The crash of 2008 was supposed to be a wakeup call to the dangers of negligent lending and irresponsible credit use. Yet, financial institutions continue to sell naïve customers on expensive credit products like overdraft protection. Sold as an “essential” account add-on, Overdraft promises to protect clients for overdrawn funds on their account.
In a recent article on Time.com, Martha C. White writes about the $30 billion in profits American banks have made from overdraft fees in 2011.
“Once overdrawn, customers are subject to high interest rates and outlandish fees. For some customers the deficit is a permanent and damaging fixture in their account, setting themselves up for larger and more destructive financial issues..”
Avoid the fees and exorbitant interest rates that accompany short-term credit products by being better prepared for account shortfalls.
Solid Financial Planning
Financial institutions need to reorganize their priorities. Instead of focusing on credit products, banks need to emphasize sound financial planning and offer unbiased advice to their clients.
Sadly, a simple inquiry at a bank can result in an undisclosed credit check, an offer for a pre-approved mortgage, and unsolicited preapproved credit card offers. Never agree to take on a financial obligation without taking the time to understand its impact on your financial and mental well-being.
Protect yourself by developing a long-term relationship with a personal banker or financial advisor that is acting in your best interests, not the banks.
Do you have overdraft protection?
Remarkably, most customers are unaware that they have overdraft protection until they take a closer look at their account activity. For some, it can be years before they realize that they are paying for a service they never use.
Remember, you are under no obligation to sign up for any service you do not want. This includes any products that the bank wants to bundle with an account opening or credit offer. Tied selling laws in Canada and the United States prohibit financial institutions from forcing you to buy an unrelated product in order to obtain another product.
The key to any budget is avoiding the small incidental costs that can accumulate over time and ruin your financial projections. This means that you have to avoid any additional services that are going to cost you fees or charge you interest.
The first rule, is always keep your account in a positive balance.
While easier said than done, examining your transaction history will allow you to see how, and where, you are spending your money. Sometimes, the reason for overdrawing your account can be as simple as bill payments not aligning with your paycheck. A quick solution is to call your bank and make sure your bills line up with your pay schedule.
Other times, shortfalls in an account are the result of frivolous spending. After examining your account history, it will be apparent where you are spending your money. People are conscious of the large purchases and the essential bill payments, but smaller expenses seem so insignificant that you fail to consider them when examining your spending. Once you tally up the coffee and fast food purchases, you can see how they can push your account into the negative.
Most importantly, be diligent in finding pre-authorized payments. Without checking, you may be paying for a long forgotten gym membership or a cancelled subscription to AOL’s dialup service.
No matter how diligent you are about money management, there is always going to be scenarios that are out of your control.
Both financial institutions and financial software packages like Mint.com allow you to create alerts that will send you a text, phone, or email message when your account is low on funds. Besides low fund alerts, you can also program some of these services to alert you to unauthorized debits from your account. Therefore, allowing you a chance to correct an error before a payment comes out.
Going Old School
Using cash is a great way to avoid account shortfalls. Based on the information you gleam from your transaction history create a cash budget for each week. This way you always know that a certain amount of money will be in the account to cover bill payments.
Unless you are reviewing your transactions on a daily basis, you will find that you will unconsciously spend more with a debit card than you would with cash.
Other strategies include avoiding preauthorized payments. By collecting all your bills and paying them one by one, you can gain a clearer picture of your financial health. If you choose to go analog, be sure to be diligent about making your payments. Otherwise, a missed mortgage, insurance or vehicle loan payment can have devastating financial ramifications.
Emergency and Reserve Funds
Instead of opening a single checking account, open a companion savings account. Dedicate yourself to putting away at least 20% of your paycheck into the new account. The account will allow you to limit your spending, and give you a financial cushion in case of a budgetary miscalculation or bank error.
Make sure you have the ability to transfer money between the accounts at an ATM, or through online banking. At any time, you can sure up a low or overdrawn account with the appropriate amount of money and avoid the need for costly Overdraft protection.
In order to serve as a proper reserve or overdraft account, you need to maintain a months’ worth of mortgage, insurance, and loan payments.
In summary, good money management starts with taking responsibility for your spending and controlling 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 and allows you to avoid any additional credit debt.
(Photo credit: Fees in Wooden Letters via Shutterstock)
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