What is an example of a financial penalty for exceeding the balance in a checking account?

An overdraft fee is a financial penalty that occurs when an individual spends more money than they have available in their checking account. This situation can arise from writing checks, using a debit card, or making electronic withdrawals that exceed the available balance. When the account goes into a negative balance, the bank covers the transaction, but charges a fee for this service, which is called an overdraft fee.

This fee compensates the bank for the risk they take when allowing transactions that exceed the account balance. Such penalties can vary by bank, but they are a common consequence of not keeping track of account balances and can add up quickly, leading to significant costs over time for those who frequently overdraft. Understanding this concept is crucial for effective money management, as it underscores the importance of maintaining a budget and monitoring account activity to avoid unnecessary fees.