Chapter I: Banking, debt and credit
Rather go to bed without dinner than to rise in debt. – Benjamin Franklin
‘No’ for overdrafts
About nine years ago, I had an experience that I will probably never forget. It’s not because it was an incredible and exciting experience, but it is because my pride took a serious hit. Younger 19-year-old Lionel had overdrawn his checking account with two transactions. I spent 30 minutes on the phone with the bank customer service representative trying to get him to waive the $70 fees. As if I had some type of authority over him and as if I was entitled to get the fee waived, I even requested that he put his manager on the line so that I could complain. What a humiliating picture! How annoyed that employee would’ve been while talking to me! Here we are nine years later and I am working for that same bank. I am now the one so fed up with clients requesting refunds. It so baffles me when people deliberately choose to ‘opt-in’ for overdrafts on their checking account when they obviously struggle with money management. Millennials, my recommendation is to always ‘opt-out’. By applying the budget technique that I have shown you, you will know when the balance in your account is very low. In addition, nowadays many financial institutions offer mobile alerts for your accounts. Take advantage of what’s offered to you. If you’re not sure at the time of a purchase, simply check your balance. Why pay $35 when you overdraw your account by $2? Many consumers don’t even know which overdraft election is set up with their checking account. If you are trying to get on your feet financially, you cannot afford to pay unnecessary NSF fees. You might as well throw money out of your car’s windows while driving on the highway. Call your bank today and ‘opt out’.
Consolidate your debt
Rick and Sam, a married couple in their late 20’s, were paying over $550 in credit card bills every month. With the astonishingly high interest rates on the cards, only approximately $425 was being applied to the principal. Although they were slowly getting ahead, they hated seeing so much money wasted every month. A simple Google search for ‘0% balance transfer credit cards’ led to transferring $7500 to a new credit card with a very small transfer fee and 0% APR for 18 months. Continuing to pay $550 per month, Rick and Sam allocated more than $1800 to their credit card principal even before the promotion ended. How cool is that?! Very. This would not have happened if they kept the initial high interest credit card. For you, the solution may be getting an unsecured loan. An unsecured loan will keep your monthly payment constant. A constant payment will allow you to budget better since it does not vary month to month. In addition, you will know that by a certain date, that specific debt will be paid off.
I would like to emphasize that this option may not be appropriate for everyone. Rick and Sam had good credit scores and they were not delinquent on their debt. They had never missed a due date. To my clients who have low credit scores and bad credit history, I recommend looking for savings elsewhere in their budget. An application for a new credit card would most likely be a wasted inquiry and a potential harm for their already affected score. It is also important to keep in mind that consolidation is worthless if you are not disciplined afterwards. Make it a point to pay off your purchases or do not use that credit card at all. Rick and Sam came back to my office once they received the new credit card, chopped it up right there and did not order a new one until it had an outstanding balance of zero dollars.
Your car is paid for, keep it for a few years
When my first car loan was finally paid in full a few years ago, I decided to keep it for a while before purchasing a new vehicle. During those years, Heather and I changed the car loan payment on our budget into a transfer to our savings account. Lo and behold just a year later, we had added $3000 to our savings. The figure in our account was so encouraging that 3 years later, I was still driving the same car knowing that we had saved over $10,000 during that period. My Nissan Sentra was still in good condition and it did not require constant maintenance.
Driving a new vehicle every five or six years may be an exciting experience. However, ask yourself: Am I buying a new car for myself or because I want to have status among my friends and acquaintances? In many cases, due to the influence of social circles, people buy new cars, new phones, new electronic gadgets or new clothes to keep up with the Joneses. When this becomes your practice, it could destroy your finances. Remember that status is simply buying things you can’t afford to impress people who do not care. If your automobile is in very bad shape and needs to be replaced, it makes sense to invest into a new one especially if regular repairs become very expensive.
If you have to get a loan or set up a payment plan for that entertainment system, you can’t afford it right now
Study.com defines delayed gratification as the ability to put off something mildly fun or pleasurable now, in order to gain something that is more fun, pleasurable, or rewarding later1. We live in a society of instant gratification; a world of microwave cooking, drive-thru restaurants and Google searches. When we miss an exit on the highway, the GPS automatically readjusts to lead us to the same destination. We post pictures of new babies from the hospital because the world must know with no delay that Johnny is born. By the way, we wanted to stream his birth live but the nurse declined our request. As millennials, we have been programmed to expect everything to be immediate and available instantly. Dear fellow millennials, when it comes to money management, we must delay that feeling of gratification and exercise self-control. I counsel with clients and this is usually their thought process. When they can make the monthly payments comfortably on a purchase such as an entertainment system, they assume that they can afford it. However, the right perspective is very contrary. A major component of financial stability is having a substantial amount of savings which would cover a minimum of six months’ worth of expenses. If you are not able to save money because you must make payments on your wireless speakers, you truly cannot afford those fancy speakers now. Delay that gratification. Be patient and disciplined with your budget. I promise you that the day will come when you will purchase those speakers in one payment and still have plenty of reserves.
I sincerely wish that there was a course on delayed gratification in our schools. It will serve us all well.
Take advantage of credit unions for your lending needs
In general, credit unions will offer you a lower interest rate than major banks on loans. According to BankRate, they will also charge you lower fees than most banks2. Although they do restrain access to their services with membership eligibility requirements, many credit unions are very flexible. You may be able to qualify for membership through your employer, your school, your community, your social affiliations or through your family relations. Search for a local credit union and join even it is just to get a better rate on your car loan or mortgage.
Arrange a change of payment due date with your lender
I previously mentioned Anita, the 30-year-old music teacher and how she called her lender to change the due date on her car note payment. This is a practice to take advantage of if you find yourself struggling to pay too many bills in a very short length of time, i.e. a week or less. When Marcelo, a semi-pro soccer player had a surgery to fix a recent sports injury, he had to assume a new bill every month for the next three years. His car payment was due on the 5th and the hospital bill on the 8th. He could afford both, but just like Anita, his finances would then be very tight until he got paid again on the 15th of the month. Marcelo called the bank which owned his car loan and they allowed him to move his payment due date to the 16th, right after his direct deposit hit his checking account on the 15th of the month.
What can you do when your lender does not offer you this option? There is another solution. Years ago, while working a minimum wage job, even before I knew about the practice of changing your due dates, here is how I managed my budget. My car note was $208 due on the 25th of the month. I would make a payment of $104 at the beginning of the month and later, submit the other half after my second paycheck. This worked perfectly with my finances and I never had a past due bill.
Set up a meeting with your banker
Yes, an in-person meeting. Technology advances are molding us into the most anti-social generation, but interaction is still needed when your personal finances and future are at stake. In the several years that I have worked in the banking industry, I rarely encounter a millennial who takes the initiative to meet with me or another banker to discuss their banking and finances. Why wait until the years close to an important purchase or investment or retirement to become serious about your money? It will be too late. Remember that a champion is not made in the ring, he is just recognized there. The training grind happens when all the doors are closed and no one is watching.
You may think that your account is worthless to a banker because you only keep a few hundred dollars in it. If a banker would not meet with you for that reason, it is time to break up with that bank. Make the point to discuss and preferably to meet with a bank representative at least once a year. The objective in discussing with your banker is to identify areas of opportunities for your finances.
Have you been paying monthly service charges? Banks make a ton of profit by charging maintenance fees. In general, checking accounts are designed with requirements to meet to avoid a certain monthly fee. Whether it is $5 or $25, it is money wasted when you pay them. Find out which checking account will match your usage to avoid paying a fee and stick to it. I personally favor the ones that require a direct deposit. As long as you are working and are being remunerated, you are safe. Just make sure that you set up a direct deposit with your employer instead of receiving checks. Some accounts require you to maintain an average monthly minimum balance. Be aware that this average minimum balance is computed based on your statement cycle which may not be from the first of the month to the thirtieth. Unless, you are certain that you will maintain a minimum amount in your checking (or savings) account, go with the easier option to avoid maintenance charges.
Is the interest rate on your credit card too high? The goal is to get out of debt. While you are on your way to meeting that goal, let’s avoid throwing away your hard-earned money into the high interest rate waste basket. I mentioned earlier how to consolidate your debt. Your banker may be able to help by identifying the best solution(s).
Are you missing out on cash back rewards? If your finances are stable and in good standing, chances are that you are being offered countless credit cards. Be careful and do not fall for the temptation of accepting them all. But if you are going to select one, go with a company that offers cash back and/or other rewards. Unless you are spending tens of thousands of dollars monthly, your rewards may not be highly attractive, but you may still be able to treat yourself to a nice dinner occasionally. In my case, a couple years ago I combined the rewards on my cards and bought a DSLR camera.
Should you take advantage of promotional interest rates on savings accounts? Alright, go ahead and laugh. Interest rates on savings accounts are a joke in today’s world. I know. As a banker, I used to detest having to deal with those clients who live to rate-shop. I would work hard at convincing them to open an account with me only to see them close it a few months later and move the funds to another institution. But then I realized, it was their money and they had the right to do whatever they wanted with it. Plus, if they could get a bit more in interest elsewhere it made sense to break the relationship with me. After all, their loyalty to me would not pay their bills. Millennials, do not count on your deposit accounts for any substantial return. Nonetheless, do take advantage of rates especially when they are competitive. I have found that banks which offer online accounts usually have higher promotional and regular rates on their savings accounts. It might be worth considering.
These are just a few topics to discuss with a banker. One very important point to keep in mind is that not all bankers are equal. The quality of their advice will relatively match their experience and their willingness to honestly help you. So, if you feel like your banker could be doing a better job or is not an expert on a particular issue, take action. It is not rude to request an expert when the subject of the discussion obviously matters to you; just make sure that you are not impolite, impatient or ill-mannered.