This is still the time of the year when people are trying to make changes, whether you made a resolution or just want to improve an area in your life. Most of these changes revolve around weight loss or financial independence, getting a handle on your debt. I took on the January Money Diet, and while not perfect it has shown me where I tend to spend my money. There is one thing I don’t hear people talk about avoiding to get control of their finances.
We hear talk about credit cards and the interest rates we pay on them, late fees, cable bills, cutting down the minutes on our cell phone plans….but the most expensive extra charge I know is Overdraft Protection.
Sure your credit cards could be eating up a large portion of your paycheck paying for things you purchased, and upwards of 20% interest (or more), but have you thought about what happens when you over draw your bank account with over draft protection?
Let’s say you are even 50 cents short on your account, your bank will pay your check, or debit transaction and charge you a minimum of $36 dollars (which is what my bank charges, but other banks in the area charge as much as $50). You are now out the $36-$50 plus what amount you overdrew your account by.
Using an example of a credit card with $500 balance with 20% interest you will pay $100 in interest. But what if you have a balance of $1.00 you will pay .20 in interest. Which is cheaper, the credit card or the overdraft protection?
Rather than accept overdraft protection, I leave a few dollars over what I need to pay my bills and take the rest out of my checking account. I keep some money on hand, because it’s pretty hard to over spend when you don’t have enough cash, and give myself an allowance.
What do you do to stay within your budget?
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Life In A Minimalist Farmhouse 
Hmmmm… overdrawing my checking account is something I have actually never done. For some reason early in life I had the fear of God put into me that the world would come to a screeching halt if I ever did it, so I just never have. My technique is actually a bit complicated.
I have 2 checking accounts and a buffer savings account all at the same bank. The “big” checking account gets all of my income automatically deposited into it (well except for the part that goes to a different bank for savings – but that’s another story) and all of my bills are paid automatically out of it. I keep a fairly big buffer in that account (like at least a thousand dollars) and I have reminders set up in Microsoft Outlook to check the balance before my monthly credit card bills are automatically paid in full (since the amounts on those can vary with circumstances) and transfer money from savings if I need to. The checkbook and bank card for this account never leave the house unless there’s some REALLY good reason. I set it up this way because I had my purse stolen once and had to close the account and then re-do all the auto deposits and payments and it was an ENORMOUS PITA (pain in the arse.)
Soooo… I have another small checking account with a debit card that I use for any shopping that doesn’t go on the credit card (I use my Discover card for anything I can to get the cashback bonus.) I don’t use it often, but some stores like Costco and Savers (one of my favorite thrift stores) won’t take credit, and cash is dangerous for me (if I’ve got it, I spend it.) So before I head out on a shopping trip to one of those places I check the balance on that account and transfer money if need be.
That’s my crazy system and it works for me. I’m going on 10 years now with no credit card late fees, and I’ve never EVER had an overdraft fee! 🙂
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I’m glad that works for you, it would confuse the heck out of me. I have my money deposited into one checking account, then transfer what I want to save. Since I have my bills down to two and neither of them will do automatic withdrawals I need to write a check or pay in cash. The allowance for myself is always in cash, but when I leave the house I only take what I am willing to spend that day, and nothing more or like you I would easily spend it.
I too had the early lessons about being smart with my money and would have had to face real hell if I ever over drew my account. It did happen once when I forgot I wrote a check, but was lucky as the bank called and asked me if I wanted them to take it out of my savings. I was very thankful for that phone call. Since then I have always gotten checks with a duplicate copy, although now I probably don’t need it any more and will more than likely switch back to just a single copy when I need to order more.
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“Enormous PITA” is an awesome expression.
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Yes, Laura it is.
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EcoCatLady, you make a brilliant point that the debit card, attached to your main checking account, is in a precarious position when it leaves the house. I never thought of the consequences of having it lost or stolen. My bank, USAA, allows quick online account set up for as many accounts as one needs (with no real minimums), so thanks to you I just set up another checking account so that I can put a small amount of cash in that account and use it for emergencies in which only a debit card will work. I will only take that debit card out of the house, not the one attached to my main checking account.
For simplicity sake, I can manage online (and iphone) all account info electronically so there’s not too much extra work year end to save those digitally. I think I will also use this account for Paypal, since I do not like them (or bill payees for that matter) to have access to my entire checking account at anytime. I can just do a quick online transfer for Ebay purchases before I do Paypal online. It is worth the extra step to not have my main checking account confirmed on Paypal (I’ve had problems with that before-I’d be careful using Paypal as a savings account as they can block it with no notice and make your money inaccessible for long periods of time).
Also, while we’re sharing, I’ve set up multiple savings accounts (same bank, same online access) so that whenever a paycheck is auto-deposited, I can transfer online for various saving purposes into the various accounts. I even nicknamed them with that the amount that I need to transfer from each paycheck actually in the title. I’ve got those individual accounts labelled “savings,” “college,” “property taxes,” etc for each category that I need to save up for during the year. I do believe my dog could handle my finances with this simple system. 🙂 Hope that helps someone and thanks for the great ideas.
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Tessa, I wanted to add something here on the Paypal. I had been selling items on Ebay several years back. When I moved I stopped all my online activity as I wasn’t going to have internet for a while. Then I began to have all these strange calls from numbers I didn’t recognize. I don’t usually answer my phone if I don’t know the number, and they never left a message. Finally one day fed up with the calls I answered it. Turns out someone hacked my Paypal account and had been using my debit card number for online purchases. It was a mess, to say the least.
The important thing that came out of this (other than I was stuck paying this off myself) is that people are smart, if they submit a purchase as a point of purchase, the bank has to honor it, even if you tell them the number is stolen and stop the card. I tried to close the account and open another one, but was told even if I opened an entirely new account, if it still had my name on it, they would have to take the money out of the new account to pay off the charges. It was a nightmare to say the least.
The point here is to never link your main accounts to anything online. If possible for online purposes use a separate bank so your other accounts can’t be used to pay off spending you didn’t make.
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Awareness of what is going outwards as expenses is an important consideration when taking control of money. It is a cashflow issue, the ability to control the cashflow dependent on knowing what is going out and will be about to go out at any one time. Keeping records and checking the financial statement against receipts an individual can then ask themselves if an expense can be avoided or reduced by a different process. It is amazing what savings I can make by shopping around for good deals on food.
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Isn’t that the truth, Alex. So many just want NOW what they want, if they can use credit and any type of opportunity to have it now they will use it and not look at the consequences. I am in need of a canvas drop cloth, something simple, yet it’s surprising how vastly the prices vary on that one item as I shop around instead of buying the first one. Food is something as well where you can save a lot if you price check and buy from a couple different places. My favorite for staples is a bulk food store run by the Mennonites, their prices are unbelievably low compared to the stores.
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Many high street shops in UK use similar suppliers, all they do is change the brand name on the product then charge what they like which can vary considerably. Shopping around is important. Looks like you have got a good process going for controlling your finances.
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I never heard about changing the brand name on a product before, but I’m sure it’s done here too, if someone can think it, they will do it.
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You would be surprised how common this practice is.
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I paid my credit card off and cancelled it. Now I have oodles of extra money for therapy (shopping). Best thing I ever did.
AV
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I had two credit cards in my life, I paid them off close to 12 years ago and got rid of them. I too use just what I have coming in and don’t allow myself to go over a set amount of spending. It’s actually a freeing experience not to dread the credit card bills arriving in the mail and trying to plan which week to pay them.
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My ex-husband overdrew his account at least twice while we were dating, and I loaned him money so he wouldn’t incur a charge. With his bank, you had 24 hours or something to replace the money that was overdrawn to avoid a charge. Oddly enough, this was never a red flag to me.
Our joint account was overdrawn a few times.
Ugh. No more joint accounts in the future. I’m off joint accounts. And possibly husbands.
To make sure I don’t go over budget, I just check my bank account before I make any big purchases. I keep a cushion in there so I always have wiggle room. At the beginning of the month, all my bills are due (rent, car, insurance, three loan payments, and phone are all due between the 1st and the 15th) so I have to make sure that the “rich weeks” when the money just sits in the bank are kept safe to pay those bills at the beginning of the month again. I also put over 10% of my pay into a savings account, and income from my freelance career sits on PayPal as a backup savings. I have had to live off my credit card and my savings account before, so I do my best to keep a decent bit of money in savings for emergencies!
It helps that I am paid weekly. My mom is paid biweekly so we always had “rich week” and “poor week” growing up. The week she got paid, for instance, we were able to get pizza for dinner on Friday, or get new clothes for school if we needed them, etc. But we learned not to ask for things during “poor week” because we needed the money for bills. (We learned to ask “Is it rich week or poor week” first, haha).
My dad gets paid on the first of the month, for the whole month. And he doesn’t budget well at all so he’s broke at the end of the month, every month. Everyone handles their money differently.
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I like your “rich week, poor week” I was there at many points when raising my boys. I always had a list of things we needed and had to put off till pay day, on pay day the boys also got an allowance ($5 for the month) to buy something they wanted. My eldest would spend every penny of his money as soon as he got it, my youngest would hold on to his money and when he saw something he wanted he would ask me to buy it for him. When I would tell him it had to come out of his money, he would usually decide he didn’t want the item as much as he wanted the money. In the end, he would hold that $5 until his next allowance before spending it to always have $5 on hand. Guess who can plan better as an adult for expenditures. I am convinced that how we spend is ingrained in our DNA rather than learned. Some people just need to spend, others need to know there is a cushion.
I’m sorry you had to learn that people need to be compatible with money to survive marriage, but at least it sounds like you won’t make the same mistake again, which is good.
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I made a lot of money incompatibility mistakes. I’m ashamed to admit I put him on my credit card as an authorized user and he definitely abused that privilege 😦
I talk to my current partner about money and savings and spending a lot. He has some credit card debt but no student loans, so his “debt footprint” is actually smaller than mine, dollar-sign wise. Cheeky bugger got one of those affordable British educations.
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Lol, I believe we need to have these life lessons to form our opinions of what works for us. Ah a British education I hear it’s much better than what is available either public or private in the US
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He says a bachelor’s degree in Britain is the same as a master’s degree here. Having a M.Ed. I’m mildly offended by this!
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Don’t be too offended, I understand their high school is so far ahead of ours. I’ve lived both here in PA, where universities first began and in the southwest. The degrees you earn in the Northeastern part of the country mean more than what you can earn in most of the southwest. For instance, my youngest son checked out some classes at the university in Phoenix and said it was easier than what high school is here in PA. I firmly believe we learn more outside of school and it’s up to us where we go in life with everything we can learn from life and school.
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Very true!!
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Regularly checking and categorizing my expenses on Mint keeps me (mostly) honest. I use my credit card for almost all purchases, because it’s easier for me to track exact expenses on Mint that way, and because I make good use of my credit card company’s cash back policies (to the tune of a few hundred dollars last year). That said, I pay the card off in full every month.
There were a few times in grad school, though, when I overdrew my checking account. It’s an awful feeling, especially when you can least afford it.
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From the comments it has shown me that we all come up with a different way to balance our money and our expenditures. For instance I don’t like using checks and would rather use a debit card which shows up on my online statement immediately. But I have switched to cash because it saves the local stores money and because I can see the money making it more real when I see the funds dip lower which keeps me from spending. As long as it works for the person is the point.
I’m sorry you had problems in grad school. I think that’s the main problem with overdraft protection, it’s the people on fixed or low incomes who get caught up in it. Once you have that overdraft to deal with you have less money on the next payday which causes you to either cut spending (when you may have a hard time finding what to cut) or continue to incur more fees for the overdrafts trying to keep your head above water.
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I never personally overdrew a bank account. My ex , well that was a different story. ugh. My bank doesn’t charge for overdraft. I have 100 leeway for that thanks to the bank, but I’ve never had to use it. As for carrying cash, very rarely do I. Here in Canada we use our debit cards for just about everything! Our debit cards can only be used with a pin number, so if it got stolen it’s no good without the pin. I hate shopping, so overspending is not an issue with me. ha! Well unless I’m in a book store. 😉
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Boy do I wish that were the case here! Here anyone can use a debit card, you simply ask to have it run as credit instead. No questions asked.
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Baby steps here. I am very proud not to have any late payments of bills for past 6 months. Rarely if ever overdraw an account.
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Baby steps is the best way to start. You should be proud of your accomplishment, so many people can’t say the same in this economy.
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My utilities used to be late out of simple procrastination. My credit card because I just didn’t want to look at it! I do some online shopping, and it adds up quickly!
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Okay, my bills were never late because I was afraid of opening them, there were entire years where we struggled so I would be late having to push bills around to be paid from this check this week, or next weeks. It was so bad I hated to even get the mail.
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Oh, I’ve been there too. I had four children and we all lived on my husband’s nice, but single, income. He picked up overtime when he could, but there were days when I got very creative with the food and bill paying!
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I think we’ve all been there, unfortunately I think it’s going to be even harder for the young parents today, things are so much more expensive than when I was raising my boys, I wouldn’t know where to begin today to cut those corners. For us it was eating lots of potatoes which I could buy 50 lbs for $5. Today you can’t find 5 lbs for that price.
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My mom used to talk of eat onion sandwiches when her onions grew in the garden and giving any meat to her boys and my dad (I wasn’t born yet).
I find a lot of the young people don’t know what to do with dry beans or rice, or how to cook certain vegetables. If it doesn’t come in a freezer bag with instructions, it’s foreign. Pre-processed food is expensive!
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Did your mom do it because she loved the onion sandwiches or because things were tight and she was trying to save the meat for the family? I love onion sandwiches, although I enjoy it best with mayo which isn’t the healthiest.
I agree, young people weren’t introduced to many of the whole foods that had been staples to past generations and it’s a shame. My youngest son’s best friend when in middle school begged me to teach him how to cook because if it didn’t go in the microwave he didn’t know how to make it. His mother wasn’t happy when he began asking for certain items to be added to the grocery list and let me know it was a pain having a child who wanted to make his own food. She never saw that it was actually cheaper to let him make these whole food meals than a package of easy mac, and precooked hamburgers every day.
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I never saw her eat onion sandwiches, so I’m guessing she didn’t care for them. She also ate cucumber sandwiches when things were tight, and I know she liked those. So do I!
Working in a food bank, I know it is getting harder and harder for (especially) the metro food shelves to give out the raw whole foods. Frozen convenience foods go like hot cakes!
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Our local food bank gives out a lot of processed foods as well, not much in the frozen variety I know it’s hard for them to keep perishables for long and when they tried to add things like dried beans no one wanted them even when they attached recipes to the package, it was too foreign to them, like you said.
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