We often hear that one of the biggest drains on wealth is paying fees. I can’t think of anyone who likes paying fees. For those who follow sound principles of money management, fees shouldn’t be much of a problem. After all, when you are living within your means, you shouldn’t have to worry about fees, right? No need for overdraft fees, since you never overdraw your account.
This is what I thought until a couple of weeks ago. My finances have a lot of automation to them, and sometimes I don’t go in and double check to make sure that everything is as it should be. I just assume that the direct deposit from my husband’s work will come through, and that all of my transfers to and from various places will arrive on time.
Unfortunately, that’s not how it played out for me a copule of weeks ago. A clerical error meant that my husband’s pay didn’t come as expected (it’s in the bank now, coming two weeks later than expected), and the fact that it takes three to four business days for money to move between PayPal and my bank account didn’t help matters. And in between, all of my automatic withdrawals, from the mortgage payment to the IRA contribution, all came out as scheduled. I found myself paying overdraft fees, and in the embarrassing position of going into the bank to find out if some of the fees could be waived (some of them were).
Why I Decided to Add Overdraft Protection to My Account
Up until two weeks ago, I didn’t have overdraft protection. I agreed to the “standard overdraft services” provision that allows the bank to accept transactions, and I thought that was good enough. Because overdrawing my account is not something that happens. However, with my mostly automated finances, and the unpredictability of mine and my husband’s pay (I’m self-employed and he’s an adjunct), I ran into an unexpected cash flow issue.
So I bit the bullet and signed up for the true overdraft protection for my account. Here is what overdraft protection usually consists of these days:
- Overdraft protection is a line of credit. It is treated as a revolving line of credit, so it is actually a loan. That means you pay interest on your balance. Your interest rate varies according to a number of factors, including your credit score.
- There is often an annual fee. I’m not thrilled about my annual fee, but it’s less than my overdraft fees ended up being. If something similar happens again (and I will be taking steps to ensure it doesn’t), at least I’ll come out ahead. If it doesn’t, I guess the annual fee is worth my peace of mind.
- An automatic transfer takes place, sending money to your checking account, if you overdraw your account. At some banks, you will pay a small fee if this happens. If you have the wherewithal to transfer the money on your own, before it kicks in, you don’t usually pay a per-transaction fee, though you still pay interest.
So I have the overdraft protection. This situation really scared me, and I don’t want to be unprepared in the future. While I hope never to need the overdraft protection, right now it’s really helping me feel better. And, of course, I will be keeping a better watch on the account to make sure that we really have the money that we should have.
What do you think? Is overdraft protection worth it?