That Time I Intentionally Overdrew Our Bank Account (photo credit)
An important principle at the heart of successful financial management is “don’t spend more cash than you have on hand.”
Cash flow is important. Run out of cash and bad things can happen… banks charge overdraft fees / businesses charge late fees & interest / Uncle Vinny busts your knee caps…
Why then did I overdraw our bank account this month? On purpose. Twice.
Emergency Funds
Over the past couple years or so we’ve had a zero / non-existent “emergency fund.” Between blog income and dividends I manage our cash flow well enough, but on a regular basis we have close to zero cash on hand.
Because I track every penny we spend, we live well for less, and our credit cards give us free 0% interest loans every month, I haven’t seen the point in keeping a big cash reserve around “just in case.”
Emergencies do happen though. In our case it was an eye infection for my better half. Our first day in Japan was spent hunting down an English speaking eye doctor, who prescribed both antibacterial and antiviral eye drops. Total cost for 3 visits to the eye doctor plus prescriptions was about $120, cash only. (Will seek reimbursement by our travel insurance.) The eye patch was included.
Shiver Me Timbers
Cash Flow Challenges
Normally a $120 surprise expense is NBD. But we had a few things working against us this month…
- credit card bills were massive –
- Alaska cruise for 5
- 2 months of Airbnb in Japan / Taiwan paid upon booking
- estimated taxes for Q3 – paid slightly early to meet Minimum Spend on new credit card ($950 value in points)
- paid for multiple group meals in US to get 5% Ultimate Rewards on dining (friends gave us cash)
- End of Q3 – already spent all of Q2 dividends, haven’t yet received Q3 dividends
- Japan has a big cash economy / many restaurants are cash only
Net net we were going to be short on cash until blog income and Q3 dividends arrived at the end of the month.
I considered our options…
- don’t pay credit card balance in full / pay short term 18% interest
- sell some stock to refill cash buffer – $4.95 fee plus a few pennies, plus another potential $4.95 to repurchase later
- also a taxable event (I’m not ready to cap gain harvest until December.)
- beg / borrow / steal
But in the end I took the easy / lazy way out and just did… nothing
Apparently Americans paid $15 billion in overdraft fees last year. With typical overdraft fees of $35, making this choice probably seems pretty dumb.
Fortunately this only cost us $0.13
Margin
As part of our normal money management, all of our cash eventually ends up on our Brokerage account at Fidelity. (We also have a savings account that earns higher interest.) Dividends are deposited directly as cash, and I transfer business income to this account before bills are due. ATM withdrawals and credit card billpay are all from the brokerage account.
Using our brokerage account like this is great because all ATM fees are reimbursed, it has a low currency conversion cost for foreign ATM withdrawals, and Fidelity will lend us a seemingly infinite amount of money on margin. The current rate for low levels is 8.575%. Some people use margin to buy more stock than they can afford, but it also works great for short term cash flow assistance.
With a negative balance of -$30.45 for a day, and then a week later a negative balance of -$181.03 over a weekend, total cost was quite reasonable.
All Is Well That Ends Well
As of today, all credit cards have been paid in full and dividend and blog income deposits occurred on schedule. Cash reserves are topped up, and the remainder of this year will be much lower cost than our most recent tour of Europe / US / Japan.
Crisis averted. Knee caps intact. Would do again.
Just did this now as we had a semi-unexpected payment of taxes on our newly purchased apartment.
We live in Israel and we have two banks and they let you go into to the red.
One bank will allow up to 5000 NIS ($1416) at 1.6% and then 10.6% percent om any remainder. The other allows up to 20,400 NIS ($5779) at 3.6% and up to 34,000 ($9631) at 6.4%.
I was amazed at how low the lower tier rates are. Im thinking always going to the 5000 and 20000 limits to move more money to my brokerage in the future.
1.6% is incredible. Leverage boosts returns and losses, so can be damaging in a recession, but depends how 25k impacts overall portfolio size
Oh yes, been there done THAT. I’m like you in that I just don’t care to have a pile of cash sitting there doing nothing for me. Our “emergency fund” is a HELOC, which is soon to be consumed by a down payment on rental #5. So yeah, I get nailed with two or three overdrafts a years. I usually call the bank to whine them into reimbursing me.
Great insights on Japan. I wouldn’t have guessed they rely so heavily on cash only transactions. Hopefully that eye infection is on the mend.
We are in semi-rural Japan right now, most places don’t take credit cards. Even in Tokyo we went to a few restaurants that were cash only. Naturally all of the tourist places take credit cards, even 7-11 and Family Mart do now
Do you ever feel stressed out having your bank account that low? My approach has been to keep a somewhat healthy buffer just for the peace of mind rather than try to squeeze out a bit more in returns. Curious to see if you’ve found the extra returns worth the stress (or if you don’t feel the stress at all!) or if you see any other benefits from keeping a low balance. Thanks!
Stress is pretty low. The worst case scenario is pretty tame.
I’m on board for having larger cash reserves if this type of thing freaks you out.
Man, another reason to check out that Fidelity account. That is not a bad deal for help in two cash flow crunches.
Any brokerage company will offer margin accounts, but I’m pretty happy with Fidelity in large part due to the ATM fee reimbursement
Loved the ATM fee reimbursement – though my broker is Charles Swab. I just came back from Peru for a 2-week vacation, and got reimbursed $65 for all the ATM fees incurred from 12 ATM withdrawals.
btw, I never thought about using the margin account this way. Clever! thanks for sharing!
Just echoing others’ comments about the Fidelity account – definitely worth checking out. I am also surprised at Japan’s cash economy, given their progressive use of technology.
This one goes back quite a while, early 2000’s, when I was still in college (and completely broke). To this day it’s one of my sweetest moves: I had a credit card payment due. I couldn’t afford (literally) the overdue fee because my credit card was already maxed out, and if I went over the limit, they’d tack on another fee. So, I went into a Citibank branch, wrote a (bad) check to pay $40 toward my CC balance, and went immediately to the ATM there and did a cash advance on that same credit card, taking out $40 (that was now available). I then drove immediately to my bank and deposited the cash, so that when the check cleared, I could cover the amount.
Tough times back then. Thankfully the banking system allowed it. I don’t think that would fly in this day & age.
Nice. I love the creative thinking here
Hmm… I have my brokerage at Fidelity as well as my Cash account that we plan to use overseas along with my Schwab debit. Is the margin line a normal feature of their brokerage accounts or is it something I’d need to apply for? I assume there’s a hard pull for the margin line?
You need to apply for it. afair there is no credit pull since the assets in your brokerage account are used as collateral
My son was discussing his emergency fund strategy with me and I suggested he keep it at $0, use the money for debt service instead, and count on the “bank of dad” should something bad occur. Last week his wife’s car had a major expense, but he was (barely) able to cash-flow it. Proud of the kid.
Any chance you are looking to adopt another son into the bank of dad? #askingforafriend
I do not recommend using margin for variety of reasons.
But I understand that for your short-term crunch situations it may have worked for you.
But if you ever need to use margin, the cheapest broker would be Interactive Brokers – it is about 2.60% today
Also, selling stock costs anywhere between 35 cents to $1 per trade with Interactive Brokers. But as a friendly reminder, keep over $100K there ( provided you ever decide to use it)
There are a lot of good options. My current brokerage probably pays us $200/year in ATM reimbursements, so we have a negative interest rate
Oh I love Fidelity, and their credit card too. 2% cash back on credit card and ATM reimbursement, is whack ;-)
I have the same setup with Fidelity. I’ve only used the margin feature to manage cash flow a handful of times and I think I’ve paid a few bucks in interest in total. And love their ATM card with zero fidelity fees, excellent forex conversion rates, and reimbursement of any ATM fees.
Fido is pretty sweet
So Winnie is now the pirate in the family? How cool?
Hopefully she’s doing better. Didn’t realize that you can use Fidelity like an ATM that’s pretty cool. Wonder if we can do the same with Questrade, need to investigate. Sounds like a great “emergency emergency” fund you can tap into just in case.
You guys heading back to Taiwan again?
We fly to Taiwan in about 2 weeks and will probably be there a year at least.
Winnie’s eye is back to normal now so no more pirate path
I’ve been on the short end of the stick more times than I can count. It has brought me to the place in my life where I sleep more soundly knowing that I can go years living on the cash/bonds we have for that purpose. My goal is to have 4-5 years of expenses (measured in minimum expenses, not including extras) so that if something unexpected happens, like a sudden recession (as has happened more than once), we are not forced to liquidate investments. I grant you, this is not for everyone, and my seem unnecessarily conservative, but it helps me sleep so that’s what the Oldsters do.
If you haven’t already, take a look at my post on the worst retirement ever. Since we can do a bit of geographic arbitrage I’m not terribly worried about the next big downturn.
If that isn’t the cheapest overdraft ever, short of free, I don’t know what is.
We ran low on cash this summer when our “necessities only” reno blossomed into the whole house needing work. We were very lucky that a friend insisted on loaning us the cash for the two months it took to complete the work and recoup the money. They said that with my money management history, they had not even a shadow of a doubt that they’d be repaid in a timely manner. We’re so lucky to have that relationship and helping hand when we needed it.
The family bank is nice to have. “We are all in this together.”
And margin interest is a tax-deductible expense, correct?
It can be if you itemize and misc expenses (which includes investment expenses) exceeds 2% of AGI
Nice moves! I hadn’t considered using margin like that. We tend to keep around $8k for expenses, but only spend ~3k/month. So we have a good sized buffer. Maybe we aren’t being optimal enough :)
I typically have a 2-3 month buffer as well. Then it gets refilled each quarter with dividend income.
I think it is impossible to pick the right amount for an emergency fund. That being said, your worst case scenario resulting in 13 cents would seem to indicate you are doing pretty well.
Yeah, I’m good with $0.13
Since we can live off of cash flow an emergency fund is less important.
That’s interesting, but we’re not built like that. I’d be stressed out and Mrs. RB40 would be freaking if we don’t have cash. It sounds like it works well for you, though. For us, we prefer the peace of mind.
I can definitely understand that. I don’t tend to get too worked up over things that cost $0.13 though
Using your overdraft is one way to cover your emergencies. I have a secure line of credit (homeline) at 3.7% just for emergencies, that way I can get my cash working and I get the peace of mind.
a HELOC is a good option for homeowners
As usual, another intriguing post from Go Curry Cracker. I’m surprised your cash flows are this tight. I’m guessing your willingness to chuck it all and travel the world non-stop and cut it this close in terms of cash flow are related. Usually, those willing to step further out on the risk curve end up with more assets. That will likely be true of you as well. Always like your thought-provoking writing.
Thanks MI.
Cash flow was about $20k in/out this month, so it was a bit unusual. I was pretty happy to be within a couple hundred bucks
And, of course, when your net assets are in the seven figures, an “emergency fund” is sort of redundant. It’s similar to getting to a level of wealth where you can self-insure against just about everything (though not quite everything).
Great info here. We are traveling in Spain and I hate the ATM fees. I’ll need to look into a Fidelity account for this type of thing.
Fido and Schwab seem to be the best options
Yup, a margin account interest is way cheaper than credit card fees. While I don’t necessarily recommend using margin accounts to buy stocks regularly, it is handy to have the flexibility.
Out of the 15+ years I’ve had a margin account, I’ve probably only used it once or twice.
Same. I think this is only the 2nd time I’ve used it
I have a question regarding the 5% Ultimate Rewards on dining. I thought it would be 3% on dining with 50% more points? If so, it should be 4.5% instead of 5%? The reason why I’m asking is that I applied for this card because of your blog and am wondering if I’m missing out something!
This is for the Chase Freedom card, which has a 5 other/$ category each quarter. For Q3’17 it was restaurants.
The Freedom card is a good companion to the Sapphire Reserve or Preferred cards, especially since it has no annual fee.
I may be slightly crazy, but when I know I’m going to have a tight month cash flow-wise, I’ll build a daily cash flow projection just to be sure I can make it to my next cash infusion. I always keep a little in reserve, but try to run net cash as close to zero as possible to minimize drag. I’d rather have that money in the market than sit earning next to nothing in a checking account.
While paying any overdraft fees are a pain, you’ll lose a lot more in stock market gains if you keep more than a nominal amount of cash on hand. Ditto for investing your emergency fund.
I was doing something similar with cash flow planning but the eye infection was unplanned
That’s pretty cool and cheap way to have a buffer in these situations. As you already know these big banks its 35 dollars per transaction under 0. That’s high way robbery, but I guess the people with the gold make the rules. IT should be 5 dollars per transaction.
Why didn’t you transfer a few hundred dollars from your savings account to that brokerage account to reduce or eliminate the fee? In and out over a week would have avoided the fees and barely affected the interest earned on the savings.
I think your wife looks good with the eyepatch. She’s got that Kill Bill thing going on. It would be great if she added an image or logo to the patch. Maybe the Japanese flag or the GCC suitcase logo.
I did transfer all funds.
I guess I misunderstood. It seems like you are saying you had a Savings Account with a non-zero balance. Instead of transferring from that savings account to your brokerage account in advance of the expenses, you instead allowed the brokerage account to be overdrawn and subsequently replenished through blog income & dividends and thus incurring 13 cents of expense. If you had moved $200 from savings to brokerage prior to being overdrawn, you could have avoided the expense. Then after your blog income & dividends get deposited into the brokerage account, you could have moved $200 back from brokerage to savings.
Maybe I am misunderstanding your finances but even 13 cents is 13 cents too much if it can be avoided. Of course, I’ve spent more than 13 cents worth of my time trying to clear up a 13 cent expense that isn’t even my expense….
I already transferred all funds from the savings account.
Savings balance = $0, brokerage balance = -$200 +/-
I see. You really do cut it close. My only caution is that if there is ever a disaster (man-made or financial) which affects the banking system, you could be in trouble. I guess we all would be but I live in an area prone to earthquakes. The last big earthquake to hit the area knocked down my bank’s ATM network & on-line services for 36 hours. After that I started keeping cash around the house. The aftermath of a real big earthquake could lead to price gouging and cash-only demands if electronic payment systems are down for extended periods.
Yeah, it was a close shave. Next time around I’ll probably worry about it less since the consequences were fairly calm.
I think we have a few Euros, some Hungarian Forint, and maybe 30USD in various pockets around here somewhere, if the need arises. I think the odds of being mugged are higher than a big natural disaster without warning. Time will tell though
I’m always looking for a way to earn a few extra pennies without any true risk. Never considered brokerage account margin before. I’ll definitely look into this.
if you have a million invested and live of it …… why not keep $5,000 back as cash ? its so small and really wont make a long term difference to how much money you make ??
That is an option. As of this moment we have about $11k in cash and $6k in credit card balance, so about $5k.
Interesting concept. I’ve considered getting a Home Equity Line of Credit for this type of thing, but margin account is probably less red tape. Going to review the options.
I’d like to see a post from your answering this question:
-What if 1929 happened today again. What would you do if now that you’re almost 100% in equity, the market lost 90% of its value and would take 27 years to recover to same level (I know w/ dividends it’s not 27 but just pretend it is). What would you do? – keep an open mind and answer this for us in a post please! Thanks
I’d go to Disney Land.
1929 wasn’t the worst time to retire.
I definitely can’t with your logic, but one thing I respect about all of the FI bloggers I follow is you all say you have to do what works for you. I have always viewed my savings as a war chest that would give me flexibility in life and have used it several times to leave a high paying job and go take a shot at a startup, or just take a self-funded sabbatical. So I know I can rebuild my war chest, but the thing that has always given me the confidence to go 100% stock is having that emergency fund to know I don’t have to touch my investments in a cash crunch, unexpected repair to the house or car (yes, good arguments for owning neither). And of course you can argue that I’m actually not 100% in equities if I have an emergency fund, but I have always been disciplined at compartmentalizing different buckets of money.
Anyhow, I think everyone needs to do what works for them, but articles like this and ones on MMM, Mad Fientist, and jlcollinsnh really challenge my thinking on some “givens” which is awesome and maybe I will make some changes over time.
Really appreciate what your doing to share your thinking, approach, and outcomes.
Hi, Do you have a blog that goes over your cash flow pre-retirement. For example, did you reinvest all dividends? How much cash reserve if any did you maintain? Did you work it so you lived on funds left after saving 50%+ of income? Thx
Expenses (rough) are here: The GCC Accumulation Phase Expenses.
Mostly we just continuously invested funds left over each month.
No emergency fund or cash reserve. We had credit cards and job cash flow.
I don’t recall if dividends were reinvested or not. Probably were.
>Did you work it so you lived on funds left after saving 50%+ of income?
I’m not sure I understand this part. Is there more than one possible answer?