In Part 1, we looked at how cash flow management can be used to avoid overdraft fees. From our discussion, we drew the conclusion that for those living paycheck to paycheck, paying your bills at as late a date as possible is the key to avoiding as many overdraft fees as possible. By minimizing outflows through delaying expense payments and maximizing inflows for the first three weeks of each month, your bank account balance is kept as high as possible. You can even go beyond having all your bills in one week and have them all paid on two or three days of each month, preferably days nearer to the end of the month and closer to your next paycheck.
In this article, we’ll be proposing a practical strategy for applying insights discussed in Part 1, once again using John as our example. If you’ve read Part 1, you’ll recall the example of John, an individual with income and expenses of $3000.
Let’s revisit his finances.
Let’s break down the category “Everything Else” into necessities (food, transportation, etc.), student loan payment, and miscellaneous spending.
John’s cash flow:
Recall that in Part 1, we made the recommendation that if John were to simply switch all his bills to W4, he would have a cushion against bank fees in W1, W2 and W3.
Simple, right? The later you pay your bills within a month, the better. Here’s our strategy for how you can organize your expenses and income.
For John, his bills are as follows:
For John, for the month of March, his expenses have the following deadlines:
In tabular form, John’s cash flow for the month is as follows:
Notice how his bank account balance changes at present.
Can you spot John’s issue?
If you look closely, you’ll see that John’s bank account balance is near $0 from 03/01/20 to 03/15/20.
Near enough for two or three small transactions to give him an overdraft fee.
So how can John ensure that his bank account balance isn’t near $0 from 03/01/20 - 03/15/20?
One way is to delay as many payments as possible and pay off bills nearer to the end of the month.
That way, John can maintain a positive bank account balance throughout the month, which serves as a buffer for any unexpected transactions.
Given John’s expenses, we would advise him to delay his utility and restaurant expenses between his first and second paycheck to the end of the month. Realistically, this would mean putting both on a credit card and then paying off that bill at the end of the month to avoid monthly interest.
That way, John can have an extra $85 throughout the month to cushion against any unexpected transactions.
But what if delaying his utilities payment isn’t an option?
What if $85 simply isn’t enough because John needs emergency funds now and then to pay off a medical bill for one of his family members?
Not all bills can be delayed.
Rent, for example, is usually paid on the first day of every month.
Exceptions are rare.
What other courses of action can you take?
You can get a loan.
You heard right.
Get a loan, but only if it’s low interest as only then does this strategy make sense.
In John’s case, getting a personal loan with an APR of 5% might actually make sense.
Let’s look at a scenario where John takes out a loan of $1400 on 03/01/20.
The difference that this move makes to John’s finances can be seen in April. Assuming that John’s finances don’t change, here’s what April now looks like for him:
As can be seen above, while John now has an extra expense of $120 every month from his personal loan payment, he also has a much higher bank account balance throughout the month. If John’s finances were to remain unchanged, this benefit carries forward.
To avoid bank fees, the key is to have a high enough bank account balance throughout your pay cycle to cushion against any unexpected transactions. That can either be achieved by simply delaying bill payments or by taking out a loan. That’s right - low-interest debt can actually help shield you against bank fees, which are often much more destructive than low-interest loans.