There is nothing to like about an overdraft fee. Except maybe the financial lessons we can learn from them. Being mindful of our spending and account balance is the first step in our economic well-being. Frequent or accumulated fees can cost hundreds of dollars, making our financial goals harder to reach. So, when money is short, put these protections in place to avoid those pesky overdraft fees.
Types of Overdraft Fees
Before diving into overdraft prevention, it is vital to understand the different types of fees. Overdraft fees are a charge from the bank for covering a charged expense or check when there are insufficient funds in the account, typically around $35 for each occurrence. Nonsufficient Fund (NSF) fees involve the bank declining a charge due to an account not having enough money to cover a change. These also average $35, although several banks are removing these types. Some banks charge an Overdraft Protection fee when they move funds from another account to avoid an overdraft, with a lower average charge of $10-$12 per transaction.
Track Balances Daily
There are a few different ways to prevent overdraft fees. The first is to keep a close eye on our account balance, checking it daily. Know how much money is available to spend, so we can avoid going into the red. Many banks offer online and mobile tools that track our balances and avoid overdrawing accounts.
The current balance won’t tell us how much we have in outstanding payments. Checks and some charges can take days or longer to process, and without a record, we can get caught off guard when that check cashes a month later. Track how much money should be in the account using a traditional checking account ledger, personal finance app, spreadsheet, or a piece of paper.
Because life gets busy, we can also set up alerts. Many banks will send an email or text message when our account balance gets low. We can transfer money into our account and curb spending before incurring fees. Set this up for an amount that provides a decent cushion for automatic and outstanding payments.
Maintain a Buffer
In the age of automatic payments, it is easy to underestimate how much money we need in our account on any given day. By keeping a set amount in the checking account that we pretend isn’t there, we can prepare for any unexpected charges. This is sometimes called a cash cushion or a bank account buffer. Unlike an emergency fund, this money stays in the checking account to help avoid over drafting.
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Build Up a Savings Account
A savings account that can act as an emergency fund or provide overdraft protection is another helpful step in overdraft fee protection. Start building up savings with automatic deposits on payday, so the money never hits the checking account. Or set up small weekly or monthly transfers that will accumulate over time. Once there is at least a couple hundred dollars in the savings account, consider linking it to checking for overdraft protection.
Consider Removing Overdraft Protection
While using a savings account for overdraft protection may help avoid overdraft fees, it may not be the best choice. While typically lower than overdraft fees, some banks charge for this service. And, it may not stop our spending until we have piled up costs and drained our savings account.
So, it’s essential to understand the pros and cons of overdraft protection. Consider removing the overdraft protection so that charges are instead declined and put a stop to accumulating damage to our finances and accounts.
Find A Bank with No or Low Fees
Increasingly banks are competing for our business by providing more attractive offers. For some, this includes no or low overdraft fees. Check out some of the banks with these offers and be aware that some may have monthly fees:
Ask For Help
Don’t be afraid to ask the bank for help. If you’re struggling to keep up financially, they may be able to offer some options to avoid fees. They may even be willing to remove fees, especially for customers who have been with the back for a while without prior overdrafts.
Avoiding overdraft fees is partially about getting a grip on our spending and financial habits. It is also about putting tools in place to help and finding banks we can partner with in our monetary well-being. What steps will you put in place today?