Tuesday, February 10, 2009

Money, Get Back

The first three parts of this series covered some big-picture items: What are your personal goals? How can you determine whether a particular job will bring you there? And how can you control spending to start building up your savings?

We'll now transition from the general to the nitty-gritty specifics. In this session, we'll look at the various options available for holding on to money and paying bills.

Whatever you do, don't carry around all your money in dollar bills. If you get mugged, or your house catches on fire, it'll be gone, most likely with no way to get it back. Carry enough cash to meet your cash-only expenses, and to handle an emergency, but no more.

So you'll want a bank account to hold extra money. Generally this will be a package deal, with both a savings and a checking account. The savings account will let you earn a little bit of interest - they'll pay you money to keep your extra money in there. The checking account allows you to write checks rather than pay in cash. In the digital age, your checking account will even more often be used to make online payments. Neither of these accounts can go negative, and you'll be hit with a fee if you try to spend more than you put in.

I tend to like credit unions more than banks. There are good banks and there are bad credit unions, but in general, unions are better. Because a bank is a for-profit enterprise and the credit union is not, the credit union will always have an advantage: it may take the form of higher savings account interest rates, lower fees, or better financial stability. That said, if you find a good bank, stick with it.

How should you pick a bank? Here are some essentials:
  1. Federally insured! Look for "FDIC" for banks, or "NCUA" for credit unions. That label should be displayed on their web site and in the building's lobby.
  2. Offers traditional checking and savings. There are great online-only banks, but those aren't appropriate for daily transactions - we'll hit those soon.

Here are some really important things to consider after passing the essentials:
  1. No fees! You should never pick a bank that charges you to keep your account open, or charges you if your balance falls below a certain amount. (Note that over-limit fees are unavoidable.)
  2. No minimums! The point of an account is to move money in and out. If you have $1500 in an account, but a minimum balance of $1000, then for all real purposes you only have $500.
  3. Availability. It can be very convenient to have a branch office near where you live or work. That said, these days almost all bank business can be done online or over the phone.
  4. ATMs. ATM fees these days can be outrageous, so consider whether it will be convenient to use that bank's ATMs. If you travel frequently, how easy or hard will it be to find them in other cities? Note that some (awesome) credit unions belong to reciprocal no-fee ATM agreements, such as the Co-Op Network. This is great, because most individual credit unions have only a handful of ATMs.
  5. Web site. If you're like me, 99% of your transactions with the bank will happen online. Unfortunately, you may not be able to see their actual banking (as opposed to marketing) web site until after you open the account. Still, check to see if there is a demo available.
  6. Recommendation. Ask other family members or friends in your geographic area about who they use and how happy they are.
  7. Credit rating. This can be tricky to judge, but sites like bankrate.com do offer helpful and clear ratings for some major banks. As long as they are federally insured through FDIC or NCUA, to some extent this does not matter, but it would still be a slight hassle if the bank went under. (In modern times, this probably would mean your money being unavailable for one or two business days, after which you would be dealing with a different bank.)
  8. Rates. This is the least important factor, because any rates you can get in a traditional bank or credit union will be far lower than what you can find elsewhere. Still, because you will be keeping money in here, it will be nice to earn a little bit for it. You can even find banks that will pay interest on your checking account, but read the fine print to make sure there are no minimums or fees. If there are, walk away.

After you've found your bank, it might take a week or so for the account to get set up - or a few minutes, depending on the organization. Here are a few things you'll want to do next.
  1. Get your checks. This will probably come with your initial packet, but you may need to order them separately. If you're like me, you'll just be writing a couple of checks a month.
  2. If available, sign up for overdraft protection. Generally the way this works is that, if you accidentally spend more money then you have in your checking account, the bank will automatically make you a small loan to cover the amount. Without overdraft protection, the payment will be refused, meaning your check bounces - this will cause all sorts of problems with whomever you were trying to pay, and as an added insult, the bank will also charge you an overlimit fee. Look carefully at the terms of the overdraft protection - there may be a penalty associated, and the interest rates are typically fairly high. You don't ever want to need this, and if you do go over, pay it off as soon as possible. Still, like insurance, it's far better to have this and not need it than to not have it and need it.
  3. Sign up for direct deposit. Every job this side of day laborer does this now, and it will save you all kinds of time and hassle. Money will automatically appear in your checking account on payday, even if you're out of town on vacation or swamped at work.
  4. If appropriate, sign up for automatic bill-payment. You can typically either do this through the bank or through the biller's web site. (For example, you can go to AT&T's web site to sign up to pay your phone bill automatically.) Like direct deposit, this will save you all sorts of time: you don't need to write out a check, look for stamps, etc. For bills with a fixed cost, like $30 every month for cable, this is a no-brainer. For bills that can vary every month, like electricity, you might not want or be able to automatically pay, but can still pay online. The more you automatically pay, the less you need to keep track of. However, you will still want to look at bills even if you don't need to manually pay them, just to make sure they aren't making mistakes.

Now, you're ready to manage the money cycle! Here's roughly how it works.
  1. Money appears in your checking account, either through direct deposit or from checks you've deposited.
  2. Some money is automatically removed from your account on certain days to pay your ongoing bills.
  3. Other money is removed after you write a check or make an online payment.
  4. If you use an ATM, the cash you withdraw instantly vanishes from your account.
  5. Throughout the month, you'll put occasional charges on your credit card.
  6. Once a month, you'll pay your credit card off in full using money in your checking account.
  7. More money appears from the next paycheck, and the cycle starts over again.

When you're first starting out, you should keep a very close eye on your account, logging in to your bank's web site every few days. Keep in mind what expenses are coming up - is there enough money there to last you until your next deposit? If not, scramble NOW to correct it. This might mean transferring money from savings, depositing some cash into your account, or canceling an upcoming expense. After a while (it took me about a year), you'll be intimately acquainted with all your expenses. At this point you can get away with only logging in a few times a month, or when something unusual is happening.

One quick note on budgeting. The ideal way to manage your money is to keep track of all your income, all of your known expenses, and all of your projected expenses. This is the one way to proactively predict your cash flow rather than reactively analyze it. To budget properly, draw up a list of all your known recurring expenses; estimates for other recurring expenses (food, electricity, gas, etc.); and decide how much you will allow yourself to spend on other categories (entertainment, gifts, etc.). If you can do this, that's phenomenal, and you should keep it up. Personally, I have trouble with this kind of budgeting - partly because of the effort involved, and partly because it's still an approximation. You won't know for certain how much certain things will cost in advance, and budgeting can lull you into a false sense of security. Whether you budget or not, you should try to maintain a buffer so you don't go under if anything unexpected happens.

I have an advantage: I am generally reluctant to spend money. Some people have the opposite tendency. If they know that they have $200 in a bank account, they will feel very tempted to spend it. Here are a few things you can try to circumvent that tendency.
  1. Write out a budget. Yeah, I know I said that I don't, but even if a budget doesn't cover 100% of your financial life, you can still budget for things that you do control. For example, consider saying something like, "I'll only spend $100 a month eating out" or "I'll spend $50 a month on entertainment and personal purchases". Keep track of all your expenses, and it will be easier to say "No" when a purchase would put you over. For big-ticket items, if you want to buy something, set aside money in your budget each month. After you have saved up enough, treat yourself and buy it!
  2. Consider going cash-only. This is drastic, but if you've gotten in trouble with credit cards, can be a super effective solution. Only use cash - if you're at a store with $50 in your wallet and no credit card, then you probably won't be picking up that awesome LCD TV which is on sale. In the extreme form, cut up your credit cards with scissors. In the basic form, keep your cards in an inconvenient drawer or cupboard at home. In the gimicky form, freeze your credit cards in a chunk of ice - if you still want to buy something by the time it thaws out, it probably isn't a pure impulse purchase.
  3. Set up purchase rules. For example, "I'll wait at least 48 hours before buying any item that costs over $50" or "Before making any big purchase, I'll tell my skinflint friend Mike. If he makes fun of me or says I shouldn't be doing it, I'll pass."
  4. Change your life routines. If you're compulsively buying a donut every day as you walk to work, change your route so you aren't walking past the donut shop. If you spend too much money every time you go out to dinner with your friends, excuse yourself from those outings and invite them over for a home-cooked meal instead.
  5. Keep your goals in mind. Whenever you make a purchase, consider whether it is a necessity or something that helps you reach your goal. If not, remind yourself about how important your goal is, and how much better it will be than whatever you'd be buying instead.

After a few months of this, you'll get the hang of it. Hopefully your checking account balance stays regularly above 0, and as you retain your savings, it will grow higher and higher. Congratulations! You now have wealth. It isn't doing much for you in that checking account, so in our next session, we'll look at what you can do with it.


  1. "In the gimicky form, freeze your credit cards in a chunk of ice - if you still want to buy something by the time it thaws out, it probably isn't a pure impulse purchase."

    This made me think of the trailer to a fantastically bad movie that's coming out. Can't remember the name, but there is a scene where she does just that.

  2. Great post! Particularly interesting about what to do once you’ve chosen a bank.

    The Center for Responsible Lending (CRL) does a lot of research on lending practices including overdraft loans/fees. We’ve found that banks often automatically enroll people in overdraft programs, sometimes without their knowledge, which can obviously be troublesome.

    If you know you’ll never overdraw your account and don’t want an overdraft program, make sure you tell you bank.

    And, if you’ve been hit with unwanted overdraft fees, make sure you tell the Federal Reserve – they are soliciting comments right now on proposed overdraft bank fee regulations.

    For more information, and to submit a comment to the Fed, visit CRL’s website: http://www.responsiblelending.org/issues/overdraft/stop-overdraft-fees.html