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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 January 21, 2020

    How to Develop a Millionaire Mindset in 6 Simple Steps

    How to Develop a Millionaire Mindset in 6 Simple Steps

    We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

    It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

    How do you go about developing that millionaire mindset? By following these simple steps:

    1. Focus On What You Want – And Take It!

    So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

    Millionaires play to win, not to avoid defeat.

    This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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    2. Become Goal-Orientated

    It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

    Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

    Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

    Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

    You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

    If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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    If you are to become a millionaire, you need to start accumulating money.

    Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

    3. Don’t Spend Your Money – Invest It

    The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

    Stop working for your money and make your money work for you.

    Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

    There’s not just the stock market — there’s also property, and your own education.

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    4. Never Stop Learning

    The best thing you can invest in is yourself.

    Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

    Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

    Learn everything you can about how economics works, how the stocks markets work, how they trend.

    Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

    Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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    5. Think Big

    While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

    There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

    Aim for the stars, if you fail you’ll still be over the moon.

    6. Enjoy the Attention

    To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

    Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

    If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

    Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

    More About Thinking Smart

    Featured photo credit: Austin Distel via unsplash.com

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