Constant Overdraft A Warning Signal

How do you know if you are at risk for money problems?  The obvious answer is that if you are getting constant collection calls and are threatened with court action you have money problems, but for most people there are many warning signals long before court action begins.

overdraft protection is a warning sign of debt and money problemsA better indicator of future money problems is something much more common: constantly dipping into your overdraft protection on your bank account or worse, bouncing cheques because you don’t have enough money in your account.

“Overdraft protection” is exactly what it sounds like: it’s “protection” for unexpected circumstances, like car insurance is protection for an unexpected car accident.  Your overdraft should not be your primary source of funds for paying your bills every month.

Ask yourself this question: do I dip into my overdraft every month?  If the answer is yes, you are at risk for future debt problems.

I commonly meet with people who use their overdraft between paycheques, and when they get paid instead of putting money in the bank, all it does is bring them back to zero in their bank account.  That’s very dangerous.  Your paycheque should give you the funds necessary to pay your bills until your next paycheque; it should not be used entirely to pay down your overdraft.

I recently met with a person who had a $1,000 overdraft.  Her paycheque is $1,200 every two weeks.  On the day before payday her bank balance is very close to fully over drawn, or negative $1,000.  Her paycheque is deposited to eliminate the overdraft, but then she uses her overdraft to pay her rent and other living expenses, and the cycle repeats every payday.

I advised her to take immediate steps to get off the financial treadmill.  I suggested she start by setting a goal of cutting her spending by $100 per week, so that by next payday instead of having an overdraft balance of $1,000, she would only be $800 “in the hole”.  If she could continue on that pattern after 10 weeks she would be back to even.  As it turned out it took her 14 weeks to get back to even, but she did it, and she told me it was a great feeling knowing she was not relying on her overdraft to live.

Now she gets her paycheque and uses that money to pay her bills.  By saving money on overdraft charges and interest, she was even able to build up a few hundred dollars of extra cash in her bank account, so now she has cash to use for emergencies.

If you are constantly using your overdraft you may be heading for money problems, so take steps today to reverse that trend and put yourself on a solid financial footing.

Category: Debt Management |

Jul 30, 2014

About J. Douglas Hoyes

J. Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a Licensed Insolvency Trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada's largest independent personal insolvency firms. As an expert in debt management, Doug has been helping people deal with debt for more than 20 years.

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