Going Overboard

Dear Dr. Per Cap,

I’ve been stung with some charges to my bank account for occasionally spending more than I have in the account. These “overdraft” costs really foul me up. How can I avoid overspending my checking account so I don’t get charged these extra fees?


Dear Dinged,

I remember once when I was younger I wrote a check for an ice cream cone – $1.75. I still remember that number because my check bounced and I had a $30 overdraft fee. $31.37 for an ice cream cone – no ice cream is that good!

There’s a lot of information about ways to avoid overdrawing your bank account and incurring those stiff bank fees. I’ll summarize some approaches here.

First, if you consistently overdraw your account you are probably living paycheck to paycheck, and that’s not a good thing. You need to take control of your finances as best you can.

One way to start is to be sure to write down every expenditure you make in your checkbook register if those funds are coming out of your bank account. This includes any checks written on that account, any debit card transactions that are linked to your account, and any automatic payments that are withdrawn from the account. A few times a month, take the time to subtract expenses in your register and add any deposits, so you always have a fairly up-to-date idea of exactly how much money you have there. And, each and every month, take the time to fully reconcile your checkbook register when you receive your monthly bank statement. It’s a chore, but it really helps keep track of how much you have.

With that knowledge, you need to be disciplined enough to NOT overspend your account. If you know you only have $40 left in checking, don’t write a check or use your debit card for something costing more than that. In fact, it’s always a good idea to leave a bit of a “buffer” in your account, too. And don’t try to guess at the timing of when a check might clear your bank or when a deposit might be made. A wrong guess could trigger overdraft fees.

If you don’t have overdraft protection, your debit card will likely be “declined” if you are over your limit. That can be a little embarrassing, but it’s better than incurring the extra fees. Checks, however, are a different story.  Your check might be accepted even if you don’t have enough funds in your account, but it might “bounce” and incur a fee for the overdraft or “insufficient funds.”

A couple of other ways to avoid overdrawing your account:

  • Alerts – Some banks allow you to set up automatic “alerts” when your bank balance falls to a certain amount. These are usually texted to your phone or emailed to you. You can decide on the level that triggers the alert.
  • Linking Accounts – You can “link” your checking account to a savings account. That way if you overdraw your checking, it will automatically pull the funds from your savings account. There still might be a “transfer fee” between accounts, but those are generally lower than overdraft fees.

Finally, if all else fails, you can try the “envelope budget system” where you carry a fixed amount of cash in envelopes that are designated for specific categories, such as groceries, gas, bus fare, entertainment and so on. Once the cash is gone, you are done spending. Period. And then you avoid getting dinged!

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. This content does not constitute professional and/or financial advice, and Dr. Per Cap is not a licensed investment advisor. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.