Imagine a society where everyone makes enough money every month to pay all their bills and they even have some cash left over. Gone would be the endless fights between husband and wife over which bills to pay, which child they should buy shoes for, which financial crisis to address first. Couples would have to figure out something else to fight about every evening after they’ve both put in their ten hour day. The phone wouldn’t ring continually every night with gruff, mean, degrading bill collectors on the other end of it. Neither of them would lay awake at night worrying about how they would ever get ahead. Come Friday, they might not even remember that it’s payday because they have enough cash flow so that they aren’t living paycheck to paycheck.
Why isn’t this going to happen any time soon? Well, I’m glad you asked. Our economy is extremely dependent on folks like you racking up debt and falling behind. Even if you don’t fall behind, you still pay thousands of dollars every year in interest just to keep your head above water. You don’t believe me? Think about it. How many people in our society are employed by companies that directly benefit by you stretching yourself in to as deep of debt as possible? Let’s see here. Banks, credit card companies, payday loan companies, bill collectors, pawn shops, and I’m sure there are plenty of others that I haven’t mentioned that are benefiting as well. Millions of jobs are dependent on you keeping yourself in debt, and going farther and farther in to debt. If we all lived within our means, our economy would have to change. All the people that continually hammer you to take their credit cards would have to figure out something else to do. The bill collectors would have to become bounty hunters. The payday loan companies would have to shut down and maybe reopen as casinos. They’d probably make just as much money that way. Credit card companies would have to loan all their money to the federal government at lower interest rates instead of charging you 18%. (I mean come on. Even in this fantasy we aren’t going to get rid of the government’s debt any time soon.)
Last time I checked, Americans had an average credit card balance of about $8,000.
So, if each American paid an average interest rate of 18% on that balance each year, they would be paying $1,440 a year just in interest. Boy, that’s a lot of extra money to pay simply because you chose to buy something before you could afford to pay cash. If you were to pay off that balance and then only pay cash for things, it would be like you had an 18% off sale on everything you bought, all the time. No coupons, no super saver club card needed. Now, imagine you go to a store that is offering a discount off of their regular prices. Maybe they are running a discount of 20% off anything in the store. If that’s the case, you’d be giving yourself a discount of 18% off of what you used to pay for things, plus the store would be giving you another 20% off. Holy crap! That’s a 38% discount. I know what you are thinking. What will happen to that poor old department store? I mean, not only are they giving you a discount off of their regular price, but they aren’t getting to exploit you financially as well. Don’t worry. Not everyone will do this and others will pick up the debt that you left behind.
Debt is not magic. It is real. In order for you to have all this debt, someone else had to have the money to loan you. Either the store that you charged all your purchases at, or some sort of finance company had to shell out the cash in order for you to have your goods before you could afford to pay cash for them. Where in the heck are they getting all of this money to loan you? Well, they are probably getting it from you. How is this possible? Well, let’s think about this. Do you have any money in the bank right now? It is really surprising to me to find out how many people have money in their savings account and also owe thousands of dollars to credit card companies. In some cases, they get their credit cards from the same banks that they have their savings in. Think about what’s happening here. You save money in your savings account each month because your parents taught you to. Maybe you’ve got a couple thousand dollars in there. Makes you feel good huh? The best part is that the bank pays you interest on that money sitting in there. Today, you might even get 2% interest per year. Now, that money doesn’t sit in a drawer in the bank. As soon as you put it in there, the bank loans it out. If you’re charging purchases on a credit card and aren’t paying off the balance each month, then they are basically loaning it back to youâ€¦.. at 18%. That means that they make 16% interest just because you are their customer.
The guys that are smart enough to run these banks, pay themselves extremely well because they have gotten so good at taking your money. I mean, heck, if they can manage to take 16% of your money and make you feel good at the same time, then maybe they deserve a big paycheck. The stockholders in these banks and financial institutions think highly of these leaders. Most of the CEO’s of these large institutions are paid many, many million each year. Don’t believe me? Check out the Forbes list of highest paid CEO’s. While there are lots of other companies listed, the financial institutions always have a darn good showing. In 2004, Richard M Kovacevich of Wells Fargo is listed as having been paid over $37 million dollars in compensation. They aren’t paying him all that money for his good looks. He gets paid that much because he has done a very good job at making a profit for his investors. A lot of the profit that he made came from people like you.
Take a look at a typical bank. I’m not talking about Wells Fargo here specifically. Every bank does things differently but most of them have a somewhat common theme. They want to maximize the amount of money that you give them every month. Of course they make money on the money that you invest. Like I said earlier, they pay you a low interest rate for the money that you keep in their bank, and then they loan that money out to other people and charge them a higher interest rate. They may loan this money to someone in the form of credit cards, home mortgages, home equity loans, car loans, boat loans, unsecured loans, lines of credit, etc. They’ve thought of every possible way to convince you that you need to borrow some money from them.
Another popular way that the banks take your money is through fees. The sky is the limit on the kinds of fees you can end up paying to these financial institutions. You can pay a monthly charge for each account you have with them, or pay fees for breaking their rules, or pay fees just to get access to your money, or pay fees if you make a mistake by overdrawing your account or, or, or. Here are a couple of my least favorite fees that most banks get you on:
Beware of the dreaded ATM charge. If you don’t follow a strict set of rules, the banks may charge you to use ATM machines. I’ve never understood their rationale for charging you to use an ATM machine. In the old days, if you needed money, you would go in to a bank branch Monday through Friday and stand in line to speak to a teller. The teller would have you fill out a withdrawal slip, and then hand you the cash. This was an inefficient and expensive way to give you access to your money. Nowadays, most people just go to a cash machine to get their money out. The machine never calls in sick, doesn’t require health insurance, and never talks back to the boss. Sure, it takes maintenance, and someone has to fill the thing up with money, but it is still FAR cheaper than paying people to hand you the money. Yet another whole chunk of jobs that have fallen victim to the lean efficiencies that technology has created. So, keeping this much more efficient method for dealing with their customers in mind, why are there fees to use these machines? Here’s an example: If you go to an ATM machine that is not owned by your bank and take $20 out you can end up paying over $3 just to have them spit out your money. That’s a 15% charge just to get your own money out. Now your bank doesn’t get all 15%. They split it with the bank that actually owns that ATM machine. Here’s a thought. Why don’t they just let everyone use their ATM’s free of charge? Sometimes their customers could use the other banks ATM, and sometimes the other bank’s customer could use their ATM. We’d all be much happier, and have a little more money in our wallets, err I mean in their banks too!
Checking accounts that have fees are definitely one of their favorites. Don’t bounce a check! If you write checks for more money than you have in your account, they’ll nail you. Most banks will charge you for EACH check that you bounce. Some of them even prioritize your checks each day from largest to smallest and process the largest ones first. Why? Well, if they process your largest check first and that takes your account in to negative territory, they have the best chance of hitting you with multiple check bouncing fees for each subsequent check that you bounce. If they processed the checks starting with the smallest checks, they would likely not get to charge you as many fees. Let me give you an example:
Your checking account balance: $100.00
You write 4 checks on one day:
Check #1 is for $5.00
Check #2 is for $40
Check #3 is for $30
Check #4 is for $100
If they had your best interest at heart, they would process check #1, 2 and 3 first, and then you would only bounce the last check. If they charge you a $35 fee for each check you bounce, you would have to pay them $35.
Some banks don’t do this. They opt to process check #4 first. Since check #4 takes your account balance to $0, they then charge you a $35 fee for checks #1, 2, and 3 totaling $105.
Doesn’t seem fair does it?
This seems pretty ridiculous. Don’t you think? Another one of my least favorite fees at most banks, are the â€œoverdraft protectionâ€ fees. Basically what this means is that when you do bounce a check, the bank will use funds from another one of your accounts to cover the check. The evil banks don’t do this for free. You can expect to pay upwards of $35 for this, and some banks even charge you a fee for each day that you don’t get your account back in the black!
The good news is that you have choices. You get to practice your number one privilege as a consumer. You can choose to take your money, and your business somewhere else. My personal favorite is a credit union. I have found that the benefits for belonging to a credit union make it the financial institution of choice for my every day banking needs. On average, their fees are lower and the interest rates on loans are lower. The only thing that seems to be higher at the credit unions is the interest rate that they pay you on your deposits! (Note: That’s a good thing!) If you don’t have the ability to belong to a credit union, then, at the very least, do some comparative shopping and find the bank that will offer you the best deal for the majority of your needs.
Let’s talk tax time! You worked hard all year. You paid your payroll taxes every payday, and at tax time you do the math and find out you get a tax return! That’s great. Please don’t fall victim to another pitfall that has become popular in the last few years. More and more people, as they have fallen farther and farther behind in their finances, have started to pay huge fees to get their tax return â€œearlyâ€. This is another really good way to make someone else rich. Let’s think about this for a minute. You are getting some money back from the IRS. If you file electronically, you can get this money back in less than two weeks. Why would it make good financial sense to pay a company a large fee to get the money earlier than two weeks? You’ve gone all year without that money. Why has it become an emergency to get it as soon as you know how much you are getting back? Why not save yourself some money and just wait however long it takes to get the money directly? When you get one of these â€œearly returnsâ€ through a company like H&R Block, you are simply getting a loan. When the IRS sends your money, H&R Block gets repaid. Just like every other loan on the planet, they get paid with fees and percentages of your return. When you use someone else’s money, regardless of what it is for, you have to pay them for it. In the case of tax return loans, you really shouldn’t be paying anyone. Just wait until the IRS sends you the money!
Earlier in this post I mentioned payday loans. There are thousands of these payday loan companies out there. It’s really amazing how fast they are multiplying. There is only one reason that they are opening more and more stores to loan out money. The people that have to use these companies are getting farther and farther behind. People are continuing to live farther and farther above their means. I looked around a bit and found that the cost to get one of these payday loans is outrageous. I found internet payday loan companies that charge as much as $60 to loan you $200 for 15 days. Another charges $15 for each $100 you borrow. Now keep in mind, this loan is only for two weeks. That equates to roughly a 390 percent interest rate per year. How in the world can someone get ahead when they are paying that much money just to get their paycheck a little early. Don’t worry if you decide that you’d like to hold off on paying that payday loan back on time. The payday loan companies are happy to hold it over for another pay period, for a large fee of course. This is literally one of the most expensive ways to borrow money. The Federal Trade Commission offers some tips on minimizing the impact of these payday loans:
-When you need credit, shop carefully. Compare offers. Look for the credit offer with the lowest APR – consider a small loan from your credit union or small loan company, an advance on pay from your employer, or a loan from family or friends. A cash advance on a credit card also may be a possibility, but it may have a higher interest rate than your other sources of funds: find out the terms before you decide. Also, a local community-based organization may make small business loans to individuals.
-Compare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost.
-Ask your creditors for more time to pay your bills. Find out what they will charge for that service – as a late charge, an additional finance charge or a higher interest rate.
-Make a realistic budget, and figure your monthly and daily expenditures. Avoid unnecessary purchases – even small daily items. Their costs add up. Also, build some savings – even small deposits can help – to avoid borrowing for emergencies, unexpected expenses or other items. For example, by putting the amount of the fee that would be paid on a typical $300 payday loan in a savings account for six months, you would have extra dollars available. This can give you a buffer against financial emergencies.
-Find out if you have, or can get, overdraft protection on your checking account. If you are regularly using most or all of the funds in your account and if you make a mistake in your checking (or savings) account ledger or records, overdraft protection can help protect you from further credit problems. Find out the terms of overdraft protection.
-If you need help working out a debt repayment plan with creditors or developing a budget, contact your local consumer credit counseling service. There are non-profit groups in every state that offer credit guidance to consumers. These services are available at little or no cost. Also, check with your employer, credit union or housing authority for no- or low-cost credit counseling programs.
-If you decide you must use a payday loan, borrow only as much as you can afford to pay with your next paycheck and still have enough to make it to the next payday.
I hope that, if you are getting payday loans, you use some of the tips above to consider alternatives. Getting ahead financially is impossible if you are continually paying other people just to make ends meet for the moment.