How to avoid insufficient funds and overdraft fees

The financial equivalent of twisting your ankle, insufficient funds—and their BFF, overdraft fees—are annoying and often completely unexpected. If you’re trying to save and spend wisely, they can be particularly frustrating as they tend to throw financial planning for a loop. If you've ever been in the difficult position of staring at your bank balance and wondering, "How much can I overdraft my checking account without risking total financial collapse?", we're here to help.

Here's the truth about insufficient funds, some info about overdraft fees, and a few suggestions that will help you navigate these pesky hurdles like pro.

What are insufficient funds and overdraft fees?

What are overdraft fees and how the heck does someone end up with insufficient funds? (Hint: it's easy to do and happens pretty often.) These twin headaches happen when the money you spend, usually via check or debit card attached to your bank account, is more than the money currently in your bank account. In a nutshell, insufficient funds means not having the dough to cover your expenses, and this mega oops is the reason that overdraft fees are charged.

This scenario can happen for a variety of reasons, from “at-the-checkout-counter” math that doesn’t add up to a store charging your card earlier or later than you expect them to. Insufficient fund problems can also happen when a deposit doesn’t make it into your account on time, or a direct deposit, like a paycheck, is less than what you planned for.

Either way, overdraft fees are frustratingly common with traditional banks. So, how do you leave these wallet-draining fees in the dust while you build positive financial habits? It’s easy with a few smart choices and tried-and-true tricks up your sleeve.

Know your financial enemy: insufficient funds

While the basics of insufficient fund issues are easy to understand—more money going out of your account than staying in—it helps to research your bank’s overdraft policies. Either request a meeting with an account representative or dig out your account paperwork and get answers to these questions about overdraft scenarios:

• How long after a transaction are insufficient funds fees applied? (This will tell you if there’s any “grace period” for getting to the bank and making a deposit to cover the deficit.)

• What amount will the bank cover if I’m short on a transaction? (You should be aware how much money your bank will front on your behalf, as auto-paying a large accidental or fraudulent charge could put you in a bad spot.)

• Is there a minimum amount to trigger the fees? (This info will help you understand if an accidental $5 charge for gas station sodas will trigger the same fees as, say, a $100 utility bill paid too early.)

• Is there a limit to the number of cascading (“same day”) fees? (You’ll need to know if one insufficient transaction will alert you to an issue or if multiple short transactions in the same day can stick you with a pile of unexpected fees.)

• What is the insufficient funds fee with your bank? (If you ever need to make your account positive after an accidental overdraft, you’ll need to know how much additional money to deposit. In most cases, this fee could be between $27 and $35 per overdrafted transaction.)

• Can I opt out of overdraft fees? (In some cases, you can ask not to have the bank consider paying your overage, which means the transaction will be denied with the vendor, but you won’t be charged an overdraft fee.)

How to avoid insufficient funds and overdraft fees

One of the reasons these fees have become such a hassle for traditional bank account holders has to do with the rise of digital banking. Decades ago, physical checkbooks and ledgers were commonly tucked in a purse or pocket, with transactions scribbled down as they were made. Today, it’s all too easy to swipe a debit card or punch in a few numbers online, making purchases in seconds. This speed is convenient, of course, but it also makes it easy to spend faster than you can mentally subtract from your bank account.

• Your best weapon to avoid an annoying overdraft fee is to keep careful track of your spending. You can do this with a physical checkbook-like register, with a smartphone app, or even just by collecting receipts from each purchase and logging them in a spreadsheet.

• Using a tech-savvy bank that has a powerful, up-to-date banking app is another way to stay on top of your finances. When you partner with a financial provider that moves at the speed of modern technology, you’ll have less to worry about in terms of late or outdated account information.

• Make use of all the spending and savings tools your bank puts at your disposal. These include linking accounts for overdraft protection, such as tying your savings account to your checking account. Be aware, however, that many traditional banks will charge a fee for each use of this service, even though necessary transfers will happen automatically once you opt in.

• Tools like paycheck advance programs can also be a lifesaver if you’re strapped for cash. These include programs like Varo Advance¹, which gives you a much-needed boost of money if the calendar is moving a little faster than your income. These typically have small fees, depending on how much you’re borrowing, and require a minimum account age and average direct-deposited monthly income, like a paycheck.

Finally, it’s important to remember that insufficient funds and overdraft fees are very common and can happen even to people who are very careful with spending and saving their money. The best way to keep your money where it belongs—in your account, and not the bank's—is by partnering with a bank that gives you the support and programs you need to stay on the right financial track.