Some say that a bank account buffer is your first step towards peace of mind and financial security, and the truth is that a bank account buffer is a good idea, but it is hardly your first step towards financial security. It is not even your first step away from financial illiteracy, so we ask, is it worth having a bank account buffer at all? It would be nice if we all had a buffer in our banks, but is it worth the hassle and planning?
What Is A Bank Account Buffer?
It is an amount of money that you leave in your bank account. It stays there on a semi permanent basis and acts as a reverse overdraft. An overdraft is there for if you overdraw by accident. An arranged overdraft allows you to overdraw a little without it affecting your credit rating and without gaining penalties. An overdraft will simply charge you an amount of interest for going over.
A bank account buffer is like a reverse overdraft where instead of having a sum available as an overdraft, you actually have a sum available in your bank account at all times. You pretend as if the bank account buffer is not there, and if you accidentally go over your budget, the bank account buffer catches your mistake so you do not overdraw.
Will It Improve Your Financial Situation?
Many people are living from paycheck to paycheck. Some people live that way because they are not good with money, but most live that way because they are heavily influenced by marketing/advertising and they do not know it. We have a nation of spenders, and they do not know it. The USA is a nation of hyper consumers, which is why so many people live from paycheck to paycheck.
Is having a bank account buffer going to alter or improve your financial situation? In most cases it is not, in most cases the buffer will be spent on what “appear” to be unavoidable expenses.
An Emergency Fund In Your Current Account
Emergency fund = money kept in checking account
Contingency fund = money kept in savings accounts
Some of our other articles have spoken about a contingency fund. It is a certain amount of money you tuck deep away in an account for a rainy day. Some people also call this an emergency fund, but I think of an emergency fund as the same thing as a bank account buffer, in that it is money you keep in your debit/checking account for a rainy day. Here are some of our articles that talk about contingency funds:
Our articles have also spoken about self-insuring where you pay your own account the same amount you would have paid an insurance company in premiums.
Promoters of the bank account buffer idea claim that it is like an emergency fund that you keep in your debit account (aka current account, aka checking account). It is like a small emergency fund that covers you for things such as unexpected direct debits, transfers, and so forth.
A Bank Account Buffer Allows You To Automate
Some people automate with software, or aggressive budgets, or with accountants or other people. How you automate is your business, but if you do, then a bank account buffer may help you avoid automation mistakes that cause you to overdraw.
If you are trying to make your finances a little more automated so that you do not have to keep administering and managing your accounts so often, then a buffer zone may be just what you need. After all, automated payments will take money out even if there is no money in your account. At least with a buffer, you can rest assured that the damage will not be too great.
For example, if you have to spend money on taxis because you are late for work, you may have accidentally spent part of your phone bill that is due to come out today. You are at work all day and you forget about it, and your phone bill is directed debited out of your account. If we assume your bank account buffer is big enough, there is no reason why you should overdraw when your phone bill is taken out. Instead of overdrawing, it should have taken money out of your emergency fund buffer.
How Big Should Your Bank Account Buffer Be?
If you decide to have one, then you have two options. You may put in enough money to cover every bill and expense you expect to have next month. Doing this will allow you to budget more directly and cleverly.
The other option is to take an average on how much you have overdrawn by over the last six years. Take an average and then add 50% to that average. That amount should cover you comfortably from future overdrawing.
How To Earn And Create A Bank Account Buffer
It is simply some money you leave in your checking account. You can leave a little in after you are paid, or you may sell a few things to raise the extra money.
The problem is not usually that people cannot make the money to create their own bank account buffer; it is that people spend their buffer on one thing or another and leave themselves without a buffer.
If you are living paycheck to paycheck, then a buffer is probably going to do you no good because you are going to spend it. Your best bet is to work out why you are such a hyper consumer, and to figure out where you are going wrong in your finances (and in your life) where you cannot afford to live on what you earn.
It may be that you have too many crippling debts, too many expenses that you cannot get rid of, and it may be that your earning power is severely limited (which is rarely the case if you are willing to do all it takes to get another job). Maybe you should concentrate on fixing these problems before trying to create a bank account buffer, which is frankly nothing more than a gimmick, no matter what other articles say about it being your, “First step towards financial security.”
If you think it is your first step towards financial security, then give it a try for a few months and ask yourself if you feel more financially secure.
There Are App Solutions
You may be able to find apps that act as buffers for you in your current/debit/checking accounts. Your balance remains whatever it is until money is taken about and you overdraw. At that point, the app leaps into action and puts money back in your account.
There are a few apps that do something like this, but the only one I could find that wasn’t a malware container was called https://digit.co/. It looks at you spending history and predicts your spending cash flow. It then automatically takes money from your accounts based on the excess the app thinks you are going to have.
Small Points That Are Relevant To The Argument
There are many smaller points to be made on this argument that are too small to fill out their own section, so here they are.
- There are bank accounts that set up free overdrafts if you overdraw. They set up a small overdraft that they do not charge you for until you pay them off. Find banks that already have a buffer in place for you.
- There are some banks that set up a temporary overdraft if you overdraw, and there are some that give you an overdraft if you overdraw so that you only pay the interest instead of a credit-score-damaging penalty. Find a bank that does this instead of setting up a bank account buffer.
- If you are having trouble overdrawing, then switch to a pre-pay account that will not allow you to overdraw. You can still get pre-pay accounts with MasterCards for free with companies such as PayPal.
- Wouldn’t it be better to have a small overdraft and work hard to make sure you do not dip into it unless it is by accident because of an accidental overdraw. Your checking account pays no interest, so you are simply depreciating your money if you keep it in there doing nothing.
- Creating and maintaining a bank account buffer is easier said than done. If you are living from paycheck to paycheck, then you have a serious financial problem that will limit your ability to create and maintain a bank account buffer.
- Many things other than a bank account buffer allow you to automate, such as not having direct debits, such as not having accounts that allow you to overdraw from ATMs, and such as budgeting more carefully.
- The money you keep in your account as an emergency fund/ bank account buffer, the more you could have been invested. The money you allow to sit in your checking account is wasted. You could have invested it and earned back whatever overdraft charge you “may” have received if you had overdrawn.
- Wouldn’t An Emergency Credit Card Work Better? You simply transfer the money over to your checking account if you overdraw to avoid gaining penalty charges. Choose a bank that waits 24 hours before charging you fees for overdrawing.
- What if you have only overdrawn 3 times in your entire life? Is it really worth the hassle? Why set up a bank account buffer for something that is not going to happen again?
Conclusion – A Waste Of Time, But Better Than Nothing
Having a bank account buffer is a waste of time for the reasons detailed in the article above. However, if your bank account buffer (aka emergency fund) is the only saving you are doing, then at least it is something, which is better than nothing.
If you can find a trustworthy app that doesn’t steal your information or install malware on your Smartphone, then consider using that to save a little money that you may use as a buffer. Though, in my opinion, you are better off saving a contingency fund in another account with an app such as Acorn, than you are saving an emergency fund in your checking account with an app like Digit.co. Geoffrey A. Fowler explains how Acorn and Digit.co work in this video if you fancy trying either of them.