In my last post, I talked about the importance of having “float” in your checking account. Float is that extra cushion of money in your account that’s above and beyond the money that comes in from your income. The goal of float is to allow you some cushion and wiggle room for paying your bills and to allow for the unexpected to occur.
So the next question to ask is how much float do you need? If you have too little float, then you run the risk of still running out of money at some point during your month. If you have too much float, then that money isn’t doing you much good (since you could be investing it or using it in your emergency fund, which is a separate thing altogether.)
So here are some general guidelines for how much float to have.
More than you probably have now
If you want to be super protective, you would have float equal to all of your monthly bills and expenses. So if everything was due on the very first day of the month, you would have enough float to cover this.
Example 1: You make $2,000 a month, so your float would be $2,000. On day 1, when you get paid, you would have $4,000.
- Day 0: $2,000 (float)
- Day 1: $4,000 (paycheck of $2,000)
- (Bills, expenses, etc.)
- Last day: $2,000
This might be a bit much for some people. The point of float is to account for some irregularities and flexibility in timing of your bills and expenses. So a slightly less intense way of doing this is to have enough to cover your fixed bills (rent, electric, phone) and not your variable expenses (food, etc.)
Example 2a: You make $2,000 a month. You have $1,000 in bills, $800 in expenses, and $200 goes to savings. Your float would be $1,000. On day one, when you get paid, you would have $3,000. Etc.
Bang your head
Most people get paid more than once a month, so let’s see how this is important here:
Example 2b (same scenario): You make $2,000 a month, $1,000 in bills, $800 in expenses, $200 in savings. But you get paid twice a month ($1,000 on day 1, $1,000 on day 15). Let’s assume that $800 of your bills are due in the first week. Follow me along and see what happens:
- Day 0: $1,000
- Day 1: $2,000 (paycheck of $1,000)
- Day 5: $1,200 ($800 of bills due)
- Day 7: $900 ($300 of expenses)
I’m going to stop right there. Do you see what happened? Your float became vitally important on day 7, as you dipped below your original mark of $1,000. If you didn’t have float, you would have run out of money (and been charged a fee by your bank). Now granted, you’d get $1,000 more on Day 15 as part of your second paycheck, but that still wouldn’t help you on Day 7.
If you find all this hard to keep track of, that’s understandable. All the reason to have as much float as possible. Having $50 is better than $0. Having $300 is better than $50. The more float you have, the less you need to worry about when your spending happens during the month. You still need to make sure you aren’t spending more than you make, but that’s another post.
And if you’re curious to know what I do, I usually err on the side of having enough float to cover all bills and expenses. This can vary over the months (slightly less right now), but it’s always in the area. Like I said, it might a bit over-protective, but I put a high value on peace of mind.
But enough about me: How much float do you keep in your account?