Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Negative Float

What it is:

Negative float is the amount of time between when a person writes a check and when that check clears the account.

How it works (Example):

In banking, the formula for negative float is:

Negative Float = Account's Ledger Balance - Account's Available Balance

For example, let's assume John has $1,000 available in his checking account today. He writes six checks of $200 each, for a total of $1,200, and he deposits a check for $2,000. Neither the deposits nor the withdrawals have cleared his account yet (it takes three days for the checks to reach their recipients via mail and another day or two for the recipient to take the checks to the bank).

Nevertheless, John records the withdrawals and the deposit in his check register, bringing his account's ledger balance to $1,000 - $1,200 + $2,000 = $1,800. However, because the bank still hasn't cleared the checks or the deposit, it still shows an available balance of only $1,000 in the account. The difference, $1,800 - $1,000 = $800, is the negative float.

Why it Matters:

Negative float implies that withdrawals are exceeding deposits in an account. This can create a tricky situation for account holders because until the deposits clear, any checks written over the available balance might bounce.