Are Your Checking and Money Market Accounts in Sync?
Amid all the outrage about checking account overdraft fees, one fact often seems to be lost: it is relatively easy to avoid overdrafting your checking account. A money market account can help.
US Senator Christopher Dodd has announced that he is introducing legislation to curb overdraft fees. Dodd's proposal would address those fees on several fronts: it would restrict banks from allowing overdrafts without customer consent, it would limit the number of times an account could be charged with an overdraft fees, and it would rein in the amount of those fees.
Whether or not the legislation goes through, overdrafting a checking account will likely remain a costly proposition--and a messy way to manage your finances. Ultimately, you should take responsibility for not overdrafting your checking account. It is relatively easy, especially if you have a money market account as a backstop.
Checking and Money Market Accounts: An Effective Team
To a large extent, the problem of frequent overdrafts is a function of the popularity of debit cards. Debit cards are a tremendous convenience--and perhaps they are a little too convenient for some customers, because they tend to create overdrafts. In 2008, banks raked in $37 billion in overdraft fees. If you want to avoid contributing any further to that haul, there are some things you can do.
First and foremost, it is important to treat using a debit card just like writing a check--that is, record the transaction and update your balance on the spot. The reality, though, is that most people end up making some debit card transactions on the fly without updating their records, increasing the chances they will overdraft. Even if you keep track of your purchase transactions, other bank fees such as monthly maintenance fees may have drawn down your balance farther than you think. And then there are those who intentionally overdraft--these are instances in which people feel they just need the cash right away, and the consequences can be damned.
For all these reasons, it may be useful to have a money market account at the same bank as your checking account. Some banks will allow automatic transfers between the two, so that your money market account will replenish your checking account when necessary to avoid an overdraft. If nothing else, having the two accounts at the same bank will allow you to transfer money into checking quickly and cheaply when your checking account is running low.
Moreover, money market account rates are usually higher than checking account interest rates, so keeping extra money in a money market account is a better alternative than keeping the entire excess cushion in your checking account. While money market account rates may not be quite as high as savings account rates, money market accounts do allow a little more flexibility. That flexibility is useful for this type of coordination with your checking account.
Looking Further Down the Road
In addition to providing immediate relief from overdrafts, having a money market account at the same bank can provide an additional benefit. Some banks provide fee waivers for customers who reach certain threshold balances on their total account deposits, so as you accumulate money in your money market account, it can earn you a cheaper checking account.
While a money market account is a good backstop to your checking account, just don't view it simply as an extension of your checking account. After all, it is important to start to build up some savings.
Joan Goldwasser • 3 Ways to Avoid Overdraft Fees • Sep 25, 2009 • Kiplinger.com: http://www.kiplinger.com/features/archives/2009/09/overdraft-fees.html
Kathy Chu • Sen. Chris Dodd's bill would limit automatic overdrafts, fees • Oct 19, 2009 • USA Today: http://www.usatoday.com/money/industries/banking/2009-10-19-dodd-overdraft_N.htm