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Chapter 2

Banking & Checking

Overdrafts, holds, fees, and what the bank pays you

A checking account does not stop you spending money you do not have. It lets the transaction through and charges you for the privilege — once per transaction, which is the part that catches people.

Chapter 2 · The idea

The order matters

An overdraft fee is charged per transaction that takes the balance below zero, not once per day and not once per shortfall. Three small purchases past the line cost three fees. The arithmetic is nothing; the trap is that the fees are usually far larger than the purchases that triggered them.

Figure 2Each step is a purchase; each drop below the line adds a fee. Change the starting balance or the fee and watch how little of the damage is the shopping.
Chapter 2 · Worked problem

Leo's expensive Tuesday

The problem
Leo's checking account charges a $35 overdraft fee per transaction if his balance drops below zero. He has exactly $40. In one day he buys a $50 video game, a $5 coffee, and a $15 t-shirt. What is his final balance?
Running the balance in order1 / 4
  1. The game takes him under, so a fee follows it40−50=−10  ⟶  −10−35=−4540 - 50 = -10 \;\longrightarrow\; -10 - 35 = -45

He bought $70 of things with $40 in the account, and it cost him $175. The shopping accounts for $30 of the shortfall. The other $105 is fees.

Chapter 2 · Two balances

Available is not the same as current

A bank shows two balances, and the one it charges fees against is the smaller. The current balance is what the ledger says. The available balance takes out anything pending — a card purchase authorised but not yet settled — and leaves out any deposit the bank is still holding. A cheque can sit on hold for two business days, and a large or unusual one for longer. Spending against money on hold is spending money the bank has not yet decided you have.

Hold
The interval between a deposit being credited on paper and being released for use. The money shows in the current balance from day one and in the available balance only when the hold lifts.
The problem
On Monday, Dana deposits a $300 cheque, which the bank holds until Wednesday. Her current balance now reads $500. On Tuesday she pays a $250 utility bill by debit card. Does it overdraw, and what does the account show afterwards?
Working1 / 4
  1. Current balance, as displayed500500

On Wednesday the hold lifts, the $300 is released, and the current balance reads $500 − $250 − $35 = $215. The money was always there on paper. The fee was for spending it a day early.

Chapter 2 · The other direction

What the bank pays you

A savings account pays interest, quoted as an APY — the annual percentage yield, which is the rate with compounding already folded in, so what it says is what a year actually pays. The number varies more than people expect. The default savings account at a large bank has paid 0.01% for most of a decade; online savings accounts have paid around 4 to 5% over the same period. Same deposit insurance, same money.

Interest for one year, at the quoted yieldI=P×APYI = P \times \text{APY}
The same $2,000 at two banks2000×0.045=902000×0.0001=0.202000 \times 0.045 = 90 \qquad 2000 \times 0.0001 = 0.20

Ninety dollars against twenty cents, on $2,000, for doing nothing differently except where the account is. That difference is the whole reason to shop for it.

Chapter 2 · The menu

What a checking account can charge

The fees
  1. Monthly maintenance
    Often $10 to $15, waived if a direct deposit arrives or a minimum balance is kept. The waiver conditions are the whole product.
  2. Out-of-network ATM
    Two fees on one withdrawal: the machine's owner charges one, and your own bank charges another for using someone else's. $5 to $6 combined is typical.
  3. Overdraft
    Around $35 per transaction, as in the worked problem. Overdraft coverage on a debit card is opt-in by law: decline it, and the card is refused at the till instead, which costs nothing.
  4. Everything else
    Paper statements, wire transfers, stop payments, a replacement card, an account closed too soon after opening. Each is small. The list is not.
The problem
Marcus pays a $12 monthly maintenance fee and uses an out-of-network ATM twice a month at $5.50 a time. He also keeps $2,000 in a savings account earning 4.5%. Over a year, how do the fees compare with the interest?
Working1 / 5
  1. Maintenance, twelve times12×12=14412 \times 12 = 144