I recently overheard someone talking about how they were hit with a bank fee for overdrawing their checking account. I don’t remember the exact amount of the charge (it was somewhere in the $30 range), and I don’t remember what bank they used. But it brought about an entire conversation about overdraft fees, what causes them, and how often (if at all) people balance their checking accounts.
Let me say that I am just amazed at how some people never balance their checking accounts.
Keeping Track of Transactions
Before going into too much detail on this, let’s discuss what it means to balance your checking account. Ideally, you should be keeping track of money coming in and going out of your checking account. Some people do this with the old-school check register (that paper booklet that comes with your checks). Other people use computer software, apps on their smartphone, an online program, etc. Your bank is also keeping track of the money coming into and going out of your account, and they send a monthly statement (either a paper version in the mail or an electronic version online) that shows you everything that has actually cleared your account. Balancing your account is simply figuring out the differences between your records and the bank’s records.
Bank Statement vs. Your Records
Now, especially if you write a lot of checks, you know that there is a timing difference between when you write and mail a check and when the check actually clears your account. It may take a couple days to reach its destination in the mail, and then it may take a couple days for them to deposit the check. But basically, you can very easily have a scenario where the balance on your bank statement shows a higher balance than what your personal records show. This is a common cause of overdrafts. For example, you see that the balance on your bank statement (or the balance that shows up when you look at your account online) is $1,000. However, in the last couple days you mailed out a $200 check for your student loan payment, a $300 check for your car payment, and a $400 check for your rent. None of these checks have cleared the bank yet. So, if you look at your bank account balance and think you have $1,000 to spend, think again. After taking into account those checks that haven’t cleared, you really only have $100. If you go on a shopping spree thinking you have $1,000 and spend a couple hundred dollars, then what happens once those checks arrive and post to your account? You get hit with overdraft fees because there won’t be enough in your account to cover the checks.
I understand that many of us don’t really write checks anymore, so you may be thinking this type of scenario is irrelevant. But the same thing applies if you schedule payments online. Maybe instead of writing a check you schedule a payment online to post to your account at a future date. It’s the exact same thing: if you only look at the balance in your bank account at a certain point in time, without taking into consideration the things you’ve scheduled for a later date, you’re at a greater loss of incurring overdraft fees.
There used to be a Chase commercial where a woman and her daughters are at the mall shopping. The woman stops to check her bank account balance on her phone, sees that there is money in the account, and they continue their shopping. I always wondered what happened later. What happened when the cell phone bill went to pull from her bank account the next day, after she spent most everything that was in her account? I’ll bet she got hit with an overdraft fee.
It really is important to maintain a record of what goes into and out of your checking account (including items that you’ve scheduled for the future) and to use this when making and considering purchases. Don’t simply look at your bank statement or online balance and make spending decisions based on what the bank shows as your balance (since it only shows things that have actually cleared your account). Take into consideration the transactions that haven’t hit your account yet. At $30 per overdraft, not doing so can be a costly mistake.