January 2015 is over. Gone, and forever, never coming again. But why is it that when it comes to our finances, we tend to keep replaying the same weary new year’s resolutions like it’s still 1999. Like last year or the year before, are you about to ask yourself again where your savings plan went? Or like most people on planet Earth, did the plan to even get a plan in the first place fail you? Overcoming a mountain of debt once and for all sounds royal, but perhaps you keep finding yourself royally broke. If you or someone you know should be shaking their head right about now, stop the nonsense. A proper financial do-over is never overdone. It’s not magic; it’s not even sexy or mystical, but it works. Fortune 500 corporations do it, governments do it and even that smart grandmother who squirreled away a hefty fortune in her retirement probably did it a few times. And no, I am not talking about bankruptcy. (That’s another article).
Let’s face it, not all of us are great when it comes to making, managing, spending and placing money. Research published this January from the Pew Charitable Trust tells us that “70% of U.S. households are facing financial strains on income, expenses or wealth.” Though we may treat it as such, money is not a naturally occurring phenomena. Not only does the adage tell us that it doesn’t grow on trees, but also we shouldn’t assume that what to do with money is second nature. The fact is, money is our creation; that’s a good thing and along with it, our financial system has created tools that we all have access to that will help us prevent making the same tired mistakes with money over and over again. So, if you are looking back at your 2015 start, and your bank statements are saying some hurtful things about you, here’s potent do-over medicine.
First Do-Over: Your Bank
This is the first do-over in the list because if you successfully pull this off, everything else falls into place so much easier. But don’t just barge into your local branch and shut everything down just yet. This may be the opportunity to re-think and do-over your relationship with your bank.
If every time you walk into your bank, you feel like you are nickel and dimed or you are pitched the latest credit card of the month, do-over. It may be time for a less thirsty bank.
Despite what your banker may tell you, free checking accounts do exist. And what we mean by “free” means no mandatory monthly charge, no minimum balance requirements, unlimited check writing, no fee direct deposit and no fee to use your debit card inside your ATM network. Do not pay monthly fees for your checking account. Be wary of “Premium” or “Elite” checking account packages that bundle a lot of products or services that you may not even use. For example, paying $20 a month for a checking account to save $100 a year on a safety deposit box is not a good option. Community banks such as First American Bank or Urban Partnership Bank, internet only banks such as Nerdwallet or Ally Bank and credit unions are good places to start looking for free checking solutions. Many institutions even offer no minimum balance savings accounts. If you prefer to bank with a larger institution such as a Chase, Bank of America or perhaps a U.S. Bank among others, make sure that you meet all of the requirements to have the monthly fees waived on your account. If you don’t meet the standards to have the fees waived, then move down to the next lowest account package. If the package still doesn’t fit, then strip your account package down to a simple stand alone checking account until the rest of your finances get done-over before your account gets over-done.
Surveying the 10 largest banks in the Chicago market, each of them offers the option to secure a stand-alone checking account without a glut of confusing extras. Make sure to ask whether you are required to buy checks or pay for debit card access. Often, the sales people that open the accounts “bundle” or “package” multiple accounts together such as credit cards, savings accounts or pre-paid debit cards. The more products you sign up for, the more fee revenue the bank can potentially make and the more money you’ll waste. For the savvy bank customer, these “extras” can sometimes be helpful tools; however, if you don’t have a plan on how to use them, these things can become money traps that nickel and dime you throughout the year.
Recognize. Though often branded as bank “products” like Nike sells sneakers and Walmart sells deodorant, banks are not just pushing products, they are opening accounts and having you sign a contract for the purpose of making a profit. These accounts track everything you do to the penny and if you don’t respect them, the contract or “account agreement” can follow you around long after you thought you ended the relationship. Yeah, they saw you at Macy’s when you thought that dress was on sale; your account kept account of that. Now you are in ChexSystems.
Do-Over: Your Overdraft
Despite that we still are essentially talking about your bank, this bank topic is so important that it deserves a do-over all to itself. By December of 2013, Americans paid short of $32 billion in overdraft and various bank fees according to the Lake Bluff, Illinois economic research firm, Moebs Services. In perspective, that’s enough to pay $11,000 to every single person that lives in the City Of Chicago and still have almost $2 billion dollars leftover to build schools.
The Center for Responsible Lending reported that online, debit card, and ATM transactions caused 78% of all overdraft fees in 2011, while only 19 percent were caused by old fashioned paper checks. For most people, the best solution is to tell your banker or salesperson to “opt-out” of overdraft coverage on your debit card which means that when you go to the store to make a purchase and there isn’t enough money in your account to pay for it, the transaction will be declined. Though embarrassing, it is less expensive than pride.
Not to be confused with overdraft coverage, overdraft protection is a different beast altogether. Some savvy consumers might find it helpful to have a spare savings or credit card linked to their checking account for that “must take that client” out to dinner event. Overdraft protection is essentially a very short term loan, but the fees are only about a third of what an overdraft would normally cost. Unless you can afford to waste money for the sake of prospecting business, stop your protection and just transfer the money from savings to checking with your bank’s mobile app. If you don’t have it, don’t spend it. Do-over, done.
Do-Over: This Time, Only Use Credit Where Credit Is Due
In March of 2009, U.S. financial stock markets fell to lows not touched since 1997. The mighty corporations that were riding that fall responded by cutting jobs and payrolls all the way down. Families by the millions felt their income get slashed, meanwhile future boarded up homes were being sold to distressed families overextended on home equity lines of credit and credit cards. This was bad debt granted by bank architects in the ‘90s who built an easy credit fountain of sorts. Back then, credit reigned. Foreclosures paced towards record highs and banks responded by cutting the credit fountain off. What resulted? By September of 2014, total 90-day late credit card and other overdue non-automobile loan bills dropped by over 51%, more than half, or about $13 billion dollars as the FDIC’s data on Past Due and Nonaccrual Assets shows this February. Evidence that if America as a whole can survive on far less credit, so can you. Unfortunately, the February 6th release of the Federal Reserve Report on Consumer Credit shows that in our post-housing market debacle era, America’s total outstanding revolving and non-revolving debt, which is basically again called bad debt, has grown approximately 20% between 2010 and 2014. Scared of debt yet? Who will bet you can beat bad debt? And nope, this article still isn’t about bankruptcy.
A primary obstacle preventing debtors from dropping debt is that persistent math of compounding interest. Bills tempt people with tight budgets to make the minimum payment. Some also feel guilty and want to pay everybody off at the same time. Don’t! Focus on the smallest debt first, regardless of who has the highest interest rate, or which creditor calls you the most. In order to salvage your credit, make the minimum payment on all of your other debt, then take any extra money and focus it on the smallest debt you have until it is paid off. Rinse, repeat and wash that debt right out of your hair. One Washington Park reader tried this method at the advice of her mother, “it worked,” they both report.
Four of Chicago’s largest ten credit card companies were surveyed. These four large institutions, like practically all credit card companies, offer hardship programs for those who persistently ask. These hardship programs will typically convert your never-ending, high-interest revolving credit card debt into a lower interest fixed-term debt. To access the credit company’s hardship division, you must qualify. If the creditor determines that your monthly income is dangerously close to you monthly expenses, but converting or modifying your debt will provide substantial relief, the creditor may offer to change the terms of the debt to make it more affordable for you. And, unlike other types of credit modifications, this does not hurt your credit as long as you stick to the agreement and make your payments on time. You will still pay the creditor all that you owe, just with more affordable terms. You will typically loose the credit line, however, and will no longer be able to make purchases on that account.
In one case surveyed, a Hyde Park-area contractor owed about $20,000 on a credit card to one of this article’s surveyed banks. He reports that after answering some detailed questions about his income and expenses, telling the creditor about his other outstanding debt and about 90 minutes on the phone, the creditor took his 14% variable interest rate and dropped the rate to about a 5% fixed rate. The creditor also converted the credit card to a fixed, five-year term. This math dropped the monthly payment somewhere between 30-40 percent. He could no longer use the credit card, just make payments only. Because he never made any late payments, his credit score actually improved particularly after the credit card was paid in full which then only took three years instead of five years. “I would have been paying on that thing for years; it probably never would be paid off if they didn’t change it.”
That contractor was me; even the professionals do-over when they can.
Sean Claiborne is a licensed Financial Advisor for Wayne Hummer Investments.
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