Living One Month Ahead: The Overdraft Protection Purchased by Holding Last Month's Income as This Month's Budget

Most households budget with the income that is about to arrive; a minority budget with the income that arrived last month, holding a full month's pay in reserve so that every bill is paid from money already in hand. This paper simulates the protection that posture buys for a household earning USD 3,900 a month and spending USD 3,780, with bills clustered early in the month. With no buffer, the household averages 0.33 overdraft events and USD 10.12 of fees a year, and 23.8% of years contain an event. A quarter-month buffer cuts events to 0.00; half a month, to 0.00; a full month ahead reduces events to 0.00 a year and fees to USD 0.00, with only 0.0% of years containing any event at all. Building the full buffer by saving 8% of income takes 12 months. The study is simulated, not measured. SIMULATED, NOT MEASURED.