I Love Overdraft Protection

"Life is about timing."
- Carl Lewis

I have previously written about how overdraft protection is a key part of my cash flow financial autopilot.

An example from a few months ago illustrates the value of overdraft protection. It was the night before we left for summer vacation and I realized that a whole bunch of bills were all going to be due within a couple of days of each other. The mortgage payment, electric bill, telephone bill, monthly credit card bill, and the bill for a new dishwasher were all due while we were gone and automatically scheduled to be debited from our checking account. Worse, the checking account had close to zero in it because we had just paid in advance for most of our vacation expenses. The paychecks to cover all this would not arrive for several weeks. This was definitely a worst case scenario.

Normally I would not even think twice about this kind of situation, as my overdraft protection will handle it properly. However, I was concerned that this was really quite a lot of money to overdraft and perhaps I should scramble to see if there was cash available in some brokerage account to quickly transfer. After thinking about it for about five minutes, I decided it was not worth spending a whole lot of effort and worry at a time when I should have been helping my family to pack and preparing to relax. I decided to simply let go of the whole matter and let the overdraft protection work as usual.

In retrospect, this was clearly the right decision. I got a good night's sleep, we left early enough in the morning to beat the traffic to the beach, and we had a wonderful vacation where I never worried about the overdraft situation. When I returned, I noticed a total of $2,700 had been overdrafted from my HELOC (Home Equity Line Of Credit) account. It took two paycheck credits (one of which occurred during vacation) to build up enough in the checking account to pay off the HELOC. As soon as the paychecks hit, I paid off the overdraft in full as I always do.

The total interest bill: $3.66!

What a deal! As I mentioned in my earlier post, with a more typical overdraft for me that occurs a few times a year, the overdraft amount is a couple hundred dollars, the full payoff occurs in less than a week, and the interest bill is usually less than 50 cents. (There are no fees of any sort for my overdraft protection, only interest charges.)

In return for a few dollars a year, I don't have to worry about the exact timing of my cash inflows and outflows. Overdraft protection is a leveler that evens out the credits and debits, preventing the possibility of bouncing a check at any time - even on vacation. On average, I pay about five dollars a year in interest for what I consider an invaluable service. In my opinion, that is practically the definition of a good deal.