at the core of huge financial problems. My problem when I was living paycheck to paycheck and not watching what I spent was the overdraft fees. The last 4 or 5 withdrawls I made via ATM card at the end of the month would end up putting me in the red and I’d get dinged $30 for EACH one. So then I’d be playing catachup with my next pay check, and the cycle continued. Finally I’m at the point now where I have my spending and saving under control (just working on getting rid of the cc debt) and it’s so much easier to manage everything now. When you’re down in that hole, the most difficult part is clawing your way out, but once out, it’s alot easier to STAY out.

  2. Cherise says:

    I’m in the same spot Matt is now. I just got all my finances in control. I would most likely overdraft because I would get so anxious to pay off my credit card debt, I wanted to use every last penny to put towards it. Then I’d forget that I put so much towards it, I’d get gas and overdraw.

    I just closed most of my accounts and I’ve paid half my debt off in the past year. I’ll be starting 2009 off much more confident and financially stable.

  3. Amit C says:

    Another one, use mint.com and watch out the alert for bank fees. Just asking my bank about those has resulted in rollbacks.

    Amit

  4. cwaltz says:

    Actually, banks online registers are only as helpful as the bank. Wachovia routinely backtracked on the online account to overdraft charge us(they’d kick out visa charges). We have been with our little credit union for a year and as a result have not have had a single issue. Additionally, poor people often have poor family who can’t afford to help them out. It’s great if your family can be a safety net but ALOT of times poor is a cycle you have to overcome all on your own. I do agree with 9 though. I have started putting all the change we get to such a fund. So far I was able to cover an expected expense when my son needed glasses, a minor shortfall on a paycheck(hubby didn’t work enough to cover all of our expenses that pay period) and pay for gas after we took a trip to NC on vacation(I didn’t veto it because oldest is 16 and this was our first “real” vacation in 10 years. I thought the experience was worth the small shortfall.)

  5. Rebeckah says:

    I feel so bad for people like Max. It seems like they have a lot of things to overcome in order to start being financially stable.

  6. Hi Trent,

    If you made more money from The Simple Dollar, you could afford to hire someone like Max to help you by ferreting out spam comments, adding images and links to posts, etc.

    Hiring someone you trust not only helps them, but it helps you gain more free time that you can use to do more with your blog and/or start another blog.

    You seem pretty resistant to selling your ebooks for more money, creating a marketable mailing list, or doing some affiliate marketing, but doing more of that would really give you a chance to help both yourself and others.

    -Erica

  7. That’s really true, Matt. The feeling of making it to the end of the month without being in the red, or even better, having a bit of a cushion is great motivation to keep it up!

    Good article, Trent. And good advice on the frugality front…eating beans and rice, bananas, ramen, and potatoes for a period of time might be necessary, but a cheap diet like that is so much better than being in a vicious financial cycle.

  8. A Dawn says:

    I see lots of businesses go bankrupt but never neen any payday loan stores shutting down. They are mushrooming all over at a scary rate, they must be ripping off ordinary people very well; otherwise, these would not survive even in a sluggish economy.
    A Dawn Journal
    http://www.adawnjournal.com

  9. DaveOR says:

    Trent,

    I have to point out that you have a contradictory statement in #1 & 3 – keep your register and eye on your account accurate, and #8 intentionally putting inaccurate info into you register. I think it’s more important to be accurate – don’t fool yourself, it probably got you in trouble before. If you really need a buffer, use a very specific amount $20, 50 or $100 so that you can still balance to an accurate number. Also really watch ATM charges which can come from both banks and mess up your balance.

    Better yet would be opening a savings or money market account, to earn a bit of interest and link it to your checking account with overdraft protection. NOTE – sometimes the auto-transfer charge is nearly as much as an overdraft charge like $10-20 so check closely. A local credit union might be cheapest.

    Still a good articly, like most of your stuff.

  10. gr8whyte says:

    IMO Max should level expenses wherever possible, e.g., if he qualifies, he should arrange with his utility to pay a flat amount/month instead of actual amounts (low in summer, high in winter) as long as there’s no penalty for doing so.

    Nothing wrong with eating a lower-cost diet (beans and rice = my favorite meal) but make sure everyone gets a balanced diet; the kids for obvious reasons, and Max because he’s the breadwinner and cannot afford to get sick. Am watching Enemy At The Door (WW2 German occupancy of Channel Islands) and the doctor says islanders’ overall health actually got better on a poorer diet because they had been eating too well before the occupation.

    It’s imperative that Max saves to the maximum extent possible in the months he doesn’t fall short to break out of this hand-to-mouth situation. It may be necessary for a trusted friend to actually take over and manage Max’s finances for a while until Max gets an emergency fund saved up. Who might this trusted friend be?

  11. Wes says:

    Sounds like Max made some tough decisions early on in his life. I assume he didn’t go to college…so along with his two kids and drug felonies, he’s going to have a tough time making more money.

    I might suggest a military career for Max. It’s not easy work, but childcare, medical care, base housing, and a decent salary would then be in reach. Heck, they’ll even help out with college expenses if he’s a go-getter.

    The military can be a good option for people who’ve made mistakes and don’t have a good sense of self-motivation. From what I hear, the drill sergeants will certainly help motivate you :)

  12. Sarah says:

    Even in these days of lower standards, it’s not easy for someone with felony convictions (if they are; Trent doesn’t say so) to be accepted into the military. Also, for a single parent with no apparent other assistance to choose a career which might require long-term overseas deployment and a significant risk of being killed or disabled doesn’t strike me as an excessively good idea.

  13. Sam says:

    I used to laugh at the Payday Loan commericals and websites that I would come across for years growing up. I thought those people were just downright stupid for “allowing themselves to fall into such dire straits” that I just shrugged my shoulders and never heeded any advice I could have picked up on.

    About 19 months ago I found myself in just the same situation as those very people. Payday Loans and Bank Overdraft fees might as well come from the same entity. (Well, technically they do – the people that are foolish with their money) It’s hard for me to admit at times, but I was downright terrible with my money. Payday loans were pretty much the band-aid (which for a lack of a better term was losing its adhesion rapidly) on whatever financial pitfall I had encountered at the time.

    The first loan I took out I finished in the time alloted. I was relieved. It was almost too easy. Because I paid on time my next loan amount was increased. I didn’t pay attention to the finance charges so I continued to borrow every now and then until finally my maximum of $500 was reached and I was taking up to 4 weeks with that lender to payback. The fees were outrageous but I still paid them. At my lowest, I had four loans out at once – well over my state’s maximum. Loans were carried out for months and it was hard to get anything done.

    Ultimately I was falling behind on everything and my wife and I agreed it was time to get real with our finances. We couldn’t pay anything and our collective behinds were being taken to court over our debts. We filed for Chapter 7. It’s not something I’m proud of, but it was the wake up call (no, going to court the first time didn’t wake us up!) that we needed to get serious about our future and the future of our children. Bankruptcy isn’t for everyone, and whether or not it is right or wrong isn’t the subject at hand.

    The one thing I have gotten out of filing for BK is that debt makes the world go round. Leaving the federal building I had my Meeting of Creditors at, I saw various BK Attorneys with their clients going over their cases. Many firms up and down the strip promising fast and easy recovery. It was sick.

    Going through this process has scared me straight. I look at my needs now versus my wants and gladly forgo the extra soda pop at work and save myself $5 a week or $25 a month and drink water. I bring PB & J to work for lunch every day. (Healthy? Not really, but it’s a cheap diet and I eat small healthy snacks throughout the day to keep my energy up) I live a mile from the office so I can walk to work. Things like that add up over time. At the rate I’m going I should have $1,000 a month every month to go into savings and build a separate emergency fund.

  14. katy says:

    I had a ‘lifeline’ checking account at chase. I was allowed a total of ten withdrawls/or checks total. it was hard, but I made one weekly withdrawal and wrote six checks so it worked out. Later I was able to upgrade to basic checking as long as I had direct deposit. you can direct deposit any amount, it doesn;t have to be high. most paychecks can be direct deposited.

    Some people don’t bank at all. They use money orders and it works for them. maybe he can give that a try also.

  15. katy says:

    Oh, the lifeline account was FREE.

  16. Dan says:

    I like the idea in the YNAB system that I think would help Max. Try to get one month ahead for expenses so you are living off last month income. During this month your paycheques are replenishing your account for next month. It takes some time to get a month ahead but it stops the overdrafts.

  17. Your Friendly Neighborhood Computer Guy says:

    @Wes – While joining the military is a big help for motivation and personal accountability, I can’t quite recommend it for someone as a way to turn their financial life around.

    I’ve been in the military for 8 years now (4 full time and 4 part time) and I’ve seen alot of soldiers make horrible money mistakes over and over again. When you first join the military you don’t get paid much, and with the possibility of being deployed for an extended period, it may not be the best idea for Max.

    I think the military is best as a motivator for folks who are young and don’t have much direction in their life. I know it worked wonders for me!

  18. Jon says:

    God how I remember the days of payday loans in my life. Those were really some dark, dark days.

    What bank has a $10 overdraft fee? Every bank I’ve seen has overdraft fees from at least $30 to as high as $40 a pop.

    Luckily, I’m turning my financial ship around and it feels great. I’m on the Dave Ramsey plan and I’m 3 months away from being debt free except for my car payment (which I plan on eliminating soon thereafter and then driving the car into the ground.)

    I would never want to go back to the days of pay day loans. Those loans seemed normal at the time but now they scare the hell out of me.

  19. moneyclip says:

    What I noticed really lacking was ways that this friend “Max” can maximize his cash flow, short of selling drugs or something like that.

    If he has any skills at all in construction, plumbing, or electricity it might be a good profession for him to moonlight at on the weekends until he gets enough experience to sign up as an apprentice or land a higher paying job doing a trade.

    Next, blogging. Why doesn’t “Max” come up with some killer blog and start off on that path. Blogging can be successful monetarily if “Max were to strike a niche and attract readers. And he has a knowledgeable friend in Trent to offer him some tips and advice.

    Another option, blood donations, plasma donations and medical research. Of course be cautious when doing any of them but they are definitely ways to make a little side cash when the old piggy bank has seen its last penny.

    I think, if he can get in the military, that’s a brilliant idea. Even the national guard, or reserves would be a good opportunity and whoever suggested it is spot on. If “Max” really wants out of the life he’s been leading then that’s certainly a possibility.

    I wonder if “Max” reads this site. Just doing that would give him loads of helpful tools and tricks to maximize profits, and minimize expenditures. Tell Max to get to the library and start reading on the subject. He should also look at any and all government assistance, tax credits for kids, WIC (if he has small children), AFDC, and the like.

    I’d also highly recommend “Truck Driving School” for someone in his situation once he gets ahead enough to pay the fee to the school.

    http://www.truckinfo.net/trucking/sage.htm

    * I’m not affiliated with that site at all. It’s just for reference.

    The cost of going to the school can be high, but the pay would be quite good compared with minimum wage and he’d be on the road and sort of his own boss. I don’t think being a felon would prevent him from getting a job with a trucking company.

    There are so many available options, like saving up for a lawn mower and mowing lawns and then expanding that business as you get more customers into a landscaping company and the like.

    Carpe diem “Max”

  20. Mister E says:

    Have you ever done an article on what happens if your bank fails?

    It would be topical for the American readers.

  21. Lurker Carl says:

    Max has a criminal record, is a known drug user, has a lousy financial history, and no marketable skills. His options are severely limited because he won’t pass any type of background check. In our present society, his fate is pretty much sealed unless he gains the trust of someone that takes him “under his wing”.

    The on-line banking suggestion is laughable in this type of situation. Most people living on the edge do not reliably sustain basic utilities, computers don’t work so well with out phone and electric service. I would assume he can’t afford DSL or broadband. Performing your private banking at a public library isn’t all that smart.

  22. Jen says:

    Trent, I wonder why your article didn’t include a mention of credit unions, which charge much lower fees for things like bounced checks.

    My sister recently deposited money to her savings instead of her checking by mistake. Overnight, her account bounced 5 checks, and she was stuck with fees for each one at $35 each.

    My credit union would have automatically transferred money from my savings account to cover those checks, and charged me a $1 fee for each. That difference would have saved her $150.

    I don’t know why banks get away with some of the fees they charge when credit unions are so plentiful and so much more friendly to work with. The one drawback is that there are a few fewer free ATMs, but I can use most other credit union ATMs for free. On the rare occasion when I have to use an outside ATM and pay a small fee, I still feel ahead because I’m not getting stuck for all the other fees that banks charge.

  23. leesan says:

    Max’s situation is hardly the exception for people in his position. I volunteer with a sober-living facility and the hardest part for these folks after overcoming their addictions are the repercussions from their prior choices in life. A lot of employers aren’t willing to take a chance on felons, even if their crimes were non-violent. This creates a vicious circle because, if they can’t find jobs to support themselves and their families, they then return to what they know. This is a really frustrating situation for me when working with people in recovery. These people have paid their debt to society when they did the time to which they were sentenced. If these people are willing to submit to random drug tests and whatever other restrictions they employer may require, why not help them get back on their feet and contribute to society by hiring them?

    It just really annoys me that the public says, “If they do the crime, they do the time,” which I agree with, but their “time” should end when they have completed their sentence. If they have turned their lives around and are afforded the opportunities to obtain decent paying jobs, then our tax dollars will cease to support them. There are many work rehab programs in the prisons aimed at helping these folks learn new job skills so they can obtain decent jobs when they get out of prison. Commendable, but there is no follow through on encouraging employers to hire them. They can learn a new job skill and be the best in their field, but, if the employer has a rule against hiring anyone with a criminal history, we’re right back to square one.

  24. Jim says:

    This year has been good, the overdraft fee instances are coming down, and my income is actually a bit above my cost of living. I try to stay minimalist outside of cable/internet and happy hour at the bar. No gym memberships (jump rope), purchases of furniture (use milkcrates) and paying for things that will not improve your health and career. Bringing my own tea and food to work has done wonders for my health and wallet.

    Being from NYC, I also want to advise all to avoid parking tickets. If you have a medical appointment in Midtown Manhattan, just absorb the damn cost of a parking lot! Those damn parking tickets add up.

    Emergency funds are gospel to me. I’ve been hit with too many surprise expenses not to realize the value of having one. Take it from a reformed overdrafter…

  25. Sherry says:

    I found this interesting. Even more so because you posted it the same day as I owned up to falling off my budget horse. http://joeandsherry.blogspot.com/2008/09/financial-boundaries.html

  26. gr8whyte says:

    If bounced check fees are indeed a big problem, e.g., if the avg fees/month exceed earned interest/month (if his checking does pay interest), which I suspect they may be after some quick calculations, Max is probably best off in the short term by going to a cash system of management. The reasoning is if avg fees exceed avg interest, there’s no point in keeping money in any kind of account and trying to earn more interest, it’s way more important to eliminate the fees.

    One way this can work is to keep the absolute minimum in checking ($1?) and only write checks for expenses that might need a paper trail, e.g., rent and utilities. Hold cash and only put enough cash into checking for the exact amount of each check. This way, Max should never ever get another bounced check fee again. Get a $123.45 utility bill? Put $123.45 cash into checking and write a check for the same amount. For all other expenses, use cash. When the cash is gone, it’s gone so budget carefully, like really carefully. If expenses exceed income in any month, Max will know up front because the cash will be gone and he’ll have to decide to go without or to borrow (if possible) but at least he won’t have to pay those fees. Only go back to writing checks regularly after an emergency fund is built up. The method is dangerous in that cash is readily available and can be easily wasted so Max has to be super-vigilant on unnecessary expenses.

    Use a food bank if not doing so already. Max should understand that he’s but 1 emergency away from potentially serious financial difficulty so he’s got to do everything he can to improve his cash flow and save some money.

  27. Georgia says:

    I remember when overdraft fees were $5-10. But, even then, it was terrible for the people who overdrafted. It was usually 3-4 small checks that bounced & took a lot of your deposits.

    I only overdrafted once. I kept tight track of our money and knew that there was a slight possibility we would overdraft on 1 check. I put my husband’s check in bank of Sat. & on Monday got an OD notice. Didn’t worry as it was expected. But on Tues, I got 2 more. Right away I went to the bank (in a small town) & we dbl checked. They had no record of a deposit on Sat. They kept looking & found out that the teller had read the name of the employer on the check & deposited the money to that account. The bank reversed everything & cancelled all fees. Boy, was I lucky & did I ever work hard to not do that again.

    I keep from it now because I have a senior account with interest (Ha!) & it requires a $500 balance at all times.

    Also, I read a large, 2 vol finances book & took 1 suggestion from it. She said to add up all your ann & semiann bills, divide by 12, & put that much in sav each month. I worked quite a ways from my S&L, so I just subtracted that amount each month & put it in the back of my checking acct. (My husband said I kept double set of books.) This way, the only balance showing in my checking was the amt I had to actually spend.

    When a bill came due, I would subtract from back, add to ckg, & write a check. Has worked great for the past 30-35 yrs. In fact, I know minus an amt each mo to pay my utilities & to set aside to pay my cc bill (which I pay off @ mo.)

  28. Jenny says:

    With #8, I think a better idea would to put that money into a savings account that is linked to your checking account. Many banks will link them so if you go into the negative with checking, it’ll pull the money from your savings to cover it. Many banks do this for free. That way, your checkbook and checking account match up exactly. I personally hate being ‘off’ because I need to make sure I’ve recorded everything, and there aren’t any duplicates.

  29. Jeff Kursman says:

    Payday loans are a proper financial tool when used properly. The only way to reach the much-hyped triple digit APR and high fees you write about is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.

    Used responsibly, payday loans are a financial tool people can use to bridge cash shortfalls.

  30. threadbndr says:

    The road “back” for me started with #8. At first it was a spare $100 in the ‘back’ of the check book, and now it’s up to being the first ‘stopgap’ month of my efund (I don’t care about the low interest – it’s as liquid as any money I have). I do keep it an even $100 amount, though.

    When you go to balance your check book, just add the ‘front’ number and the ‘back’ number to compare to the bank number. Once you’ve done it that way for a month, it’s automatic.

    That ‘cushion’ is not only my first line of defense efund, but I haven’t bounced a check in over 25 years. Even in the scary broke times.

    The only time I’ve been into one of those loan/pawn, etc places is to pay my utility bill before I got online banking. I really hated it that the utility company closed the nice, clean service center and gave the contract to whoever bid it. A local chain of pawn shops won, to my everlasting disgust.

  31. Steve in W MA says:

    I don’t like the strategy of depositing money but not recording it. It’s like lying to yourself.

    I prefer to work out a zero based budget and budget out all of the money to various budget categories. If you are a beginner at this just stick to the categories of things you buy in a normal month. One of the categories can be a buffer (call it “buffer”). If you had $2000 to your name but $1200 worth on monthly expenses, assign the last $800 to the buffer.

    Now when you spend, refer to your budget first while making the spending decision, not your bank account. You will have $2000 listed in your bank account but the fact is that you have only $80 left for food for the month because that’s what you budgeted. Go by the budget, not your bank account. Only check the bank account to verify funds are in there, not as a means of determining the affordability of something. The budget is what helps you determine affordability.

    There.

  32. Steve in W MA says:

    I like threadbndr’s method too. Make that extra deposit and record it in the BACK of your checkbook. AS you deposit extra funds, build that buffer up in the back of the checkbook and keep tabs on it there.

    In the front of your checkbook do your normal accounting, then every once in a while add up the numbers from the front of the book and the back of the book. They should match your bank balance.

    This is a very simple way to build up an income buffer without doing an detailed budget for the month and might be a good first step for some people.

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