Yesterday, I received an email from a reader named Lauren. Here’s what she had to say:
My husband and I have excellent credit scores (his 820, mine 814) but he does something that I am uncomfortable with. We are both very good savers, (age 56 and 55) he has his own business, I work and we have owned our home free and clear for about 12 years ($900,000). He has set a goal of saving $1 million dollars for retirement (we are at $800,000) within the next two years. To that end he has $1,000 pulled from his monthly check before we have paid the first bill. Three times in the last 7 months I have been greeted with an overdraft notice.
He pays them very quickly so the fee is not my problem. I feel we are not being responsible in using the overdraft protection in this way and not for emergencies only. I want him to stop putting $1,000 in savings and after paying our bills he can put what is left in an account. We contribute the maximum to our 401(k)’s and he has a profit sharing policy at his firm.
First of all, I’ve got to give a bit of congratulations to Lauren and her husband. They have their heads on straight. A credit rating in the 800s is an indication of a long period of taking one’s finances seriously, as is a nice nest egg that will enable you to retire and not worry about it. Plus, I can’t even imagine owning a home with a value of $900K. Congratulations to the two of them, and the fact that someone in that strong of financial shape would ask me a finance question is a true honor.
Now to Lauren’s problem. The problem here isn’t the automatic deduction; that’s one thing that they’re doing right. By deducting it right off the bat, Lauren and her husband are making sure that they’re never tempted to spend it; it’s not even a part of their functional budget.
The problem is actually communication, and it’s one that happens time and time again. An overdraft occurs when (a) someone is actually trying to spend money they don’t have, or (b) some piece of information is not properly communicated between two parties. Given Lauren’s financial shape, it’s pretty safe to rule out the first one, so we’re left with option b.
There are two ways to fix this problem: one is an easy band-aid and one is harder. The easier solution is to simply add a buffer to the account, and this is what I suggested to Lauren. I suggested that she add $1,000 to the account from some other source and never add it to the ledger. This way, if an overdraft occurs again, it will appear on their ledger but not cause an overdraft notice and the related fee.
The harder solution is to sit down and really examine what is causing these overdrafts to occur. In almost every situation, the root of the issue is a miscommunication or a misunderstanding of where the money is going; either Lauren or her husband spends some money and doesn’t appropriately record it, then the other one assumes there is enough money and spends it on bills. This may lead to a frank and painful discussion, but in the end, it will often fix the problem over the long term. For some people, this may be the preferred path, but in the case of Lauren and her husband with their history of great financial management, I am mostly convinced that it is simple forgetfulness, and thus the buffer is probably the best choice for them.
If you have a financial issue you’d like to discuss with me, I’d be happy to answer your questions (unless they get too overwhelming) – and I won’t post your email without your permission! Just check my contact information and ask away!