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How to Avoid Overdraft Fees

How to Avoid Overdraft Fees


    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.

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    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.

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    Overdraft Protection

    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.

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    Be alert

    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.

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    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.

    Conclusion

    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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    Last Updated on September 2, 2020

    How to Set Financial Goals and Actually Meet Them

    How to Set Financial Goals and Actually Meet Them

    Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

    In this article, we will explore ways to set financial goals and actually meet them with ease.

    4 Steps to Setting Financial Goals

    Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

    1. Be Clear About the Objectives

    Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

    It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

    Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

    2. Keep Goals Realistic

    It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

    It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

    3. Account for Inflation

    Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

    Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

    For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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    4. Short Term Vs Long Term

    Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

    As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

    By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

    How to Achieve Your Financial Goals

    Whenever we talk about chasing any financial goal, it is usually a two-step process:

    • Ensuring healthy savings
    • Making smart investments

    You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

    Ensuring Healthy Savings

    Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

    This is the focal point from where you start your journey of achieving financial goals.

    1. Track Expenses

    The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

    Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

    If you’re not sure where to start when tracking expenses, this article may be able to help.

    2. Pay Yourself First

    Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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    Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

    The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

    Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

    3. Make a Plan and Vow to Stick With It

    Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

    Nowadays, several money management apps can help you do this automatically.

    At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

    Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

    You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

    4. Make Savings a Habit and Not a Goal

    In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

    Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

    • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
    • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
    • If you go shopping, always look out for coupons and see where can you get the best deal.

    The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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    5. Talk About It

    Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

    Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

    6. Maintain a Journal

    For some people, writing helps a great deal in making sure that they achieve what they plan.

    If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

    When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

    Making Smart Investments

    Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

    1. Consult a Financial Advisor

    Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

    Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

    2. Choose Your Investment Instrument Wisely

    Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

    Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

    As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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    3. Compounding Is the Eighth Wonder

    Einstein once remarked about compounding:

    “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

    Use compound interest when setting financial goals

      Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

      Start saving early so that time is on your side to help you bear the fruits of compounding.

      4. Measure, Measure, Measure

      All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

      If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

      Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

      The Bottom Line

      Managing your extra money to achieve your short and long-term financial goals

      and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

      More Tips on Financial Goals

      Featured photo credit: Micheile Henderson via unsplash.com

      Reference

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