Let’s admit it. We all have, at some point, looked at our bank account or updated our check register and realized we are in the red. If you have never had this happen, congratulations and move on with your amazing life. As for the rest of us, this is a scary situation to be in and I must confess, I have been there more than once.
Luckily, I have matured a little through the years and although money is still tight in my family, we are getting better at staying out of the red altogether. Here are a couple of tips to both avoid getting in the red and how to get out quick if you happen to find yourself there.
How to Avoid Dropping “Into the Red” in your Checking Account
1. Keep a detailed list of deposits and transactions
Enter YNAB. I have written an entire post about why I love YNAB, which is a budgeting software. One of the great features is the ability to track all of your spending. Remember those old school check registers that we used to use to keep on top of how much was in our checking account? YNAB allows you to do essentially the same thing via your computer or smartphone. This has been a lifesaver for me and I have faithfully recorded every transaction since the beginning of last year.
Some people fall into the trap of only using online banking to check their account balance and fail to record their spending. I would bet I’m not the only one who, while adopting that philosophy, spent money when my online banking said I had it in my account, only to overdraft later because something hadn’t gone through yet. DON’T TRUST YOUR ACCOUNT BALANCE FROM ONLINE BANKING!
Most of us have automatic payments set up for most of our bills, some of us still use checks on occasion, and some pending transactions don’t show the true amount for a couple of days. All of these things make it difficult to budget your spending based on what your online banking shows. The best way to get around this is to keep your own records. It really isn’t as difficult as you may think. If you don’t want to use a budgeting software there are many free check register apps that are helpful too.
Of course best practices would include to record transactions on the spot, which is why a mobile app is helpful. However, life is busy and there are days when I don’t record anything. This is when I first wrack my brain to remember what I paid for and then use my online banking to double check. If I get gas and it shows as a pending transaction on my online banking, I can usually remember about how much it was. I will record that number and flag it so I can remember to check back later, when the transaction is cleared in my account, I adjust the amount as needed. This helps me stay on top of my spending and always know how much is ACTUALLY in my account and not just what the bank SAYS is in my account right now. I always look at my numbers when deciding how much money I have left, not my online account balance. This helps to keep us out of the red.
2. Round your transactions
When recording your transactions, round the amount up to the nearest dollar. When recording your deposits, round down to the nearest dollar. This is helpful in two ways. 1) You are always dealing with even dollar amounts and 2) You create a small cushion of savings. When recording your transaction for your trip to Walmart where you spent $100.57, record it as $101. When entering your paycheck for $829.78, record it as $829. This makes recording and calculating much easier, as you don’t have to deal with change. Think of it as a change collector.
We have a mason jar where we keep most of our extra change and I sometimes dig through it when I go to the car wash or something. This is essentially the same thing. Instead of accounting for every penny, forget you even have it and round your transactions. Throw the change in an invisible mason jar and feel good about the fact you are building a small cushion in your checking account to avoid overdrafts. This is another reason to record your transactions because your bank account will always say you have more than your records say you do. Trust your records and you’ll be fine.
3. Build an emergency fund
This is a no-brainer but apart from your invisible mason jar, you want to set aside money in some kind of easy-access emergency fund. This helps to avoid going over your budget when you blow out a tire on your car one day or forget you have your amazon prime yearly subscription due this month and you don’t have that money budgeted. You can build it little by little. Making this step automatic is even better. If your job allows for direct deposit to more than one account, take advantage of that and set it up for a certain percentage to go into a savings account to build up that emergency fund. In just two years, you can save $1,000 with only $42 a month going into that account. If you get paid biweekly, that’s only $21 a paycheck!
4. Set up overdraft protection
This is the last option because I’ve come to find out that this doesn’t necessarily avoid paying fees. Most banks now charge a fee if they have to transfer money from your savings account or transfer transactions from your checking account to a credit card in cases of overdraft. It’s good to have this set up as a precaution but remember to include the other steps above in order to avoid problems in the first place. If you completely fail to check your account balance one day or by the time you check it the banks are closed, this would be a great protection. The fees associated are most likely much less than the alternative of insufficient funds fees.
What To Do Immediately If You “Drop Into the Red”
1. Start a spending freeze
If you’re in the red, please do not continue to spend money. Insufficient funds fees are usually based on the number of transactions overdrawn. The minute you find out you’re in the red, freeze all spending in your family. That means letting your spouse know it’s NOT ok to buy a coke on their way home from work and you will have to cancel your hair appointment that day.
,Challenge yourself to only cook what you already have in the house for dinner this week, until your next paycheck. You may need to contact your utility company, cell phone provider, or any other bills that are scheduled to come out of that checking account between now and your next paycheck. Many companies will work with you if you let them know you’ve run into a small financial crisis and many times they will allow you to pay your bill a little late with little to no penalty.
2. Deposit cash or directly transfer from savings
If you check your account daily, which you should, you will see those red numbers and should act immediately. If you’re quick and you check it in the morning, you can deposit cash or directly transfer from your savings account within the same bank to cover the deficit in your account. Most banks, I believe, will waive the fees associated with overdrafting from your checking account if the problem is taken care of immediately. Depositing a check will not take care of that immediately. It must be cash or direct transfer within the same bank.
3. Raid your house for things to sell
If you don’t have the cash…or savings…or mason jar of change…raid your house for things to sell quickly. Do you have something you meant to return to the store but haven’t yet? Get your butt to the store, with the receipt hopefully, for a cash refund. What can you part with at home that you could sell quickly? There are usually many facebook groups where you can sell things locally and if you do it right, you could sell it the same day and deposit that money right away. In Utah we also have KSL classified ads where you can sell things online, or there’s always craigslist. Get real about things you don’t necessarily need and let somebody else benefit from them while saving your financial butt.
4. Do a service for quick compensation
A while back while chatting with my sister about having to replace the transmission in our truck and wondering how that was going to be possible with our budget at the time, she quickly said, “Oh hey! I’ll pay you $100 to finish painting my furniture I started!” She gave me the money right then and it took me a few days to finish her furniture.
Maybe you don’t have a gracious sister like I do but I bet you have a neighbor who could use your help in clearing the leaves and debris from their yard. Or I once heard of a young man going door-to-door offering the disgusting service of washing out your city garbage bin for 20 bucks. The point is, people are willing to help you if you let them know you need it. I wouldn’t recommend borrowing money if at all possible. That can drive a rift between you and the ones you love. Instead, ask if there’s anything you can do to help them out and receive a little compensation in return.
5. Work on avoiding these situations in the future
There are small changes you can make to totally avoid ever going through this again in the future. I rarely overdraft in my account anymore but I do sometimes “overdraft” according to my own records. This is when my online banking shows I have $500 but according to my records, I’m negative $78. It’s sometimes easy to let that slide because I know I have an invisible cushion from rounding my transactions and it’s unlikely I will really overdraft in my checking account. However, I try to treat these “overdrafts” just as I would a real one with insufficient funds fees from the bank.
Let’s quickly recap: First and foremost, avoid these problems by keeping meticulous records (and by meticulous I mean rounding your transactions ) saving money, and setting up overdraft protection as a last resort. If you end up in this situation of “being in the red” start a spending freeze and deposit cash or directly transfer from savings immediately to cover the deficit. If you don’t have anything to deposit, get some cash by selling stuff or working for it. It’s that simple folks.
* * * * *
So…what are you going to do differently to avoid these situations? Or if you find yourself there now, what are you going to do to get out of it?