Overdraft fees are the amount you pay for the “courtesy” of the bank allowing your payment to go through when the funds were not available in your account to cover the payment. If gone unnoticed, these fees can rack up very fast. At an average of $30 per transaction, 4 transactions could result in $120 worth of fees in one day.
If you have a good track record with your bank, chances are you can get the overdraft fees waived, but a better idea is prevention. Here are some steps to avoid overdraft fees altogether:
1.BUDGET. Find a budgeting system that works for you. Do NOT rely on the available balance as shown by the ATM or online banking. These do not always give an accurate amount nor account for pending transactions. Consider using a debit card register to track your purchases and hold your receipts.
2.BUFFER. $100 is the new $0…or whatever amount you want your buffer to be. Do not allow your account to drop below that amount. Treat that amount like zero. So if my buffer is $100, when my balance says $100, I don’t spend anymore.
3.Use an envelope system and avoid daily use of the debit card. Pay your bills online, then withdrawal enough cash to disperse between the categorized envelopes. Categories include: gas, food, misc, etc. When the cash is gone from that category it’s gone! You can move money from another envelope, but discipline yourself not to make another withdrawal unless it is an emergency.
4.Opt out of the overdraft service. Of course, this means that you run the risk of being denied at the counter. Would you rather pay $36 for coffee or deal with the inconvenience / embarrassment of having a transaction declined? Personal preference.
5.Use overdraft protection by linking your checking account to a savings account. Some banks will still charge an overdraft transfer fee, but it is usually a fraction of the overdraft fee.
6.If available, set up low balance threshold alerts. Most banks offer this service. If you set a buffer (see #2), you can set a low balance threshold slightly above your buffered amount to let you know when you are near your spending limit.
UPDATE:
7. As some have pointed out in the comments, the title says there are 7 ways. I pulled the last item off the list at the last minute for a future post. I’d love to hear your prevention ideas, whether it be a new way to save or using quick payday loans instead of suffering the NSF charge if you know you are going to overdraft.
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No one mentioned my favorite way to prevent overdraft fees… close your account and move all your savings and investments to either a credit union or online bank that doesn’t charge criminal 3,520% overdraft fees (while stating your reason for leaving loud enough for everyone else to hear as you leave). If enough people did this, such fees would soon be but a faint memory. One person, two feet – use them.
@Shawanda –
It’s always better to transfer the money yourself than to have to pay an overdraft fee! That’s a lot of juggling but sounds like you have a system in place.
@Patrick,
How does the buffer system mean less interest? What am I missing here?
Yeah, the 7th was pulled for a future article…good catch!
Kyle,
Your right, in fact, success in personal finance can probably be summed up as “spend less than you earn”
The 7th was removed after it was posted…it is going to be it’s own post in the future.
Thanks for stopping by!
Kita
The alerts / buffer method works best for me as I am always in my email. There are enough measures that we can implement so it shouldn’t happen, but banks are still making plenty of money from them so I guess it is a matter of discipline and implementation.
Nice list of ways to avoid overdraft fees. Setting up alerts is the one I use the most. I set it up so I am alerted when my account balance is at my buffer balance which you mentions. These are also easy to set up so there is no excuse why you should have overdraft fees.
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