Over the past 8 years, I have met with hundreds of bankruptcy candidates. While they each have a unique story, they also share many common problems. On average, I would estimate that the average bankruptcy client spends about $3000-$4000 per year on overdraft fees, most of which could be easily avoided with a little planning. Imagine what you could do with an extra $4000 this year?!
Some banks charge as much as $35 per overdraft. A $5 coffee can end up costing you $40 if you’re not careful. Here are three tips to help you eliminate those nasty overdraft fees.
When asked, most people will tell me that they ‘have’ a budget. But what most people actually have is a loose and amorphous idea about what they spend each month. Unfortunately, this idea is usually not consistent with reality.
Humans, with all of their highly evolved cognitive abilities are masters of deception… and most often they learn only to deceive themselves. You can tell yourself that you’re budgeting, but the proof is in your wallet.
Simply put, a budget is a master plan for your finances. You cannot spend more than you have; if you do, you end up in debt and inevitably, bankruptcy. Budgeting ensures that you spend within your budget, and allows you to limit your discretionary spending so you can accumulate savings.
To create a budget (1) create a ‘money in’ list; (2) create a ‘money out’ list; (3) compare; and (4) adjust. For convenience, use monthly figures for both ‘in’ and ‘out’, since most expenses are paid once per month; this will make Step 3 (comparison) easier.
Money In = The money you currently receive on a regular, recurring basis. This is most likely your ‘net pay’ or the money you take home from work, after taxes and other deductions. It also includes social security and pension benefits, income from rental of property, child support and alimony, and pretty much anything else that puts cash in your bank account on a regular, recurring basis. Occasional or one-off payments might technically be considered income, but because you do not receive them regularly, you should not include them in your budget.
Money Out = The expenses you currently pay on a regular, recurring basis. For example, rent, utilities, insurance, food, and pretty much anything else that takes money out of your pocket. You should not include expenses that are paid by others in your household. If you have expenses that are paid less often than monthly, calculate the monthly cost first. For example, real estate taxes are paid every 3 months; take the total and divide by 3, to come to the monthly cost.
Compare = If you have more ‘money out’ than ‘money in’ you have a problem. If you have more ‘money in’ than ‘money out’ you have a surplus.
Adjust = If you have a problem, you have to take a closer look at your ‘money out’ column and reduce or eliminate some expenses. PRO TIP: Start by reducing or eliminating the non-essential items like expensive cable packages, large cellular data plans, and eating out (that means ‘cheap’ eats and food delivery, too).
If you have a surplus, you need to plan ahead for how you’ll use it. You should always put a portion of your surplus aside for savings. If you have an emergency, you won’t have to rely on credit cards AND if you link a savings account to your checking account, you can avoid overdraft fees since overdraft will come from your own savings, instead of the bank (for which they charge fees). PRO TIP: You should set aside 10-20% of your ‘money in’ for savings each month. This will also ensure that you have enough cash on hand when those less frequent payments (like real estate taxes) become due.
However, a portion of your surplus can be designated for ‘discretionary’ spending. Discretionary spending is any non-essential expense, including luxury and convenience purchases. For example, hair and nails, alcohol and cigarettes, and going out to social events (like dinner or the movies). PRO TIP: You should set a daily or weekly limit for discretionary spending and carry this amount in cash; when the cash runs out, so does your spending. Using debit cards makes it more difficult to track your spending.
Either way, you cannot spend more than you have unless your goal is to build DEBT instead of CREDIT. You may have to sacrifice some of your discretionary spending, but it is the better option in the long-run.
Don’t ignore your bank statements. With online and mobile banking, there’s no reason not to know exactly what is going on with your account at all times.
Get in the habit of reviewing your bank activity on a daily or weekly basis. If you set a daily/weekly spending limit (which you should), check to make sure you have stayed within your budget. If you spent over today’s budget by $10, that means you have to make up for it tomorrow.
If you notice that your balance is low, and you’re still a few days (or more) away from your next paycheck, you may have to make further adjustments. However, now you will be able to better predict when an overdraft event may be coming, and can take steps in advance to avoid it.
Now that you’re reviewing your bank activity regularly, you are empowered to make overdraft fees a thing of the past.
For example, reconsider automatic bill pay. While it’s wonderfully convenient, and avoids forgetting to make a payment, it is one of the biggest reasons that overdraft fees occur. You might be only $5 short for your car payment, but that can cost you as much as $35 if that payment overdrafts your account! Certainly, you don’t want to miss something as important as a car payment, however, if you know in advance that you will come up short, you have time to plan and adjust.
Call your lender and ask for an extension. Most lenders will grant a 5 or 10 day extension with no fuss at all. If that’s not an option, transfer funds from your savings. If your savings won’t cover it, ask a friend or family member for help. Then, immediately repeat step one (budget) and make the necessary adjustments to avoid this problem in the future.
Certainly, not all overdrafts can be avoided. However, if you carefully budget, stick to your budget, and build savings, you will have an arsenal of powerful weapons aiding your financial security.
Even though I am 100% confident that my plan will eliminate overdraft fees, I also understand that sometimes, life happens. Unexpectedly you have a medical emergency, your car breaks down, your job cuts your hours, you or a household member becomes gravely ill or disabled. Sometimes, no matter how much we plan, debt cannot be avoided.
When that happens, it’s quite often impossible to recover without help. Bankruptcy is merely a 10-letter word for HELP. The law provides relief to people who need it. Bankruptcy offers a second chance and a fresh start, and it’s easier than you think.
Eligible filers can eliminate 100% of unsecured debt in as little as 4 months (unsecured debt = credit cards, medical bills, payday and personal loans, repossessions, lawsuits/judgments)
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