Banks make billions of dollars off of overdraft and late fees and other easily avoidable charges. That money, of course, comes from their customers — maybe even you.
It can feel unfair. But if you can't change the world, you can only change your actions, says economist Neale Mahoney of the University of Chicago.
Some financial housekeeping can save you from the cycle of unnecessary overdraft fees, credit card interest and high-cost loans, helping you hold onto those hard-earned dollars.
Mahoney says there are simple things you can do "which will take an hour on a Saturday afternoon ... you only have to do it once, and it's going to serve you well for the next five years."
Here's what to remember:
1. Automation is your friend. Set your bills on autopay.
Putting bills on autopay means reducing your chance of getting hit with a late fee. Just set it and forget it.
When it comes to autopay for your credit card bill, Mahoney says don't pay off just the minimum payment.
"You might end up incurring more credit card debt than you plan to," warns Mahoney.
If you're worried automated payment might cause you to overdraft your bank account, the next tip can help you out.
2. Overdraft protection is deceptive. Link your checking account to a savings account to avoid overdraft fees.
"Overdraft protection" is a supposed service offered by banks that might sound like it's something good, but it often ends up costing the consumer a lot of money.
The basic idea is if you spend or withdraw more than you have in the account, the bank will loan you the difference and charge you a fee — often around $35. But think of it this way: if you're overdrafting by just a few dollars and get slammed with a $35 fee, that's like a bank charging you a huge interest rate for a very small loan.
"The implied interest rate on that borrowing is huge, so it is not a wise way to borrow," says Mahoney. Not exactly protection.
Instead of signing up for overdraft protection, open up a free savings account or line of credit and link it to your checking account. So if you overspend, the checking account reaches into your savings account and grabs the extra money that you need.
"If you make a mistake and overdraw your checking account, that money basically gets kicked over, and so you avoid the overdraft fee," says Mahoney.
And this all happens for free — no charge. And if your bank insists on charging you a small annual fee for the account or line of credit you'll probably still be way ahead. If your bank won't let you set up an arrangement like this for free or very low cost, consider finding another bank that will.
3. Start building a buffer savings account with automatic deposits.
That savings account mentioned tip #2 is also known as a buffer savings account to economists. Annamaria Lusardi is an economist and teaches financial literacy at George Washington University. She says a buffer account can be tremendously powerful and keep you out of all kinds of trouble.
"A small buffer goes a long way to work, kind of keeping our consumption a little less bumpy than our life and our income," Lusardi says. That way when life happens — an unexpected car repair or a bigger than usual electric bill — a buffer account can cushion the financial blow.
You can think of this like having shock absorbers in your car, it smooths out the little bumps in the road. Without shocks your teeth would be rattling in your head. And without a buffer account any little problem like spending $5 more than you have in your checking account will impact you much more. Wham —$35 overdraft fee.
Of course, you'll need to make sure funds are in that savings account. Automation can be your friend there, too. You can auto-deposit part of your paycheck into that savings account every month to make sure that you've always got some a cushion. And you want to have enough to cover the unexpected expenses in life, say a $500 car repair.
4. Don't use credit cards for emergency spending.
It might be tempting to pull out the credit card for those unanticipated expenses, but Lusardi says relying on credit cards as an emergency life raft is what gets people into financial trouble.
"The best way to deal with a credit card is really use them as a method of payment, not as a method of borrowing because 20, 25 percent interest rate is a very high interest rate," she says.
Piling on that expensive interest can easily snowball into massive debt. Life Kit has strategies for paying off high-interest debt to help ease the burden.
5. If you do have an emergency, try asking your employer for your already-earned wages.
If you're living paycheck-to-paycheck, getting hit with even a few banking fees can send you down a perilous financial path. One option to explore is to ask your employer to give you some of your wages early.
"When you are stuck, I think the obvious option is to actually talk to your employer or HR and discuss that with them. There should be no shame associated with that," says Safwan Shah, CEO of PayActiv, a company that facilitates employees receiving their earned wages early.
"I doubt that an HR person would look at you and say, 'you're a loser for saying that,'" says Shah. The goal of his company is to help employees avoid much higher-cost loans such as payday loans which often effectively charge 300 percent interest rates. Shah notes even if your employer doesn't have an official protocol like PayActiv in place, it's worth asking to get your money a few days early so you don't incur unnecessary fees or debt.
"You've earned it. If you need it, you should be able to access it," says Shah.
6. Balance transfer checks can help with high-interest debt but read the fine print.
A balance transfer allows you to transfer your credit card balance with a high-interest rate onto another credit card with a zero introductory rate. Usually, there is a low cost for transferring the balance over to the new card.
This can be a good option to save a lot of money in interest, but it's not without risk. You need to make sure you're able to pay off the new lower interest rate card during that introductory rate period. Mahoney says consider putting this new credit card on autopay so you don't miss a payment. Sometimes missing even one payment can make the rate jump.
This financial housekeeping isn't always fun, but work that helps get you on a path to free you from financial stress.
"The objective of saving is not to have savings," says Lusardi. "This is a happiness project. The objective is to have freedom."
Bonus tip: If you're struggling to pay your mortgage because of the current financial downturn, call your lender and ask to be put on a forbearance plan. Be sure to ask what happens once that forbearance is over. Some mortgage lenders are telling people they can skip payments but then requiring the lender to make a big lump sum payment in a few months.
The key is to tell your lender you want to just shift those payments to the back end of your loan term.
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The audio portion of this podcast was produced by Alissa Escarce and Meghan Keane. The story was adapted for digital by Meghan Keane.
This story originally published on January 14, 2019.