The abilty pay a fee in order to use money you do not have, has its purpose in life. Mainly when a bill is due, you know you do not have the cash to pay it, and the company will not take a credit card payment. However, nobody enjoys unnexpected overdraft fees (ie: you did not realize that you had insufficient funds to cover your purchase). Yet there is a large portion of the US population that fights a constant battle with keeping their account balances in check.
Shortly after starting work at as a banker, I remember telling my boss that I had never balanced a checkbook in my life. He looked at me like he was about to have a heart attack before I remedied the conversation. However, the truth is that I had been using a checking account for 6+ years and had only overdrafted an account once in my life. The one overdraft I had incurred was when I had been out of the country and unable to check my balance for 6 months.
Since that time, I have encountered many people who have not learned the tricks of account maintenance. Some of this is due to lack of financial budgeting education. Moreover, banking has changed in the last 50 years. Many people who currently range from teenagers to early 30’s do not use checks as their primary method of banking. In general, people who rely on ATM’s, debit, and credit do not balance a check books.
So if you or someone you know has moved from the realm of occasional overdraft to consistent overdrafting, here are a few ways to help get the situation under control.
1) Opt Out of Overdrafting
This is an option that had been unavailable until recently. Although the option is not available at all banks, it is a great option. By opting out of overdrafting you will never be charged an overdraft fee. You still need to budget your money to ensure that you do not run out.
However, buy opting out of overdrafts you cannot spend money that you do not have. This means if you run out of money in your checking account, your debit card will be declined, you cannot take out cash, and your checks will bounce. When checks bounce, you are usually charged a fee by the company that tried to cash your check.
2) Opt In to Overdraft Coverage
Overdraft coverage typically links another account to your checking account. Most of the time, you still incur a fee any time that this money is transferred into your checking account. The fees tend to be much lower than overdraft fees. The most common types of overdraft coverage links a savings account or credit card to your checking account. For this coverage to work, you need to have money in the savings account or available credit on the credit card when you overdraft your checking account. Since overdraft coverage varies between banks, it is important to check with your bank concerning the particular rules of this coverage.
Be sure to ask your banker:
- How much am I charged for a transfer fee when I overdraft the account?
- Will I be charged a cash advance fee in addition to the transfer fee? (credit card coverage)
- Are there any other fees?
- Will I be charged per overdraft or per day of overdrafting? For example: a person could overdraft on 5 purchases in 1 day. That could either count as 5 overdraft coverage transfers (per transaction) or 1 overdraft transfer (per day)
- How much money is transferred from the linked account? Often banks transfer a block of money (ex: $25, $50, $75, etc) or they transfer a minimum amount of money (ex: $100+). In order for the overdraft coverage to work, you need to have the right amount of money in your account. For example, if you bank does transfers in block of $25 and you overdraft your account by $3, the bank will still transfer $25 in to your checking account. If you do not have $25 available, the transfer will not occur.
3) Utilize Mobile, text, and Online Banking
I am a big fan of online banking and have been using it for years. Online banking is great for people who do not balance checkbooks. The online banking system keeps track of all purchases you have made on your debit card, bill payments that you have done online, and any cash that you have taken out of the ATM. It also lets you know if you have pending charges that will be debited from your account within the next few days.
Text banking is a simplified version of online banking through your cell phone. You do not need a smart phone (iPhone, Android, Blackberry) to use text banking. Text banking is great for checking your balance while you are out making purchases. Before you swipe your debit card you can quickly check your balance to ensure that you have enough money in your account.
Mobile banking is available on smart phones (iPhone, Android, Blackberry). Mobile banking let you check your balances, much like text banking. Depending on your bank, mobile banking can also have much more sophisticated features, like checking your account statements, payments, and making deposits with your phone.
Note: Online, text, and mobile banking do not show outstanding checks. If you have written recently written a check, that has not yet been deposited or cleared your account, your balance will not include that check.
4) Set Account Alerts
Account alerts are typical set up through online banking. If you would like to set up account alerts and are unsure how to do it, stop by your local banking branch and they will be happy to show you. Most online banking sites also have instructions once you have signed into your online banking account. Account alerts can typically be sent to you email or your cell phone.
- Balance Alerts: These are the most helpful alerts to avoid overdrafting your account. You decide on a specific amount of money that you consider a low balance (let’s say $100). Once the alert is set up, your bank will email, text, or phone email you warning you when your account has dipped to or below $100. It is best to set up the alerts for a media that you check often. If you check your email 10 times a day, then email alerts would be a great option. However if you hardly check your email, text or cell phone emails may be a better option.
- Deposit Alerts: These alerts let you know when a deposit has been made to your account. By doing this you do not have to worry if the bank has received your check or not. You avoid spending more money until you are sure that your check has cleared.
- Spending Alerts: These can either be set up for the size of individual purchases (ex: $500 at any given store) or set up as daily alerts (ex: $500 in total spending on any given day). These alerts help you keep track of days that you may have over spent.
- Bill Pay Alerts: These alerts let you know when a payment has cleared your account. Typically these will cover either checks that you have written or electronic bill payments you have made.
NOTE: The types of alerts that are available vary depending on your bank. These alerts are also a great system for warning consumers of fraud on their accounts because it alerts you of unusual spending.
5) Switch to Cash Near the End of Your Pay Period
This is a great method for people who are not fans of technology and do not balance a check book. Overdrafts tend to occur near the end of a person’s pay period (ie: right before you get your next pay check). This requires a plan. Choose an amount of money that is sufficient, many people chose $100. When you notice your account nearing the last $100, take all of the money left out in cash. By taking the money out in cash you ensure that you will not overdraft your account by accident. The money is in your wallet, you know exactly how much you have left until your next paycheck, and you can spend accordingly.
If you decide to use this method make sure to cover necessities first when you take the remainder money in cash. Buy groceries, gas, or anything else you absolutely need before you spend the rest of the money. You may still run out of money before your next paycheck, but if your necessities are covered it is not the end of the world.
6) Always Use the PIN Option on Your Debit Card
Debit cards always have 2 different options. When you make a purchase with a debit card, you can enter your PIN or you can sign a receipt. When you enter your PIN, the transaction is processed as a debit transaction. When you sign a receipt, the transaction is processed as a credit transaction. Debit (PIN) transactions are always debited from your account immediately. Credit (sign a receipt) transactions are often debited from your account days later [depending on the bank.
I have seen article on avoiding overdraft fees that say to run everything as a credit transaction (sign a receipt). These articles claim that it is better that you have a delay before charges are debited from your account. This is the worst thing you can do if you tend to forget how much money you have spent and how much money you have left. By having a delay between when you make the purchase and when the money is taken out of your account, you have to remember exactly how much money you spent until the purchase hits your account. By using the PIN option on your debit card, you do not need to remember what you spent. Instead you only need to continue to check your available balance.
7) Avoid Using Checks
Checks are the big unknown in your account balance. Despite all of the technological advances in banking, there is no way around tracking your own check usage. Therefore it may be better to avoid writing checks if you have problems remembering to track them. There are a few different options that replace the use of checks.
- Online Bill Pay: Depending on your bank, you can now pay most if not all of your bills online. These payments are usually debited out of your account the same night or within a few days. This shortens the amount of time you have to remember the transaction.
- Cashier’s Checks: You can get a cashier’s check at any bank branch. The teller debits the money out of your account and hands you a bank drafted check. Since the money has been debited from your account immediately your account balance will reflect the check immediately. It is important to keep the receipt for cashier’s checks. Since the check clears your account immediately and not when the other person cashes the check, the receipt has the information you need in order to verify that the other person cashed the check. Depending on your bank and account type there is often a cost for cashier’s checks. Ask you banking representative what the cost is.
- Automatic Bill Pay: This can usually be set up for utilities, rent, mortgages, car payments, credit cards, etc. You can either set up the payments through your bank or through the company you are making payments to. If the payment is set up through the bank you can make changes to the amount, date of payment and other information with your bank. If you set the payments up online you go back to online banking to make changes. If the payments are set up through customer service with the bank, you make any changes with that same department. Generally, all automatic payments set up with the bank will be debited from your checking account. If you set up the payment through the company you are paying, any changes must be made with that same company. When automatic payments are set up through the company, you have a choice between paying with your checking account, your debit card, or your credit card. However, not all companies will offer you 3 different choices of how to pay your bill. Often companies will give you 1 or 2 different payment options. With automatic bill pay you can often chose what date the bill is paid on.
NOTE: It is always best to set up automatic payments for the early part of your pay cycle. This allows paid your necessary bills before you spend money on other items. You can always choose to cut back on convenience items, like eating out. However you cannot choose to cut back on paying your rent, utilities, gas for work and other necessities.
8) Create an Account Buffer System
This system takes some will power and mental training, but is one of the greatest ways to long-term change the way you deal with money. It will probably take some time to get used to, so it is best to use in combination with other methods until you are used to it. On the other hand, this is the major reason I never unknowingly overdraft my accounts.
In my personal life, I have always been somewhat paranoid about money. I think it is a trait that I inherited from my father. I have always assumed that $0 in my account is not just broke; it is a reason for panic. Because of that thought process I have always had an amount of money that I think of as broke. Throughout my life the specific amount of money has changes dramatically, depending on how much income, bills, and savings plans I had at any given time. However I always have a number in my head that ranges from $20-$5,000. That number is based on how much buffer money I need to cover an emergency. If I have almost no income and almost no bills it could be $20 because the emergency is that I may need to get home if my ride bailed on me. If I am saving up because there is a chance of unemployment, or one of the cars breaking down, the number could be $5000+ to cover the cost.
In this system you decide on a buffer amount that you would always keep in your account. This number is dependent on the amount of money you would need in an emergency. An emergency can be anything from you forgot to bring lunch to work to you need your utility bills double this month from a heat wave. Pick a number that makes sense for your life. Be careful though, to pick a realistic number. If you tend to spend $100 when something goes wrong, do not pick $20 as your buffer money number.
The trick to this system is to mentally convince yourself that the buffer number is equivalent to having $0 in your account. Let’s use $100 again. Assume that when you hit this balance it is the equivalent to having $0 in your account. By mentally deciding that $100 means you are broke, you do not need to overdraft your account when a last minute unexpected expense pops up. If you do drop below your magic number, it is important to get that buffer back into your account on your next pay check.
9) Use your Credit Card
This option works well for people who stay within their general budget, but do not track their daily spending. By using your credit card instead of your debit card, you do not need to worry about overdrafting your account. When the credit card bill is due you pay off the entire balance. This works great when there is a necessary bill that is due before your check has come in. For example, say that you need gas to get to work today, but your pay check does not come in until tomorrow. You can put the purchase on your credit card and pay it off as soon as your check comes in.
NOTE: This is not a good method for people who tend to overspend in general. If you are not good about keeping to a general budget, you will rack up debt on your credit card that you cannot easily payoff.
10) Use a Prepaid Card
Prepaid Cards always have some type of fee associated with their use. Depending on the card, the fee can be per month, per purchase, or per time you load more money on the card. It is important to understand the fees associated with a card before you start using it. Prepaid cards can either be much cheaper than account overdrafts or much more expensive depending on how they charge fees and how you tend to use the card. These cards can help people who like the convenience of using debit, but have problems tracking their spending. Once the card is out of money, you cannot use it again until you add more money to it. Therefore, you cannot overdraft a prepaid debit card. These cards can either be purchased through your bank, online, or at drug stores and convenience stores. The cards are reusable. You can load money on to the card online, over the phone or in person depending on the card.
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