Dave Ramsey Says Overdraft Protection Doesn't Really Protect You. Here's Why He's Right

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KEY POINTS

  • Overdrafts occur when you try to take more money from your bank account than you have.
  • Overdraft protection is intended to save you from paying costly fees.
  • Dave Ramsey doesn't believe overdraft protection actually protects you, and it's better to change your spending habits to prevent overdrafts.

Don't count on overdraft protection without reading Ramsey's advice.

If you try to take more money out of your bank account than you can afford to based on your current balance, your bank may allow you to do that. But this will come at a cost. You will likely get hit with overdraft fees, which can be very expensive.

Finance guru Dave Ramsey has warned about these fees, indicating on the Ramsey Solutions blog that banks made more than $11 billion on them in 2019 alone. Obviously, this is a major cause for concern for many, since paying your bank a big fee when you already have insufficient funds is the last thing you need.

Many banks do offer a service called overdraft protection, but Dave Ramsey warns that this often isn't all it is cracked up to be. Here's why the finance expert doesn't believe overdraft protection is actually protective.

This is Dave Ramsey's problem with overdraft protection

According to Dave Ramsey, overdraft protection "doesn't really protect you" for one simple reason. This type of protection typically ends up transferring money from another linked account, such as a savings account, in order to cover the shortfall when too much money is withdrawn from your bank. And Ramsey believes that's a bad thing.

"The more money you take from your savings, the more likely you are to start racking up minimum balance fees," Ramsey warned. "And the less money you have to spend if you have a financial emergency."

Overdraft protection may also come with ongoing fees for the service, so you'll end up paying your bank even if you don't end up needing the protection. And banks may limit the number of overdraft transactions that are protected against before the fees come back, or even revoke your protection and close your account entirely if you end up overdrafting too often.

What does Dave Ramsey recommend instead of relying on overdraft protection?

Instead of signing up for overdraft protection, Ramsey suggests that you simply change your spending habits to make sure that you never get hit with these fees.

"The only way to truly avoid overdrafts is to control your spending. Because the truth is, children do what feels good. Adults come up with a plan and follow it," he advised.

Now, the reality is that some people do get hit with overdraft fees not because they spend frivolously, which Ramsey suggests is one big cause of them. In some cases, life necessities do lead you to taking too much out of your bank account. And Ramsey acknowledges that can happen. "Now, we know sometimes overdrafts happen when you're trying to pay bills. We get it. Making ends meet is stressful, and bank fees don't help," the Ramsey Solutions blog reads.

However, even for those who do tend to run short of money, Ramsey believes his solution of limiting spending will work. "You can still take control of your money and create a budget that works for you so you never have to pay an overdraft fee again," he said.

Following this advice to make a budget and live within your means is definitely smart both to avoid overdrafts and to improve your overall financial life. But, if you think mistakes may still happen, it may also be a good idea to open an account with a bank that doesn't charge overdraft fees at all. That way, if things do go wrong, you still won't get hit with an added fee that only makes your situation worse in the end.

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