Three Ways to Avoid Overdraft Fees

After I wrote the piece on how debit cards can rack up tons of overdraft fees for users, I saw this piece by Kiplinger that suggests three ways to avoid overdraft fees as follows:

• Bank at a credit union or small bank.
• Link to another account.
• Set up two accounts.

Ok, maybe I'm a bit too simplistic, but I've had a checking account for almost 30 years and have never had an overdraft charge that was my fault (I did have some when my bank went under, but that's a different story). Here's my ONE suggestion for how to avoid overdraft fees:

Keep enough money in your account to cover what you spend.

Is it really that hard to simply budget for what you need, know what you have available, and not spend more than that? I guess it must be since banks rake in $27 billion a year by covering overdrafts on checking accounts, but I really don't see the problem. Seems to me that simple, basic money management techniques would make this a non-issue.

What am I missing?

Comments

[Crystal]

Technically, you aren't missing anything. As long as you keep enough in your accounts to cover your purchases, you will not get overdraft fees (we've never had one and I've had my own account since I was 6 years old).

Are you really surprised that some people do not keep up with their balances? Basic money management is fun for me, but not everyone puts the same value on budgeting, savings, and their money...

[Drhilarius]

(1) Keep a check register. This is the #1 best way to avoid OD's
(2)Round up al purchases and checks in your register, as this will create an automatic savings buffer.
(3)Leave traditional brick and mortar banks. I have 1 brick and mortart account for check cashing. Beyond that, all of my money is online. On my cashflow accounts I have OD lines of credit, and all of my debits are posted in realtime and stay up until cleared.

[Strick]

I can't stand check registers, etc., I just let quicken download and automatically categorize everything for tracking my spending and look at it at the month end.

Since my wife and I both spend out of the same account and we don't really consult each other on anything but large purchases, we would be the prime case for an overdraw, so we keep an extra $2K buffer in our spending account over and above the monthly amount that transfers into it.

Given the $2K would only be earning a couple percent anyway (its the first piece of our emergency fund) what's lost is only about $40/year in interest, more than worth it to not bother with precise daily tracking of the account, and I've never overdrawn an account. I certainly understand how a couple using a joint account and allowing the balance to approach zero each month would have an occasional accidental overdraw.

The "email alerts" most banks offer now are also good back-ups for the slackers like me. The "linked accounts" you really have to watch out about because I've noticed many of them charge some fee for each "overdraw protection" transaction (Seems natural to me to assume "overdraw protection" means there are no penalties/fees, but that is not always the case).

[MC]

Yes, the best way to prevent overdrafts is to leave a buffer of 1-2K or so in your account (depending on your monthly spending). Because you can balance your checkbook/use Quicken all the time and still get screwed with fees when your bank inexplicably chooses to wait 10-12 days to post to your account a check that you deposited.

Like Strick, I've also noticed that "overdraft" protection at the bank is just another fee. I suppose it keeps your landlord or babysitter from demanding cash in the future if you ever bounce a check, but it's not good for much else.

I leave a buffer *and* check on my account every few days online. Haven't had a fee in years.

[billyjobob]

I have never had an overdraft fee. I always have enough in the bank(credit union actually) to cover anything I buy. If I ever thought that I might not have enough, then I wouldn't make a purchase with money I don't have. I know the banks get a lot of flak for charging overdraft fees. But the way I look at it is that they have the right. If your writing checks for money that you don't have... then your the problem.. not the bank.

[ttfitz]

I don't know that you are missing anything, but I have occasionally gotten an overdraft fee, in every case because of forgetfulness or stupidity on my part. Like the time I forgot to transfer money from my online savings to my online checking before an automatic bill pay; or the time I forgot I had set a transfer out from checking to savings and did a large transfer out from the checking to investments.

But, yeah, like you I don't understand how the "regular" sort of overdrafts you hear about happen so much.

[robert w]

Sorry, Old School here.
1 Know how much is in your account
2 Stop spending like Congress
3 Keep a reserve amount in your account but off your ledger
4 spend with CASH and you'll not pay 'overdrafts'

[Bad_Brad]

I balance my checkbook monthly and keep an Excel spreadsheet budget to the penny of income and expenses.

Even still, I accidentally bounced two checks last July when I hadn't had a chance to check things in a week or so, and my wife and I were each doing things the other was not aware of. Oops. Hadn't done that since college (and I won't tell you how many years ago that was).

It can happen to the best of us, once in awhile. If it happens regularly, there are big problems.

Lesson learned for me - better to have an overdraft line of credit. Better to pay a few dollars of interest charges on a cash advance than $60 of overdraft fees.

[Old Limey]

To quote the old British proverb, "If you look after the pennies, the pounds will look after themselves".

I fail to understand why some people will not use a check register. If you are one of those people then you deserve to pay overdraft fees, enrich the banks, and are beyond help I'm afraid. I would rather have the bank pay me interest every month even if it doesn't amount to very much. I have a Saving's account and a Checking account. It's the simplest thing in the world to move money between accounts and to check balances and activity on-line. At my CU the Bill Pay service is free and with electronic fund transfer to institutions I schedule payments to arrive the day before they are due, maximizing the interest I am earning in my saving's account.

One of the best deals around is to pay off your Credit Card in full when it's due thereby getting a free float of up to 25 days on their money while your money is earning interest.

One small but essential component of managing money successfully and gaining wealth is, avoiding paying interest except on very large purchases such as cars and homes, and not being a sucker and paying fees that are so easily avoided.

This is not Rocket Science, it's just common sense, however there are evidently many people that are either very stubborn or sadly lacking in this department.

One very handy item I have used for years is a Desk Calendar. I use it to jot down appointments, when credit card payments are due and when credit cards close for the current period. My wife also jots down appointments that she sometimes makes for me. Nothing slips through the crack this way.

[Kay Morgan]

Good tips. Another option is sign up with a bank that does not charge overdraft fees, never.

[PNCBank Victim]

What about people like myself and husband who, due to his loss of job and having to take another job making much less money, are now living paycheck to paycheck and minute to minute while PNC Bank robs us blind. If there is a direct deposit coming in today plus the cable, electric bill and car insurance (or any others)we are slammed with a $39 fee for each debit that comes in. Then, of course, all the money is gone and any other bills that were on their way in don't get paid, plus we get hammered again for $39 on each of those coming in. Although, the account wouldn't have been negative had the initial fees not been charged.

So, you have a family living hand to foot, needing every dime they earn, and a bank stealing weeks worth of paychecks from them, go figure. Oh, you'll ask why the debits are coming in at the same time the deposit comes in. So, do we schedule the payments for the day we know we'll have the money in the bank or do we keep stringing creditors out until they shut things off and we have to pay late fees and reconnection fees?

Things aren't always the way they seem and the people who are getting slammed with these banks fees aren't necessarily what the comments above have accused them of being, maybe they had A+ credit ratings and have fallen on hard times, like us. With the loss of a job comes the loss of health insurance, I bet you have no idea what prescription drugs cost with no health insurance coverage, I sure do.

[Matt Mason]

"Keep enough money in your account to cover what you spend."

Now that's just real talk!

I have said for a long time that the financial services industry sets out to make simple things complex.

Now while I do know that banks have set up ways to increase their overdraft fees and they should not be let off the hook for that... the bottom line is that anyone with a correct handle on their finances should not be in that situation.