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Build an emergency savings account, and manage your payday loan needs

[May 20, 2011.]


The best way to avoid having too many payday loans is to start an emergency savings account. Starting with $25 can be a good first step, especially if you schedule automatic transfers from your checking account to your savings account with each paycheck.

You can start small. As you grow comfortable living with a little bit less from each paycheck, gradually increase the amount or the frequency of your transfers into savings. Of course, if you have any outstanding payday loans, be sure to making paying those off in full your first priority.

Overdraft fees and money management

While you are establishing a savings account, you will need to carefully plan your spending. Even the best plan can sometimes get sidetracked by a forgotten bill or an unexpected expense. When you set up your checking account, you should consider your options for overdraft protection so that you are not constantly paying overdraft fees.

The Federal Deposit Insurance Corporation (FDIC) recently published a consumer newsletter explaining how new federal regulations allow consumers to choose how they want their bank to handle debit card overdraft transactions. Traditional overdraft programs often charge $25 or more to automatically cover purchases made above the balance in your checking account. Those fees can add up quickly and put a dent in your savings plans.

Opting out as an option

Consider opting out of overdraft protection in order to avoid racking up those fees. If you try to spend more than your checking account balance, your debit card transaction will be declined.

Alternatively, you can prearrange an automatic transfer from your savings account into your checking account when the balance hits zero. However, if you don't have enough funds in the savings account, the overdraft will be denied or a fee will be charged. Some banks offer an overdraft line-of-credit loan that is triggered if your balance drops below zero, but make sure you know the interest rate and size of the minimum payments you will need to make to repay the loan.

The best plan would be to avoid overdrafts completely by signing up for email and/or text alerts that tell you when your balance is below a certain amount.

Prepaid cards or a checking account

Some consumers want to avoid the fees associated with a checking account and don't write checks for their bills, so they opt for a prepaid card to use instead of a debit card or credit card. Unfortunately, the FDIC says that these cards often have hidden fees. Your funds on the card are not protected, either, so a checking account might be a better option. Compare checking accounts at various banks and credit unions to see if you can find a no-fee account that meets your needs.

The better control you have over your money and the more you avoid paying unnecessary fees, the more you can avoid relying on too many payday loans.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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