5 Tips to Avoid Overdraft Fees
A recent report in Financial Times reveals that US Banks stand to take in over $38 Billion in overdraft fees from their customers this year! The bulk of this revenue is said to come from, “the most financially stretched consumers amid the deepest recession since the 1930s, according to research.”
Checking account overdraft fees now account for more than 75% of the fees banks charge on consumer deposits. The median overdraft fee is $26, and can be much higher. Worse, the fee can be assessed each time you overdraw your account, up to several times a day according to the report. Disturbing news if you happen to have a checking account, isn’t it?
The good news is that overdraft fees can be easily avoided with a little forethought on your part. These tips work whether you keep your check register manually or electronically:
How to Avoid Overdraft Fees
- Keep your Register Updated. Simply put, if you don’t know how much money is in your checking account right now, then you are at risk of overdrawing your account. Many people think keeping a check register up to date is a hassle. Instead, make it a habit by entering each check or debit card purchase as it is made. Set aside time when you get home to balance the register. Do this every time you spend, and soon it will be second nature.
- Don’t Forget ATM Withdrawals. One of the easiest ways to lose track of your money is to forget to record cash you withdraw from an ATM. It happens to people all the time – they forget to record the withdrawal and when the bank statement comes they find out they have $50 or $100 or whatever amount less than they thought they had. Nip this potential problem in the bud by always getting an ATM receipt. Place the receipt in a safe place. When you get home refer to the receipt to enter the withdrawal into your register.
- Remember to Record Automatic Payments. Having your utility or insurance company automatically take payments out of your checking account can be very convenient. Overdrawing your account because you forgot to record an automatic payment is decidedly inconvenient.
- Review your Statement. The best way to keep tabs on your checking account is to compare the monthly statement to your check register. Any discrepancies need to be taken care of immediately. If you have done a good job keeping track of your money there will never be a discrepancy – and that is the goal.
- Cushion your Checking Account. Having a little cushion in your account is probably the most effective way to stop overdraft fees when all else fails. To create a cushion, record a withdrawal in your register of $100 or whatever you want the cushion amount to be but leave the money there. Try to forget about the cushion and carry on as usual. If you get into trouble and accidentally spend more than your balance that $100 (or whatever amount) will be sitting there to take up the slack, and hopefully prevent a nasty fee.
Most banks also allow you to link your checking account to a savings or credit card (not recommended) account to avoid overdraft fees.
@Single Guy Money — Thank you for the comment!
I didn’t include this option because there is often a fee involved, even though the transfer is happening between your own accounts! For example, Bank of America charges $10 for every $100 they transfer from a linked savings account to checking account to prevent an overdraft. Yikes!
If you can get this service with no fees it might be an option for some. I’d highly recommend against using a linked credit card account just as you said.
My bank allows for a “line of credit” overdraft for a fee of $35/year. It’s up to 2K, and has an interest rate of about 19%. However, one uncleared check typically would cost $30, and I usually am only a day or two off, so my interest is minimal. I am thrilled with the option.
@Juli — Thanks for stopping by!
That is a lot better than $10 for every $100! It is good to hear you found an option that you are happy with and that works for you.
Personally, I think the best things to do are 4 and 5. Just make sure that you have a good cushion in your checking account. If I was so dangerously low that I might overdraft, I would probably just use a credit card.
@David — Appreciate your comment!
When I first started digging out of debt having a cushion was the best thing for me personally. I set Quicken up to “hide” $25 a paycheck automatically (they later came out with a feature to do that). Since I never saw the money I just forgot about it.
Months later there was over $500 extra in the account! At the time this was a good thing for two reasons:
1) It triggered the no-fee minimum balance to make the checking account fee-free. This is before the days of free checking everywhere.
2) I had $500 saved! At the time this was like having $50,000.
I kept saving the $25 a paycheck. I left $500 in the checking account to avoid those fees and put the excess into a savings account.
For me this was the beginning of my financial freedom. Even though I was in debt I was also getting into the habit of saving regularly. It paid off huge down the road…
So yeah, I’m quite fond of #5 myself. To this day I have a cushion in my checking account!
Nice list. 4 and 5 are key to preventing overdrafts. I would add one more to the list. Set up alerts on your account to notify you when you have reached your predetermined minimum balance in your account. This way you know that you must make a transfer or deposit into your account.
@B Simple — That is a good tip and I appreciate your input!
I for many years I’ve used an Excel spreadsheet to plan 6-12 months in advance and replace my predictions with actuals as they occur. I’ve also used the function where the color of the cell showing the running balance will turn yellow if the projected balance drops below $1500 and yellow if below $1000. A useful warning to prevent every going into overdraft. My spreadsheet is chunked by weeks and I always have the projections in for a minumum of 6 months into the future. I can test “what ifs” by increasing what I pull out for investing/saving, or removing one salary to see the long term impact of a layoff. It’s been a very handy way to see the long term impact of a large unscheduled purchase.
To set up the spreadsheet I create a list broken out as week 1,2,3,4(sometimes 5) and list what known expenses will arrive in each week, one per row. Then I add in my budgeted number for the weekly and monthly variable expenses (gas, groceries). I’ve had people look at me like I was crazy and ask how I could possibly know what I’ll spend next April, but if you think about it, most of your expenditures are predicable and repeated. Our mortgage comes off every other Monday, we get paid on alternating Fridays, house&car insurance is withdrawn automatically on the 17th or next business day. Property tax monthly installment automatically on the 1st, phone and cell week three of every month, and so on. I also keep a list of annual and infrequent expenses which I can predict but might forget to include as I extend into the future. For example, kids summer camp, annual saftey deposit box fee, the annual vet bill every May (I include it in May week 1 every year and just bump it into the next week until we get there for the appointment. For the numbers which might vary I use a plug number and when the real purchase is made I update the spreadsheet. I assume the same amount every week for gas, groceries, and a little pocket money. Since the price of gas fluctuates and I work from home different numbers of days some weeks, the gas amount is only an estimate. Same with groceries. Last week we stocked up the freezer with chicken on sale and spent $25 “over budget” but this week we were $30 under so I don’t get too concerned. For me working from a fixed amount in an envelope might stop me from taking advantage of an opportunity.
Once a year I review all the grocery amounts for the past 12 months to decide if the plug amount I’m using is still valid. Same for gas. Same for pocket money. We used to take out a lot more pocket money but unless you carefully note where you spend it, you have no way to track it. We got prepaid cash cards for our favourite coffee place. We load them online with our credit card so now I know how much I’m really spending on coffee (note to self, I need to cut that down a bit). We’ve also started using our credit card for virtually everything in order to get the air mile points, but also so we have a record of everything. As a result I’ve had the same $20 bill in my wallet for nearly a month. I just haven’t needed it. BTW – I pay off the credit card every week so I can balance up the spreadsheet and replace the estimates with the actuals, and as a result I’ve never paid interest on the card. Getting all those air miles is also a huge bonus. Last vacation our flights were free, just for buying our usual groceries, gas etc.
We don’t have an “official” savings plan or emergency fund set up in separate accoutns. We live WAAAAAY below our means so the excess just accumulates in our one bank account and every few weeks I skim off an amount to invest, or once in a while let it really accumulate in order make a large purchase (trip, major house repair, vehicle). It has the same effect as moving the money to other accounts specifically tagged for trips, future car purchase, emergencies etc, but because we run so far below our income we just haven’t bothered with the extra administration. We just aren’t inclined to spend it because it’s sitting there in the account. We typically live day to day on 50% of our income, so the other 50% is what we direct in an informal way to vacations, vehicles (always used), paying down the mortgage or topping up retirement savings accounts. For visual folks I really think the envelopes/jars and separate accounts to save for different things are an excellent idea. My visual aid is my spreadsheet. If I want to know if we can do something unplanned, I plug in the amount and look into the future weeks to see the impact. If it causes a crunch we either don’t do it or wait. Our dishwasher failed last winter. We washed dishes for a month while we did our research to choose the new one. By that point the excess had piled up more than enough to make the purchase. Of course we didn’t hand them the case, we bought it on the credit card for the points and then I went home and immediately paid it off.
@Jenn — Thank you for your detailed comment. There are many systems that can work for people, the trick is finding out which one works for you and stick with it.
I don’t have an “official” emergency fund either. In fact, I don’t even budget any more. Once I got completely out of debt (including mortgage) keeping track just wasn’t necessary any more. The frugal habits I learned as I was getting out of debt have carried over to present day and since I don’t spend much there is always an excess.
My current system to avoid overdrafts is simple — I just keep $1000 minimum in the checking account at all times. Easy to do now, but when I was struggling I used the other tips described in the post.