The term ‘current account deficit’ is often heard in the context of a country’s finances. However, this concept is also applicable to personal finances, and can have long-term negative effects on an individual’s personal finances. Read about the causes of current account deficit, how you can avoid a negative bank account, and ways to deal with a current account deficit.
The causes of current account deficit in personal finances –
If an individual’s current account balance is less than zero, they are said to have a ‘negative’ current account or ‘overdraft’. Banks offer an overdraft facility through their current account, allowing customers to withdraw money beyond their existing bank balance. In other words, when you have ₹1000 in your current account and you write a cheque for ₹1500, the bank lends you money (₹500) to make up the difference. In such a scenario, your account gets converted to a negative bank account. Here are the main causes of current account deficit:
- Spending beyond one’s means: Individuals who give in to impulsive spending using their current account can run the risk of current account deficit. Overspending can also be a consequence of poor or no budgeting.
- Enabling automatic payments for multiple services: In the age of automatic payments through mobile banking apps, it is easy for any individual to lose track of the services that automatically deduct an amount from their bank account.
- Inconsistent earnings: Individuals or business owners who are not salaried employees often have irregular income streams. Improper planning can lead to a negative bank account situation.
- Financial emergencies: During a financial emergency, a business owner might require immediate access to cash in order to meet certain unexpected expenses. This, too, can lead to current account deficit.
The consequences of current account deficit:
Here are the main consequences of current account deficit –
- The bank charges an ‘overdraft fee’: When the bank covers the cost of a transaction despite the customer not having the required amount in their current account, it charges an overdraft fee from the customer.
- Restrictions regarding account closure: You might not be allowed to immediately close your current account in case you have a current account deficit. The bank might ask you to pay the balance and then apply for account closure.
- Your creditworthiness is negatively impacted: Negative bank accounts lower your credit score, thereby affecting your ability to apply for loans in the future. It might also impose several conditions on your ability to avail debt.
How to deal with current account deficit?
You can handle a negative bank account situation easily by following any of the following strategies –
- Budget regularly: You can easily account for every monthly expense by budgeting regularly. Be sure to disable automatic payments for the services that you don’t require at present. You must endeavour to significantly reduce any unnecessary expenses using your current account in a current account deficit situation.
- Having an emergency fund: An emergency fund protects your savings and investments in the event of a financial emergency. You must have an emergency fund equivalent to 6-8 months of your monthly salary.
- Opt for an overdraft protection program: Banks offer ‘overdraft protection programs’ that help customers link savings account(s) to their current account(s), enabling the bank to deduct the outstanding balance from their savings account(s) instead.
In conclusion, a current account deficit situation can be resolved by opting for an overdraft protection program, budgeting regularly, and avoiding any extra expenses using one’s current account. To avoid a negative bank account situation, you should build an emergency fund before getting a current account.
