How to Avoid Overdraft Fees and Protect Your Finances

The crash of 2008 was meant to serve as a warning to the dangers of negligent lending and irresponsible credit use. However, financial institutions continue to sell expensive credit products like overdraft protection to unsuspecting customers. In fact, according to an article on Time.com, American banks made $30 billion in profits from overdraft fees in 2011. These fees, coupled with high interest rates, can lead to permanent financial struggles for some individuals. To avoid falling into this trap, it is crucial to be well-prepared for account shortfalls and understand how to protect your finances.

Solid Financial Planning: A Priority for Financial Institutions

Financial institutions should reevaluate their priorities and place more emphasis on sound financial planning. Instead of focusing on credit products, banks should offer unbiased advice and guidance to their clients. Before agreeing to any financial obligation, take the time to understand its impact on your financial and mental well-being. Build a long-term relationship with a personal banker or financial advisor who will act in your best interests, rather than the banks’.

Do You Have Overdraft Protection?

Surprisingly, most customers are unaware that they have overdraft protection until they carefully examine their account activity. Many people pay for a service they never use, sometimes for years. It is important to remember that you are under no obligation to sign up for any service you do not want. Financial institutions are prohibited from forcing you to purchase unrelated products in order to obtain another product, according to the tied selling laws in Canada and the United States.

The Key to Avoiding Overdraft Protection

To maintain a budget and avoid incidental costs that accumulate over time, it is essential to steer clear of additional services that incur fees or charge interest. The first rule is to always keep your account in a positive balance. While this may sound simple, it is not always easy. Examining your transaction history will allow you to understand how and where you are spending your money. Sometimes, overdrawing your account can be as simple as bill payments not aligning with your paycheck. A quick solution is to contact your bank and align the due dates of your bills with your pay schedule.

Another cause of shortfalls in an account can be frivolous spending. By carefully reviewing your account history, you can identify where you are spending your money. While people tend to be conscious of large purchases and essential bill payments, smaller expenses often go unnoticed. Make sure to tally up all your coffee and fast food purchases. They may seem insignificant individually, but collectively, they can push your account into the negative.

Additionally, be diligent in finding pre-authorized payments. Without checking, you may be paying for a long-forgotten gym membership or a canceled subscription to a service you no longer use.

Remaining Alert

No matter how diligently you manage your money, there will always be scenarios that are out of your control. To stay informed, both financial institutions and financial software packages like Mint.com offer the option to set up alerts. These alerts can be sent via text, phone, or email to notify you when your account is low on funds or an unauthorized debit takes place. By receiving these alerts, you will have a chance to correct any errors before they lead to further financial problems.

Going Old School: Using Cash

Using cash is an effective way to avoid account shortfalls. Based on the information you gather from your transaction history, create a cash budget for each week. This way, you will always know that a certain amount of money will be in your account to cover bill payments. Unless you review your transactions daily, you will unconsciously spend more when using a debit card compared to using cash. Another strategy is to avoid pre-authorized payments. By collecting all your bills and paying them individually, you can gain a clearer picture of your financial health. However, ensure that you are diligent about making your payments to prevent any negative consequences.

Emergency and Reserve Funds

Instead of relying solely on a single checking account, consider opening a companion savings account. Commit to depositing at least 20% of your paycheck into this account. Not only will this help limit your spending, but it will also provide a financial cushion in case of a budgetary miscalculation or bank error. Make sure you can transfer money between your accounts via an ATM or online banking. By doing so, you can quickly replenish a low or overdrawn account without incurring costly overdraft protection fees.

Conclusion

In summary, practicing good money management starts with taking responsibility for your spending and carefully monitoring what comes in and out of your checking account on a monthly basis. Once you understand the problem, you can make adjustments to fix any issues and create a backup plan that protects your hard-earned money. By following these guidelines, you can avoid additional credit debt and safeguard your financial stability.

(Photo credit: Fees in Wooden Letters via Shutterstock)