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Ask the expert: How much of a cushion does a checking account need?
Q: My parents always tell me to make sure I leave a cushion in my checking account, but my question is, how much of a cushion do I need?
A: Keeping a cushion in a bank account is a question of balance. Having a cushion is a good idea, because it can help you avoid overdraft fees or bouncing checks. However, keeping too big a cushion means too much of your money sitting idly, when it could be earning interest or helping pay your expenses.
To find the right balance, consider the following factors:
- The size of your monthly fees. More and more checking accounts these days are charging monthly maintenance fees, and you may also routinely incur things like ATM fees. The more you pay in fees every month, the more of a cushion you need to maintain in your accounts to leave room for these fees.
- The accuracy of your record-keeping. Do you record every transaction immediately, and update your record of the balance? Do you check your balance online before writing new checks or using your debit card? If you stay on top of things, you can afford to keep a smaller cushion. If you tend to be lax in your record-keeping, you'd better leave a bigger margin for error.
- The minimum required to avoid monthly fees. The bank may effectively decide on the right cushion for you by requiring a certain minimum balance to avoid maintenance fees. Give the size of those fees, this is well worth doing if at all possible.
Finally, remember that it's not just the size of the cushion, but also the timing of the cushion that matters. If you can leave a little time between when a deposit is made and when you start writing checks on that deposit, you'll protect yourself against overdrafts caused by delays in posting a deposit.
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