How to budget and never get another overdraft fee from your bank

How to budget, never get another overdraw fee from your bank, never pay another ATM fee, live well and stay inside your budget. It took me an embarrassingly long time to figure out this amazingly simple system, so I hope to help you by passing on this info.


Step one, make sure you have enough bank accounts

Bank accounts are buckets of money. You can have your banks automatically move money from one bucket to another, which I think is the key to success.

Here is the minimum number of bank accounts any person should have, and what they are used for.

  1. Main Checking Account
    • This is your main bank account, the one that receives your income each month.
    • This bank account is used to ‘pay’ other bank accounts, pay rent, and make debt payments.
  2. Short-Term Savings Account
    • This should be at the same bank as your Main Checking, and tied to it in online banking so you can easily make transactions between the two accounts.
    • Your Main Checking account should automatically be set to ‘pay’ this account a set amount each pay period.
    • You should try not to think of this as spendable money, but don’t feel bad if you use money from this account for unexpected monthly expenses (doctors bills, car repairs, etc)
  3. Medium-Term Savings Account
    • This account should be at a different bank than your other accounts, so that transfers and checking the balance are more difficult. You want to forget that you have money in this account.
    • Online-only bank accounts are great for this, as you typically get slightly better interest rates on your savings than from a brick and mortar bank. I use Orange Savings from ING.
    • It might help if you decide this money is going to be used for something specific on a specific date. Like I need the $x for a down payment for new car next winter, or I need $x for a vacation in summer of 2011. Then divide the amount of money you need by the number of pay periods you have between now and then, and set up an automatic transfer to pay this account that much each pay period.
  4. Spending Money Checking Account
    • Your Main Checking account will pay this account with the amount of money you’ve budgeted for yourself to spend each month.
    • At the start of each week, you will visit your banks ATM, and withdraw the amount of cash you have allotted yourself to spend that week.
    • Now, when you look into your wallet, you will know exactly how much money you have to spend on buying lunch, buying dinner, buying gas, going out to drinks, buying coffee, shoes, albums, etc, etc. You don’t need to track any purchases made with this money, but you will start to think about how big a piece of the spending money pie each thing is; you will begin to feel whether or not certain purchases are worthwhile.
    • If you need more money in a given week, you can check your account balance online. Because you don’t use the debit feature on your ATM card, the account balance will almost always be accurate. If you don’t have any money left in the account, you can choose to use a credit card–but you’ll know that you’re going over budget with every single swipe.


Suggested additional accounts.

  1. Credit Cards
    • I have two cards. One with a balance from before I started using this system (which I am steadily paying off), and one without a balance which I pay off every pay period.
    • The credit card should only be swiped for must-have daily purchases, when you run out of money in your spending money account. You must focus on the fact that every swipe of the card is you going over budget.
    • The credit card can also be used for emergencies, like car repairs and doctors bills. Then, transfer money from your Short-Term Savings into your Main Checking, and (hopefully) pay the credit card bill in full.
  2. Long-Term Savings (retirement account)
    • I have a Roth IRA with Vanguard for my retirement money. If you want to know what that is and how to set one up for yourself, visit the post I wrote about that!
    • This is an account which you probably will not be able to withdraw money from without loosing a bunch to taxes. That’s OK. You should think of money you put into this account as an expense, as money that is leaving your possession.
    • You can have multiple Long-Term Accounts, one retirement IRA from work, one Orange Savings for a down payment on a house, one for your (or your kids) college education, etc.


Step two, creating and keeping track of your budget

I use two spreadsheets for this. If you are not familiar with how spreadsheet programs work, you could make some lines on a piece of paper and do the calculations by hand.

The first spreadsheet

The first spreadsheet is used to manage each what you pay each pay period.

Click the image above for a larger view, or download the Weekly Budget Sample Spreadsheet.

What is on this Spreadsheet?

  1. There are two worksheets on this one sheet, the one the left is your scratch pad and the one on the right is a monthly breakdown just for informational purposes (not strictly necessary).
  2. This spreadsheet looks simple, but only because you aren’t actually tracking all your expenses, just the big, regularly occurring ones. The smaller more irregular transactions come out of your Spending Money Checking Account (IE your wallet). If your wallet is empty you do something cheap like go to the park instead of to a concert.
  3. I also have a little ‘fooling yourself’ pad of a minimum balance in this spreadsheet. I have it set to $100 on this budget, but you should change it (as soon as you are able) to be the amount of one pay period. The reason for this is that your work can screw up and accidentally not pay you (this has happened to me) and you don’t want to have to scramble to make transfers and cover things. The pad is also useful in case you forget you wrote a check or some unexpected thing hits (like something that recurs every six months). The moral is you want a pad against mistakes, either your own or your employers.

Tailoring the Spreadsheet to You

  1. The hard part here is to find all of the things that you pay a set amount for each month, then find out at what time of the month you pay for each thing. Put each under the appropriate pay period.
  2. I try to make a little payment on my debt every time you get paid. I don’t do this for my student loan only because the company that I pay can only automatically withdraw money once a month. Make as many regular withdrawals and transfers automatically as you can.
  3. For the things you can have flexibility on when to pay (Savings, credit card payments), try to balance the money you pay out so that you are paying approximately the same amount each pay period. For example, if you pay $400 in rent from the second pay period of the month, make $400 in payments to your savings accounts from the first pay period. If the pay periods are somewhat balanced, then you won’t feel like you are waiting for a certain pay period, because that’s your big payday, and the other just goes to rent.
  4. Lastly, make sure that the amount you are paying out during each pay period is less than you are taking in. You want to have about $100 of breathing room (what I call Available Money). If you don’t spend this, let it accumulate in your Main Checking Account for a rainy day. I end up spending my breathing room money paying my the Credit Card that I use for my ‘over budget’ spending money purchases.

How to Use this Spreadsheet

  1. To use this sheet, open it up every time you get paid. Put x’s next to all the items from the previous pay period items which have been debited from your bank account.
  2. Next, log in to your Main Checking Account’s online banking, and get your account balance. If you have x’s next to all the items from the previous pay period on your spreadsheet, you know that your account balance is for real, so put that at the top of your worksheet, in the ‘starting balance’ cell.
  3. Next, for every payment amount that fluctuates each month (credit card balance), find out what the debit amount is this pay period and fill it in. If your free money drops below $0, you have to make a transfer from your Short-Term Savings.
  4. All of these line items should be paid from your Main Checking Account. If you have automatic deductions happening to other accounts or Credit Cards, have them moved to your Main Checking Account. You want to only see those CC balances go down anyway, and not having things automatically withdrawing from your CC’s gives you more freedom to close or change credit card accounts later.


The second spreadsheet

The second spreadsheet is your planning sheet, or your motivation.

Click the image above for a larger view, or download the Planning and Motivation Spreadsheet.

What is on this Spreadsheet?

  1. Each row is a pay period.
  2. I have one or two columns for everything I want to track over time. The required column for each thing I want to track is a ‘transaction column’ (labeled ‘Trans’), or how much I put in or took out of a bucket during that time period. The second column is a running total.
  3. Rent doesn’t have a total, and the long term balance fluctuates with the stock market, so I don’t have total’s columns for them. I do want them on the sheet so I can see how much money I pay in rent and for retirement over time.

How to use this Spreadsheet

  1. I call this my motivation sheet because I can see about how much money I’ll have at a given date in the future.
  2. I’m trying to calculate interest as the totals go (download the spreadsheet with the link above and look at the formulas if you want), and in the totals lines I’m calculating interest so I can see how much my debt is costing me, and my ‘investments’ (savings accounts) are earning. This is not totally necessary, the money accrued from interest is pretty insubstantial, as you can see.
  3. This spreadsheet is incredibly useful for figuring out how much you should pay each pay period on a certain debt (for use on the first, budget sheet). For example, I want to pay off my Credit Card by July 2010, and now I know if I make these payments I’ll have it done by then.
  4. Open this sheet every pay period and enter with how much you’ve actually paid towards each debt or savings account.

4 thoughts on “How to budget and never get another overdraft fee from your bank

  1. Anthony Curreri

    Sol, I haven’t been self-employed while using this system, so I can’t say how well this will work, but here’s what I would do. Basically, you need to have a good guess on how much you’ll make, then have enough cash on hand to cover when your guesses are wrong.

    1) Take a guess on how much money you have coming in each year. Be conservative — it’s much, much better to guess low here. Say that number is $24,000. That means you take in an average of $2000 a month — some months you might make more than 2,000, some less. Plan your budget to revolve around $2000 a month though.

    2) Choose a “payday.” You can deposit your checks whenever you want, but I would pick one day of the month to sit down and make sure my “weekly budget spreadsheet” checks out. It is then that I would make manual credit card payments, etc. Just let the money sit in your account until “payday,” then make sure everything goes in the proper buckets.

    3) DO Make long-term/medium-term savings auto-deduct from your main account. Savings is the most important thing.

    4) DO NOT make short-term savings auto-deduct. You are going to have to do this manually. On light months, you’ll have to transfer money in from your short-term savings to make your weekly budget spreadsheet balance. On months where you make more than you’ve budgeted, you’ll have to transfer that money OUT to savings.

    5) TRICKY — The sticky wicket here is that if you are self-employed you’re probably making quarterly tax payments. You should take a guess on what those are, and split them up monthly so that they are in your “weekly” budget. I would put this money into medium-term savings each month, then not feel bad taking it back out when a quarterly payment is due.

    Does this help?

  2. Sol

    I wonder whether you can help me I am self employed therefore I don’t have a fixed amount coming in every month so how would I be able to budget?

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