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Have you ever wondered how banks can afford to offer free checking accounts? The answer: overdraft fees! So how do you avoid overdraft fees for good?
These fees certainly have gotten out of hand, and they've become a huge source of revenue for banks. Did you know that overdraft fee revenue was $32 billion in 2013?! That's about $275 per US household. Knowing how to avoid overdraft fees can save you hundreds of dollars!
The vast majority of people paying these fees are families who are stretched thin and just trying to get by. Having a negative checking account balance with overdraft fees on top of it is humiliating! Of all the financial mistakes that you wouldn't want to admit to friends and family, this has got to be at the top of the list… The. Worst.
And I know because I've been there. In 2007, we paid several hundred dollars in overdraft fees. When I wrote '13 Things that you Should Never Pay For', I should have included overdraft fees in the list.
With just some moderate planning, you should be able to avoid overdraft fees for the rest of your life!
But man – I get it… when you're living paycheck-to-paycheck and not paying close attention to your account – BAM, you get hit. And it usually ends up being a rapid fire kind of hit – BAM BAM BAM, or more like -$35, -$35, -$35.
Yup, you read that right. The most straightforward way to avoid overdraft fees altogether is to simply not enroll in the overdraft protection program.
Legislation in 2010 required banks to give customers the option to opt-in instead of automatically enrolling them in the protection.
Not enrolling in overdraft protection means 2 things:
I would much rather not buy my Chipotle Burrito than pay the $8 plus $35. That's one expensive burrito!
Many banks offer overdraft protection through the use of a linked credit card. When a debit card is swiped without sufficient funds, money from the credit card will be automatically transferred to cover it. However, there is usually a fee per transfer associated with this protection – so it isn't free. And if you aren't paying attention, you might have a balance on that credit card without realizing it. If you miss the payment on that credit card, you might have a late fee assessed of around $35. So there might be a potential fee of $45 in total for overdrawing on your account!
The online-only Chime Bank doesn't even offer overdraft protection. Your card will just get denied, but they also send balance notifications every morning so you know how much is in your account at all times. If your account does happen to go negative, they give you a full 15 days to deposit money before moving money (for free) over from your savings account to cover the negative balance. Not bad.
I strongly recommend this approach as opposed to retrospective budgeting (budgeting after your money is spent). This is what I teach in my online course called The Financial Renovation. If you are living paycheck to paycheck, it is important to plan out the next month's expenses ahead of time, to make sure that your account isn't projected to go negative at any point.
Understanding how to budget prospectively gets you ahead of the game. It give you the chance to tell your money where to go before you spend it. It puts you in control of your money.
When you combine prospective budgeting with using cash for many of your purchases, not only are you limiting how much you can spend (which will save you money) – but that worry about having enough money in your checking account disappears.
If you don't know how to start a cash budget from scratch, it will be well worth your time. And once you get the hang of it, you will find that you will actually spend less money overall.
I can't stress this enough – the first step to getting your financial house in order is to simply know what's going on. Like I mentioned earlier, we've been there. Even though I am a ‘Saver' my tendency is to be passive and lose track of where we are financially. Lauren, on the other hand as a Recovering Spender, has a tendency is to spend money without thinking about it. This means we've got to be extra militant about tracking our finances.
In The Financial Renovation eCourse, one of the modules focusses heavily on getting on the same page as your spouse and having a monthly Budget Night set to plan your next month's expenses. Sticking to this routine with my husband has allowed us to know how to avoid overdraft fees for about a decade now.
This is not the same as an Emergency Fund (which is also super important to get) but it is a good safeguard to have. Basically, make it a goal to set a new “floor” for your checking account balance. I recommend to start by shooting for $50 and then slowly growing it to $100-$200.
This is a bit of a mental game, but start to think of that $50 balance as your “$0” if that makes sense.
So, if $50 is the new “floor” in your account, you know you can't go below that. This will give you some wiggle room if something does happen. It's good to grow it to maybe $200 or more to cover any electronic bills that auto-draft or you forgot you scheduled. If your balance falls below your new minimum, try build it back up as quickly as you can.
Sometimes things happen… maybe a check was cashed that you wrote 5 months ago and forgot about, or you and your spouse miscommunicated, or you simply made a mistake. If that happens, you might get charged one of these fees in the future. If you do, simply call your bank right away and try to get it waived or reduced.
The key in knowing how to avoid overdraft fees comes down to just a little intentionality. Try out a few of these tips and see if you end up saving yourself from the frustration of overdraft fees.
What is your view on these fees? Crazy out of hand? Or reasonable?