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Avoid Overdraft Fees With a “Balance Buffer”

Written by Nickel - 24 Comments

As a followup to my recent post on the dark side of debit cards, I wanted to highlight a simple strategy for avoiding those nasty $30+ overdraft fees

Instead of letting your account balance run down near zero, create a “virtual zero” by depositing what might be referred to as a “balance buffer” of (say) an extra $100 or $500 in your account. The trick here is to treat that number as your new zero balance point.

If you think it might help, you can go so far as to ignore this amount in your checkbook register, Quicken, etc. That way, it will look you’re really approaching zero as you get close to your “virtual zero.”

Now… If you slip up and accidentally dip below “virtual zero,” respond as if you’ve truly overdrafted, and immediately bring your balance back into positive territory.

Admittedly, this is a bit like setting your clock ahead by a few minutes to avoid being late. Such tricks don’t work for everyone, but if they work for you, then run with it.

Hat tip to BG for the suggestion.

Published on September 18th, 2009 - 24 Comments
Filed under: Banking

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24 Responses to “Avoid Overdraft Fees With a “Balance Buffer””

  1. 1
    Brad Says:

    The ‘buffer’ is a great concept. In fact, I would take it a step further by trying to have a months worth of income as a buffer. This is the premise behind the youneedabudget software (no affiliation, just a happy user).

    Having a month buffer allows you to budget off what you have already earned so you’re not living paycheck to paycheck. Also, it helps to cover those unforeseen events without penalty. It is a lofty goal but well worth it. I did this over a year and half ago. Having a months buffer was probably the single most thing that has helped to smooth out my finances to allow me to focus on my other financial goals.

  2. 2
    Jo/GaelicWench Says:

    That’s what I pretty much stated in your previous post. It’s virtually the only way to avoid those fees. And knowing that is currently how the banks are making money, it’s more important than ever to keep track of transactions. They’ll get you coming and going.

    Thanks for posting this. There’s nothing like a refresher to keep us on track….(pun intended)

    Have a great weekend!!

    Added: Brad, the owner of YNAB espouses this. You build up one month’s income and then work on the previous month’s income to pay bills and necessary expenses.

    UGH! Upon posting the above, you already mentioned it. Sorry about that….well, just to let you know that I definitely understand the concept behind this. Truly important.

  3. 3
    Retirement Savior Says:

    I believe there is a way to tie your credit card to your checking account for free, so if you overdraft your account, it pulls the money from your credit card.

    While you wouldn’t want to pay interest on the CC, it would provide the buffer you are looking for.

  4. 4
    Retirement Savior Says:

    Here is an example of overdraft protection at Wells Fargo:

    https://www.wellsfargo.com/credit_cards/services/protect/overdraft

  5. 5
    BG Says:

    Also, would like to mention that you should setup an email alert on your account so that you are notified when you cross your ‘virtual zero’ boundary.

    For Bank of America users, this is done by:

    1) Logging onto the BofA website
    2) On the right side of the page, under the “Communication Center” section, click on the “Alerts” link
    3) Click on the Manage Alerts link at the top of the new page
    4) In the table, go down to the “Low Balance Threshold” section
    5) Edit that field with your email address and set the amount that is your new “virtual-zero” — mine is set to $500.

    Now, whenever your balance goes below virtual-zero ($500 for me), you should get an email alert from BofA.

    I’m sure other banks provide this service as well. (Thanks for the props Nickel).

    RetirementSaver: That link you posted to WellsFargo still shows fees: instead of an “overdraft fee”, you will be charged an “overdraft-protection fee” — same thing in my mind (though the protection fee is less, so might as well do that anyway).

  6. 6
    Kevin@OutOfYourRut Says:

    I did this for a long time. I think I need to get back to it.

    It’s also a great way to reduce concern about your balance. Just knowing you have a cushion in the account is like having sleeping money. It’s one less thing to worry about.

  7. 7
    BG Says:

    #1 Brad) That is a great idea as well. I usually “pay” my bills soon after I get them, but using the online bill pay, I set the payment date to a day or two before the bill is actually due (2-3 weeks in the future). The amount is immediately deducted from my records that I keep in a ledger. The effect is that my actual bank balance stays fairly large, probably averaging around $2,000 or so at all times, even though my ledger will drop down to my virtual-zero ($500) right before a payday.

    This does provide a very large buffer (of time) to allow me to transfer funds if something unexpected happens and I need to transfer funds. If I ever get that email alert from BofA (balance below $500), then something really serious has happened because that would mean I’m not only “overdrafting” in my virtual-zero mindset, but I’ve also killed 2-3 weeks of buffer!

  8. 8
    Tim Says:

    @Retirement Saver: You have to watch out for tying a credit card as your overdraft protection, and check to see if it charged as a cash advance or charge. If the former, you will immediately start being charged cash advance rates, which are normally max rates and do not have a grace period. This is especially important if you carry a balance on your credit card. Not to mention that if your cc puts payments towards lowest rate first, you can get into serious problems.

  9. 9
    Chris Says:

    Paste your electronic bank statements into Excel. Plot the Date(x-axis) by Balance(y-axis) and use this to identify your transaction patterns. This will help you choose your ‘zero’ mark and know what time of the month is most crucial to keep an eye on your balance, and which day to shave off excess balance and move it into savings while remaining confident that you have enough money left.

  10. 10
    Ellen Says:

    Brad (#1),
    The only thing about keeping too much of a buffer in your checking account is that it doesn’t earn interest from that account, and you could be cashing in on keeping that money elsewhere. Though I do respect the cation that this method applies, and it is the best option for some.

  11. 11
    Dan Says:

    @Tim

    You are correct on that one… I had my BofA checking account tied to my BofA credit card… and in transferring $2000 from a high yield savings to checking, I somehow screwed up and sent the money the other way. What hurt even more is that BofA charges a fee for each $100 transferred from the CC.

  12. 12
    BG Says:

    #10) A single overdraft episode could easily wipe away a year of interest that would’ve been gained by not keeping 1-month extra cash in the checking account. $5000 earning 2% interest will net you about $100 in interest — seems like when people overdraft, they are usually hit with multiple $35+ fees based on how the banks like to reorder the transactions from largest to smallest.

    It seems that is a better “investment” to keep some breathing room in the checking account, than to try to stay on the $0 razor’s edge.

    #8 & #11) also, if you use a CC for your buffer, you still have the potential to “overdraft” your CC line — if you card is already near maxed out. Potentially just transferring the overdraft fee on your checking account, to being an overdraft fee on your credit card. Of course, everyone should pay their CC’s off fully each month.

  13. 13
    Lissa Says:

    I keep $1000 buffer in the checking account. I do include it in the register and in my software. I just treat it as a 0. The goal is not to let it get below that number. It tends to happen a few times a year (like last month due to some medical bills), but as soon as it does I make adjustments to correct it.

  14. 14
    Wojciech Says:

    I used to keep a $500-$1,000 buffer in my checking as an imaginary “emergency” fund, but it was really meant to protect against overdrafts.

    Now, as many of you have mentioned, and although I don’t use YNAB software, I am working toward being one month ahead in my checking account, which would provide a nice financial and mental cushion.

  15. 15
    Jimmy Says:

    I tend to keep at least a $1,000 buffer in my checking account as well and just as an extra precaution, I keep an additional $1,000 in a savings account that is tied to the checking account. In the unlikely event that I somehow misjudge my checking account balance to the tune of $2,000, I’ll still be covered.

  16. 16
    Dan Says:

    I used Quicken and Pocket Quicken.

    In Quicken, I created a Saving Goal account call Checking buffer. I transferred a few hundred dollars into this virtual account from my checking account. The money is still in my checking account. I can check or uncheck the option to show the balance with or without the checking buffer.

    When I sync Quicken with Pocket Quicken on my Treo, my checking balance is shown without the buffer amount. But it does show an account call Checking buffer.

    If I get below my virtual zero, I transfer some money from my saving account into my checking.

  17. 17
    AVSN Says:

    I have tried this. But it seem that real world expenses always interviene.

  18. 18
    Brandon Says:

    Now… If you slip up and accidentally dip below “virtual zero,” respond as if you’ve truly overdrafted

    Get upset and deposit the shortfall and put an additional $35 in your savings account? :)

  19. 19
    Jen M. Says:

    I create a buffer by using the old round up/round down technique. As of now, I think my buffer is around…$60 or so.

    For those who do not know what it is, it means that when I pay for something, I round up to the next dollar when I record the receipt. When I make a deposit, I round down to the next dollar. (When I pay $10.15 for an item, I record it as $11. When I deposit $32.50, I record it as $32.) It’s not a lot of money all at once, but it really adds up.

  20. 20
    Jen M. Says:

    @Ellen (#10) That is why, when I have enough “extra,” I transfer it to my ING savings account. From what I understand, their interest payout isn’t what it used to be, but at least my money is earning interest. My checking account is a non-interest account, so the ING account is better than nothing.

    I could invest in CDs or what-have-you, but I prefer to have my money liquid, because I do tap that savings account for emergencies.

  21. 21
    Jen M. Says:

    I admire those of you who can do a month’s income or $500 or $1000 buffer. I just don’t have that kind of money coming in, let alone laying around.

    I do what I can.

    WTG!

  22. 22
    BG Says:

    #18) Yes, absolutely — especially if you don’t think you have a large enough buffer (but put that $35 in your checking account not savings).

    In fact, everyone who does not currently have a buffer should go ahead and pay themselves a $100 overdraft-fee right now to start your buffer. Just pretend you got socked with it from the bank like tons of people are dealing with everyday. Pay the fee to yourself now, instead of “really” paying it to the bank tomorrow, next week, next month (eventually it will happen).

    Look at the testimonial on the linked article where that unlucky guy got hit with $238 in overdraft-fees in a single day. If he had the $100 buffer, likely he wouldn’t have paid a single penny to the bank in fees.

  23. 23
    MountainMan Says:

    Take it for what its worth, but here’s what I do. Everytime I write a check, enter a debit bill, or enter an ATM withdrawl into my checking ledger, I round up to the nearest dollar and add ten bucks before I subtract the amount from the balance. You would be amazed at how fast it adds up! If you don’t have,say, $500 seed money for a buffer, try this. At some point, 3 months, 6 months etc. go online and balance your checkbook to see how much you’ve saved. Good Luck

  24. 24
    Sandaili Says:

    Are you kidding me? This is why banks like Bank of America will hold checks longer…..doesn’t matter what buffer you have if they make sure your direct deposit gets held longer and longer each time you deposit. They make sure they eventually get your account down, one way or another. This is how the banks make money.

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