Frugal Dad Forums

Hi! Is it a good idea to have an account set asside for overdraft. I am thinking of getting rid of my "Cash reserve" account becasue it's almost like having a credit card without the card and they charge %18 interest and I think if I didnt have an overdraft account then I would probably spend less money and end up saving more.

Danielle,

I once had a friend that had an overdraft account, she also had another account which would automatically deduct 'x' amount from each paycheck for a "Christmas Fund" (almost like escrowing). Anyways, she was excited that her bank did not charge her anything to perform these services, and she continued to use them. Personally, I don't have the need to do this, but that is because I feel comfortable managing my own money. For example, when I purchased my house, I was offered an escrow service, which would 'pay' my taxes throughout the year by increasing my mortgage payment. (In reality they're taking my money and having the ability to steal interest I could be making on it and calling it a service). There was a fee associated with this service, but it would ensure that all taxes were covered at the end of the year. This service is offered because people have a common problem of overspending and not rationing money for their taxes when it comes due, and the banks know this -- and use it to make additional money. But, for me, I would much rather pay myself that money and set it aside (making interest) rather than paying for their service and losing any possible associated interest, even if it's only 1%.

Now, Overdraft protection? I would certainly agree with your statement "...if I didnt have an overdraft account then I would probably spend less money and end up saving more." If you have to know how much you have in the bank before you spend it, you become much more cautious about how those expenses are accruing.

But, if you don't plan on changing your spending habits, then you will end up shooting yourself in the foot by removing it. So think it through before you go through with any changes.

-Jon

We have set up our own overdraft account - we put $1000 into the account and pretend it is not there. So if the balance in reality in $1500, in our minds it is just $500. It takes some discipline to get used to, but it can be done. Since doing this over 15 years ago we have never bounced a check. But as was mentioned before, you have to be willing to know what in in the account on an ongoing basis and adjust your spending habits.

Here are a couple of other things you could do to help with overdraft:

Set up alerts on your accounts to let you know that your account has reached the minimum you like to have in your account
Set up automatic transfer from another account when your say checking account reaching a specific amount

These are just some other ways to can set up your account without having a cash overdraft account.