How do you deal with overdraft fees?

“Bob” emails me his frustrations with managing his checking account:

I just got hit with an overdraft fee and I’m really annoyed. I regularly check my account online but this time a check cleared unexpectedly. It was a check I wrote a couple months ago and forgotten about.

How do you deal with situations like this or avoid them altogether?

I love this email because it shows why balancing a checkbook monthly is not good enough. Most of us need more information on how much money is available to spend. There are three ways I manage my checking to avoid paying fees like overdrafts.

1. Ask the bank to waive the fee

This one is common sense but it bears mentioning. Banks or other companies often waive fees to good customers. Why? It’s because good customers are costly to acquire. Think about it—if a bank like Chase can offer $200 for you to sign up, it has to make more than enough money to make up for that. You have the power when negotiating fees, so use it. In my experience, 90 percent of the time a single phone call will solve the problem.

In the remaining 10 percent, it pays to be persistent and know you have a good chance of getting the entire fee waived. Companies don’t always offer the full discount right away hoping you’ll bite. If you get a low offer, reply that you are not content and ask them what else they can do to give you the full refund. You’ll be fine if you work on the principle of being reasonably unreasonable.

Bonus tip: Make a note about the call, including the time you called, who you talked to, and the stated resolution. If you don’t get what you were offered, you’ll have your own record to ask again.

2. Have your own tracking system

This is good advice in general. While your bank keeps track of money, there can be errors. I once was credited a few dollars less on a deposit for no explicable reason. This error persisted to my monthly statement. I noticed it because I tracked my transactions and the bank quickly fixed it.

It doesn’t really matter what you use. For many years I used a paper check registry. Then I switched to a password protected spreadsheet. Commercial software is fine too though not always necessary.

Tracking puts you in touch with your spending and you avoid the most common mistakes, like writing a check a day or two early.

3. If you can afford it, keep a little extra on hand

It’s not great to keep boatloads of money lying in a low-interest checking, but having a little extra can save you plenty of headaches. Not everyone can afford this option, but I highly encourage it to busy professionals. Most of them would rather avoid fees in the first place than have to spend time arguing to remove them.

Many people worry that they are forgoing interest on the money that’s “lying around,” but this turns out to be a small concern since many savings accounts don’t offer high rates. An extra $1,000 has the potential to earn a $30 in a savings account with 3 percent interest. And the interest is taxable so it really amounts to even less. Plus, there are other reasons to keep some extra money in a checking account, like being able to pay for unexpected expenses or invest in business opportunities.

I supplement this recommendation with my own method about how to track a checking balance. I don’t actually try to keep a real-time account. Instead, I keep a tally of how much money I think I have to spend. This boils down to two rules:

–subtract expenses when they occur, whether cleared or not

–add deposits only when they clear the bank

This is a safe method because you’ll always have more money than you think.

I keep track of my account at the beginning of each week and after every transaction. By the end of the month, most things have posted so it’s easy to reconcile when I balance my books.

Here are some examples of the system:

–check to roommates (subtract right away)
–transfers for investments (subtract right away)
–automatic deposits of his paycheck (wait until clears bank)
–payments to credit cards (subtract right away)
–cash withdrawals at ATMs (subtract after it occurs)
–depositing rebate checks (wait until clears bank)

This is easy to do in a spreadsheet if you make a new entry each time you do something. Here’s the basic bare-bones template that I use:

But use whatever tool you want. The most important part is keeping up you’re your transactions. If you have many, you might consider commercial software.

You can download the template at the Financial Tools Page. Be sure to password protect the file.