Build a Safety Net with Savings

If you’re like a lot of people, you have a checking account for day-to-day spending and at least one savings account that you use for, well, savings. But did you ever think about maybe keeping some savings in your checking account? Now wait, before your head explodes, let us explain!

We know that while the rate of inflation appears to have cooled down a bit, everybody’s still looking for ways to reduce costs and keep more of their money. So, we’ve been diving into the topic of best practices to avoid unexpected fees, especially those pesky overdraft fees that can really add up. And we think a savings safety net in your checking account can really help to secure your financial wellbeing.

What is a savings safety net?

Unfortunately, a recent study shows large numbers of Americans are living paycheck-to-paycheck. That includes the vast majority of those making $50,000 or less per year and 65% earning $50,000 to $100,000. Scary stats, right? They really point to the fact that pretty much all of us could benefit from a savings safety net: basically, a cushion of extra funds that can be a buffer to prevent inadvertent overdrafts that can keep us from making the most of our money and achieving our financial goals.

The concept is simple in theory, but in practice, it can take some discipline. Here are some helpful tips to make it happen.

How much of a cushion is enough?

Now remember, this is completely different from the all-important emergency fund you’ve heard us talk so much about. An emergency fund is there to prevent a total financial meltdown if you get hit with a disaster like huge unexpected medical bills or a job loss, for example. That should be separate from your checking account and have funds to cover three to six months of expenses, perhaps even more, depending on your individual situation.

Instead, when we’re talking about a savings safety net, or checking account cushion, we’re talking about a technique to prevent overdrafts. This, too, needs to reflect your individual situation. Some experts recommend keeping one month’s expenses, a percentage of your monthly expenses, or a round dollar figure of, say, $1,000 as a cushion in your checking account.

To determine how much is right for you, think about your recurring monthly bills like rent, utilities, and groceries, as well as intermittent bills like house insurance, family birthday gifts, and travel. Then figure out how much you’d need to have as a cushion in the event one of your recurrent bills was higher than usual or you were to accidentally pay one of those intermittent bills without first checking your available balance.

Another option is to simply review your previous account statements and see what circumstances have triggered overdrafts in the past. That may tell you better than anything else how much of a cushion you need.

Pick a round number that’s easy to subtract

Whatever number you decide is right for you, we recommend making it a round number – something like $100 or $1,000 – that will be easy to calculate in your head. The idea is not to use your cushion but to know it’s there just in case. So, you always want to be able to quickly look at your available balance and mentally subtract your cushion amount when determining how much you can actually spend at that time.

Build it gradually

Like other savings goals, building up your checking account cushion may take some time, but be consistent and you will reach your goal. If you’re already making some sort of direct deposit to savings or an investment account, you might want to temporarily redirect those funds to your checking account cushion, then resume that automatic saving once your cushion is filled.

Remember, this cushion can save you a ton in overdraft and other fees that can hit when you live paycheck to paycheck, so make it as much of a priority as building an emergency fund and paying down credit card debt.

More is not better

We know what you’re thinking: how can the Credit Union be telling me more savings is not better? Well, that’s not what we’re saying. More savings is always better. Always. What we’re saying is we don’t want you to mix up the concepts here and start using your checking account as a main savings tool. The purpose of the checking account is still day-to-day spending, and BluPeak has tons of other, higher-yielding savings options for you to grow your money and achieve your savings goals faster. Think savings accounts, term certificates, and Money Market accounts, for example. Once you’ve got your checking account cushion in place, make any excess dollars work as hard as possible by putting them in the right types of accounts.

Want to learn more?

A savings safety net is just one of the ways you can reach your financial goals faster by keeping more of your money and avoiding unexpected fees. For more financial tips, visit our Financial Education & Counseling page.

This information is provided for educational purposes only and is not intended to be financial advice. Must meet membership and account criteria. Insured by NCUA.