Let’s get one thing straight: the bank is not doing you a favor by letting you deposit your money. You are doing the bank a favor. How so? Well, trust me: your local bank branch does not own a gigantic money vault into which it locks all the checks, the dollars, and the cents its customers fork over each day. The bank takes your money and invests it. Got that? The bank is making money on your money.

While your money is deposited in a checking account that earns nothing or a savings account that earns almost nothing, your money is earning money for the bank. So…why on earth would you pay for the privilege of not earning anything? Or worse yet, for the privilege of using your money that you earned with the sweat of your brow? Every time you pay a bank charge, that’s exactly what you do!

Quit that! Here’s how:

Get no-fee banking services.

The most effective strategy is to move your checking and short-term savings accounts out of the bank and into a credit union. By and large, credit unions still treat customers like customers and not like sheep waiting to be shorn. Typical of a credit union: no-fee checking, no-minimum-balance checking accounts that pay interest, and respectable interest on certain kinds of savings accounts. (Another thing to be considered about a credit union is that their loan rates generally can’t be beaten, but that’s another story).

An alternative strategy is to find a bank that does not charge fees for checking accounts. Shop around. But pay attention: sometimes “no fee” is not what it seems. Some such offers require you to keep a fair amount of money, such as $500 or $1,000, in the checking account with no interest paid to you—not the best of all possible deals, when you could be earning 4 percent on it somewhere else.

Don’t bounce checks or EFTs.

Well, okay…sooner or later even the most self-righteous among us will spend more than we have in our accounts. What to do?

1. If you have an excellent track record and your overdraft is a one-time mistake or the result of something you hadn’t planned on, call the bank and explain. Sometimes the bank or credit union will forgive fees. Just don’t make a habit of it!

2. Keep part of your emergency fund in your checking account as a cushion. I stash an extra $500 in my credit union checking account, for example, and in my bookkeeping I consider $500 to be the same as $0.00. I try never to dip into this $500 barrier between me and a bounced-transaction charge. If I “overdraw” my budget by a couple hundred bucks, I’m the only one who knows it, and in the next budget cycle I make it a point to repay the “debt” to myself.

3. Get overdraft protection. Check first that no fees are charged—here, too, a credit  union is more likely than a bank to offer terms you can live with. This is actually a line of credit, and of course the institution covers your bounced check with a loan. That loan bears interest, and so you must keep an eye on your account to be sure you repay the loan quickly. 

When my beloved employer, the Great Desert University, switched its payroll over to PeopleSoft without bothering to test the new system to see if it worked, many people were not paid at all. Others received a fraction of their regular paychecks. Sensing disaster barreling my way, I raced to the credit union and signed up for overdraft protection in the amount of one month’s pay. Mercifully, I’ve never had to use it. Even though overdraft protection represents potential debt, it may stand between you and an expensive headache if you miscalculate what you’re spending or if something happens that you don’t get paid.

4. Track every single expenditure, current and planned, against available funds. Use a program such as Quicken or MS Money or a spreadsheet such as Excel to tell you what you start out with and what you are spending, as you go. Keep receipts, and once each week—or even once every few days—enter your expenses in your records. In addition, at the start of each pay cycle, enter the typical amounts you have to spend from that paycheck, such as rent or mortgage, utilities, savings, and insurance. Then change them to the current month’s amounts as the bills come in. This is crucially important. You can’t know what to spend and what not to spend unless you know how much you have in your account at any given time. Because the bank’s online records tell you only what you have spent—not what you still have to spend—a visit to your banker’s online site may not tell you how close you are to overdraft. 

This account, for example, contains funds to cover my recurring expenses and the occasional surprise such as car repair, plumber’s bills, and veterinary charges. Except for the annoying Qwest, which will not accommodate requests to bill at certain times of the month, all my recurring bills happen after the 15th. So, on the first of the month I enter an estimate of the highest amount those bills are likely to run, dated the 15th. I enter the amount of my two paychecks, showing the dates they will be deposited. This leaves me with a view of the amount left in the account after all regular bills are paid; that’s what remains to pay surprise bills. Because I know how much will be left in the account after scheduled bills are paid, I never bounce a check or EFT transaction.

Remember, I’ve entered estimates of the highest possible amount each bill will run. The end-of-month balance that appears, then, is as low as it is likely ever to go. When the statements come in, those estimates are replaced with the actual amount for that month. In the winter, when utilities are fairly low, there’s usually a little money left at the end of the month.

5. Write a bare minimum of checks. Checks are expensive. Most banks and credit unions gouge you royally to print and ship new checks. You can get them cheaper by ordering them through various printing companies, but you still have to pay for the darn things. Try to use a credit card, a debit card, or cash instead. 

And: BIG! arrange for automatic debits for recurring bills from creditors you trust. In my case, I have the utilities, long-term care insurance, and life insurance debited through EFTs. I made the arrangements through the creditors, not through the credit union, and so I pay no fees for this service.

However, by no chance on God’s Green Earth would I allow a credit card issuer to automatically debit my checking account. Credit card statements should always be checked carefully before you pay them. Ditto the phone bill, especially if you make a lot of long-distance calls.

6. Do not use automatic teller machines. YES, I know this sounds like it comes direct from Luddite Central! But…think about it. What did Mom and Dad do before there were ATMs? I’ll tell ya what we did, kids: we didn’t pull cash out of the wall so it could slip through our fingers like sand! And we most certainly did not pay a freaking bank to let us withdraw a few bucks of our own money from which the bank was cranking a profit! Use a debit card or a credit card, if you have the willpower to do so responsibly. If you can’t keep spending under control with a debit or credit card, if you do better with cash and the envelope system, then go to the bank in person to make withdrawals. Or, for small amounts, go to a grocery store that will let you write a check for $15 or $20 over the amount of a purchase. Buy a pack of gum and write a check for $20 over the amount.

These steps should get rid of bank charges.

Next: Get out of revolving debt.

Revolving debt generally means credit-card and department-store debt. Debt siphons away your funds in two ways:

1. It commits you to paying out assets that you haven’t earned.

2. It charges you (deservedly enough) through the wazoo for the privilege of borrowing against assets that you haven’t earned.

You can’t use a credit card to your benefit until you have paid off all pre-existing debt on the card. To make a credit card work for you, you absolutely positively must start from zero each billing cycle.

So, if you still owe on revolving debt, go here to learn how to pay off the cards. Once you’ve freed yourself from that burden, consider this:

Never charge more than you can pay in a single pay period. Pay off all credit-card charges at the end of that pay period. Then you never will incur a finance charge.

No credit-card debt, no credit-card interest, no finance charges.

When you don’t have to pay a gouge to use a credit card, the card becomes a valuable tool. We’ll talk about how to use that tool in a future post. For the nonce, though, the message is that when you don’t carry a balance, you don’t pay finance charges. Since low-interest cards usually have an annual fee, get yourself a higher-interest card with no annual fee and never run a tab on it. When you pay off the card every month, you will never pay for the privilege of charging things. Not directly, anyway.

Department store and home improvement store credit cards work essentially the same as credit cards. Don’t run up charges on with these outfits. Buy only what you can pay for with money you already have.

One exception is the one-year no-interest scheme for large purchases. Here, too, I avoid using these plans unless I already have enough in savings to pay for a big-ticket item such as, say, a refrigerator. As soon as I’ve made the purchase, I put the cash to pay for it into a money market account that will safely earn a little interest. The money sits there for eleven months, at which time I pay off the bill in full. Be careful with one-year no-interest offers: if you’re one day late in paying, the lender will zing you for a full year of interest at some exorbitant rate. Remember, they’re betting that you can’t or won’t pay on time.

The long and the short of it:

1. • Do business only with credit unions or banks that refrain from gouging you with transaction fees.
   

2. • Develop banking habits that avoid overdraft and other fees.
   

3. • Use automatic bill paying instead of writing checks to pay recurring bills such as utilities, rent or mortgage, insurance.
   

4. • Pay off credit-card debt.
   

5. • Never run a month-to-month tab on a credit card.
   

This is one of Funny’s Ten Money Principles

debt, frugal habits, personal finance