Wednesday, November 4, 2015

End of the Overdraft

It is estimated that Americans spend $24B every year on overdraft fees. That is humongous!  H&R Block is only offering to find you $1B and yet there is so much more just being tossed away by citizens not being good stewards of their resources. I absolutely hate overdraft fees and other penalty fees charged by our financial institutions but I understand they can't just cover my lack of discipline without a cost.  Recently, new products have begun to enter the market that allow you to transact business but don't allow you to incur an overdraft. Thank you to the loadable debit card to save us from overdraft fees. A loadable debit card allows you to access your money at stores by swiping it like any other card and doesn't allow you to go negative. 

Finally a product that will save us from ourselves. Now when I am out of money I HAVE to stop spending and that can be a good thing. If I can't discipline myself, a product can do it for me. It's kind of like those meal plans dieters can purchase so they know how much and what they can eat. 

There is a huge downside to debit cards like this. They don't generally have a mechanism for saving money. At the end of the month, if it didn't spend it all, it is there for the next month. I never start building any significant assets for that next emergency, to repair my car, to pay for college or to make a down payment on a home. You have to specifically establish a savings account and earmark money to go to it. Ideally, deposits to savings should come right off the top when you get paid through automatic deposit from your employer. Savings accounts have been around a long time and are so under appreciated, especially in an era of low interest. The beauty of the savings account is not that it puts interest (though it is great when you can get it). The beauty is that it is separate from the monthly spending. You remove some of the temptation to dip into the funds when they aren't right there in your transactional account. 

This week the Department of Education issued a ban to bank accounts offered on campus that have high fees and overdraft features attached to them. Too much of student loans are now channeled into paying for overdraft fees. This sends a clear signal that government is not afraid to exercise its influence to protect consumers from their own mismanagement. I wish the same kind of energy were devoted to equipping people to manage their money well and have more choices rather than fewer. It is only a matter of time before financial institutions create new fees so they can pay their staff and stay in business. The cost of operating the bank didn't go down because of the ban and consumers are not more informed because of it. Students will continue to do foolish things, it will just be some new enterprise benefitting. It is the nature of youth and the lack of training that will ensure this practice continues. 

Commercial enterprise has thrived by offering people more options and more choices. It shouldn't be the role of government to save us from ourselves, but if they want to get involved they should equip citizens with information and skill development so they never have to be victim of a scheme and they keep more money for themselves. Power to the people.