While listening to Marketplace this morning I was surprised to hear that overdraft fees are at a record high. It was not that long ago that I was also getting sucked into that cycle of being a few dollars shy on one transaction to a $100+ negative balance in my checking account. If it feels like being kicked while your already down you are not alone. Many Americans find them in the same hole over and over and the only tool offered by their financial institution is a shovel.
There is a lot of advice out there on how to avoid overdraft fees, but most of it comes from the banks that charge the fees or from the perspective of someone who has never faced any kind of economic hardship. Hopefully, I can offer a perspective that actually improves your financial situation and you too can live the rest of your life without ever paying an overdraft fee again. I’ll even show you how to get to a place where the bank pays you!!
What is overdraft “protection”?
The fee charged by a bank for making a purchase that is more than the available balance is often referred to as an overdraft fee or NSF (non-sufficient funds) fee. A NSF fee purchase usually results in a canceled transaction and an overdraft purchase you may not know about until the bank notifies you or you check your balance. The fees average $35 per transaction. So buying something for five dollars triggers a fee that leads item costing as much as $40. I know you don’t have any money, so let’s charge you more for everything you buy!! That is often worse than the interest charged if you were to borrow $40 until your next paycheck. I don’t need to explain further, if you know, you know. What can you do?
How to avoid the fees
Dump your bank for a better partner:
When you give your money to someone else and expect to get it back that is called lending. That is exactly what a bank does, they borrow your money. If your bank is charging you fees for anything related to a checking account or savings account you might want to start by looking for a different bank or credit union. Your financial institution should pay you to have a savings account, even if it is a measly quarter percent. There are many online banking options for checking accounts that pay interest and come with a lot of other benefits. Some of the most popular are Ally,* Capital One, and Charles Schwab. There is also Marcus by Goldman Sachs which as far I know only offers a high yield savings account.
*Ally Bank eliminates all overdraft fees, ending centuries-old industry practice and lifting consumer burden
Use your budget to build a cushion:
There are so many strategies for creating and following a budget you may find yourself following no budget. I’ll make an updated post for Real Wealth KC when I have a chance but I previously wrote about the 50/30/20 budget on WinningAtDadding.com. Budgeting for a baby or a house or a wedding is not that different, you set a goal and you reach it. The point is once you are in the habit of saving your money and are intentional in your spending, you will end up with a cushion. You worked hard to save that money, don’t give it some crappy bank that charges you a monthly fee for borrowing your money. Look for a bank that gives you the option to link your checking account to your savings account if for some reason you should overspend your checking account.
Are you an overachiever?
One day you are going to look back on your history with your bank and wonder why you ever put up with abusive relationship. What I am going to share with you will not believe can be true and may even seem unfair. Unfortunately, this is the world we live in so use it to your advantage and then pass on that knowledge to the next person to help them.
If you have managed to get a budget that you actually follow; If you have managed to get yourself out of credit card debt or avoided it altogether; if you pay your bills on time every month; chances are you can open a credit card account with no fees that offers cash back. Chances are you can now get a discount on everything you buy, just like the wealthy do!
Now, wait a minute! I just worked so hard to get rid of the credit cards and I heard Dave Ramsey says credit cards are the devil!!
Dave Ramsey gets paid $15 million a year to say whatever makes him money. At less than $15 an hour I don’t think I’m going to take advice from a guy who has no idea what my life is like. Go get a credit card that offers cash back on the things you buy anyway, and use it to your advantage. Here’s how it works:
- Pay off your credit card every month. None of this works if you carry a balance. Interest will eat up any cash back you earn. Think of your credit card as a debit card. If I have $100 in my checking account I can only spend $100 on my credit card, not a penny more. The credit card is not a way to borrow money, it is a way to spend only the money I have.
- Pay off your credit card every month. If you are on step two and you do not have a zero balance on ALL of your credit cards go learn about budgeting and debt reduction and then come back to step one. You do not need to be debt free, but you must be credit card (high interest) debt free.
- I use the credit card to buy the groceries I would normally buy. I use it to fill up my tank driving to work. I use the credit card to pay the utilities I would normally pay for that will accept auto-pay set up with a credit card.
- My paycheck is deposited into my account and my balance builds a little larger each month that I follow my budget. The money I have is earning interest in my high yield checking or savings accounts. My credit card is paying me an average of 1.5% for every purchase, including that utility bill I set up for auto-pay.
- I set up auto-pay for my credit so I know it will be paid in full each month. I know this can be scary, but a little fear can go a long way to help avoid over-spending. Once I got in the habit of following a budget and became more comfortable with all the automation, I realized how nice it is to basically track and pay one bill each month rather than keep track of five or six and when they are coming out of my checking account.
- Sign up for a free app that monitors your accounts in one place. Some banks will offer this service free or you can use something like Mint. Now I can check all accounts in one place and set up alerts for things like low balance, when I get paid, or unauthorized transactions
- Each month on a $2000 I get .10% interest (the average rate in 2021) from my checking account and 1.5% cash back on the $1400 max I put on my credit card.* I net $2/month from the checking account, and $2.10/month from the credit card. I pay the bank $0 and the credit $0.
- I now have $400 in the savings account earning .25% interest which is $1.*
* $2000 assuming the 50/30/20 budget. $1000 for needs, $600 for wants, $400 for savings
- Repeat every month. Use the reward points to pay off your balance or for Christmas gifts for family.
Your numbers will be different and it may take a little while to get to this point, but you can do it. Instead of paying an $8 per month fee to my bank I’m making more than $4+ per month and that number gets larger as the savings interest begins to compound. Not only are you protecting yourself against overdraft fees you are building wealth.
Don’t let people like millionaires like Dave Ramsey tell you aren’t smart enough to manage your money. None of us make enough to be irresponsible!! What we are really saying is do not let financial institutions be irresponsible with your money.