During his four years of college, Daniel D. became all too familiar with a dreaded financial concept: overdraft. Put another way – his bank balance had a nasty habit of dipping below zero. “Before I had my mobile banking app, if I was at school I would keep swiping my debit card until they gave me that decline notice,” says Dan, 22 and a recent graduate of La Salle University in Philadelphia, Pa. “It would hit negatives or I would try to buy something that cost more than I had and that’s how I would know I was getting really low on cash.” Sometimes he would check his balance and forget about a recent transaction that wasn’t yet reflected on his account – so he would keep swiping and spending. “The lowest I’ve reached is negative $80,” says Dan.
Following bailouts from parents and the sting of bank overdraft fees (as much as $35 each time you spend more than you have in your account), he is trying harder to avoid that negative bank balance – but even he admits that he has a lot more to learn. “I’m still overdrafting once a month,” says Dan, who is currently working for a tuition and student loan management company. “It’s awesome at first to be paid every two weeks, and then right as you get your next paycheck you have no money. I’m a spender. I need to save more.”
He’s not alone. A common refrain from Dan’s friends at college when referring to their bank balances: “I’m negative, man. I couldn’t help you if I wanted to.”
In fact, America’s three biggest banks — JPMorgan Chase, Bank of America and Wells Fargo — earned more than $6.4 billion in 2016 from ATM and overdraft fees, according to an analysis by CNNMoney that was verified by S&P Global Market Intelligence. This was nearly $300 million more in ATM and overdraft fees than they earned in 2015.
Teens and twenty-somethings are among the worst overdraft offenders. “The main issue is that many young people have a hard time visualizing their future,” says Kent Smetters, a Wharton professor of business economics and public policy who also hosts the Your Money program on Sirius XM Channel 111, Business Radio powered by The Wharton School. “That leads them to consume more now.”
Add to that the fact that many teens, particularly in the U.S., are “financially illiterate,” says Olivia Mitchell, also a Wharton professor of business economics and public policy, and you have a recipe for bank accounts that regularly see red.
Here are four strategies to help you confront that negative balance and put your overdraft days behind you:
- Create automated savings so you save first, then spend. “Have your paychecks directly deposited into a higher-yield [one that earns more interest than most] online savings account,” suggests Smetters. “When you need money, you then move money from the higher-yield online savings account — which often can be done for free — to your checking account. The effort involved will help force you to only make transfers when needed.” Smetters adds that if you have access to a 401k retirement account with an employer match, you should have money taken out of your paycheck for the 401(k) to at least get the match. It’s bonus money coming directly from your employer and will double your retirement savings.
- “Learn budgeting skills!” urges Mitchell, adding that you are never too young to start – and ideally you should start in high school or even sooner. A budget is basically a tool to assess your financial situation. “The goal of good budgeting is to spend less than you earn – and to know what you are saving for,” says Zina Kumok, a personal finance blogger who contributes regularly to KWHS. Kumok, who paid off $28,000 in student loan debt in three years by getting smart about money management, advises novice budgeters to list your goals, write down all your expenses, make a plan, and talk about it with others to hold yourself accountable. Read Kumok’s Budgeting Tips to Help You Take Control of Your Money for more details. Check out the related links and related KWHS stories in the toolbar to the right of this article for lots more budgeting basics resources.
- Talk money with your parents and figure out the best plan for you. Since college or wherever you land after high school ushers in independence, make sure you’re ready for the financial decision-making that comes with it. If not, you have options, especially with the growth in financial technology. If you share a bank with your parents, you can link your checking accounts so cash transfers take only a few minutes when you get into a bind. If you don’t share banks, then consider a P2P payment service like Zelle or Venmo, which lets you send money online or through a mobile app. If overdraft is your middle name, then a prepaid debit card like Bluebird by American Express may be the best option for you. This will limit your spending to only what you have – no overdraft services provided.
- Speaking of overdraft services, buyers and spenders beware. If you have a checking account with your bank, be sure you understand what happens if you spend more than you have in your account. If every attempted overdraft costs you $35, you could quickly get into deep debt with a mere series of swipes. Some banks might even allow you to link a credit card to your account to cover overdraft fees, but that too is dangerous if you don’t have the money to pay off the credit card balance. Financial experts often recommend that you don’t sign up for overdraft protection on your bank account or you opt out if you already have it. As NerdWallet personal finance columnist Liz Weston recently told money expert Jean Chatzky: “Opting out means that if you do try to buy something your balance doesn’t cover, your debit card will be declined — but a moment of embarrassment at checkout is likely worth the high-fee alternative.”
Do you agree with Kent Smetters' suggestion that many young people have a hard time visualizing their future? Why or why not?
Does your bank account often enter the red zone? Share your story with other KWHS readers in the Comments section of this article. Why do you struggle to maintain a positive balance and to save some money?
One of the tips in this article is to talk with your parents about money and your capacity for managing your own finances. Far too often money is a taboo subject at home -- it should be discussed, but instead it is overlooked or even avoided. When was the last time you had a conversation about money at home? What did it entail? If you haven't had one, do you think you should? How would you start the conversation?