Living paycheck to paycheck? Knock it off

Dear Liz: Like many Americans, I often must scramble to make ends meet between paychecks. I vigilantly monitor my account online, and when my balance is getting low, I curb my expenses as best I can.

Recently, I have had an overdraft experience that leaves me wondering about ethics and legalities. It was three days from payday and I had about $45 in my account.

I made four purchases under $10. Then a $54 automatic payment came through that I could not reschedule. One would think I would then be charged one overdraft fee, as all of the previous purchases made were within my available funds at the time.

I logged in today to find that the bank cleared the largest transaction first, which threw all other small transactions into overdraft. I was charged five overdraft fees because of this rearrangement of clearance order. I talked to a customer service manager who said that nothing could be done.

Essentially, it appears that the bank is manipulating transactions to capitalize on overdraft fees. This strikes me as unethical, and I wonder if I have any rights in this situation? Aside from getting a better job and making more money, what can I do to protect myself?

Answer: Of course the bank is manipulating your transactions to increase its fees. Most banks do. Lawmakers and regulators have questioned the practice, but so far it’s not illegal.

What you can do to protect yourself is to stop living paycheck to paycheck. That may sound like a flip answer when you’re on the financial edge, but you’ll never get ahead as long as a $54 overdraft can throw your finances into chaos.

Having just a $500 cushion in the bank can reduce not just bounced-check fees but also worry, sleeplessness and lost productivity at work, according to a savings review by Stephen Brobeck, executive director of the Consumer Federation of America.

How do you get a cushion? Try a “no spending” month. Limit your purchases to true essentials. Eat out of your cupboards instead of at restaurants. Entertain yourself at home or at the library. Most people can raise at least a couple hundred dollars this way, which you could supplement by having a yard sale and selling unneeded items online.

If you want more ideas, there are a wealth of frugal-living websites; start with one of the oldest, the Dollar Stretcher, at www.stretcher.com.

You also need to limit the bank’s ability to swamp you with “gotcha” fees.

First, sign up for true overdraft protection. Banks often automatically enroll you in an inferior substitute, called “bounce protection” or “courtesy overdraft.” These programs allow the banks to approve over-limit transactions and charge you $30 or more for each one.

True overdraft, by contrast, links your checking account to another of your own accounts: typically a savings account, line of credit or credit card. If your transaction exceeds your balance, the money is drawn from one of these accounts. You’ll pay an annual fee of around $50 and possibly a $10 per transaction fee, but the costs for making a mistake will be substantially lower than under bounce protection.

If the bank won’t approve you for true overdraft, ask it to stop approving over-limit transactions. If it won’t, take your business elsewhere.

Build savings or pay off debt?

Dear Liz: We have about $800 extra each month after paying bills, but we aren’t sure we’re doing the right thing with it. Should we pay down our adjustable-rate, maxed-out home equity line of credit? Or do we put it toward our savings, which has only $5,000 right now?
Answer: Before doing either, make sure you’re saving adequately for retirement. You may be tempted to cut back in this uncertain market, but the costs of retirement are so great that you need to start saving early and not stop if you want to have a sufficient nest egg. Your human resources department at work probably has tools to help you.
If you’re convinced you’re on track there and you don’t have any credit card debt, the next step normally would be paying down that home equity line. In today’s environment, however, you might find your lender lowering your limit as soon as you start to reduce your balance. Rather than freeing up credit that you could use again in an emergency, paying down your HELOC may actually reduce your overall financial flexibility.
This might not be an issue if you have tons of equity. If your current mortgage balance and your line of credit total less than 60% of your home’s current value, you may not need to worry about your lender reducing your credit limit.
If your loans total more than 60%, however, or if housing values are falling fast in your area, consider instead building up your savings.

Help with a 30k College Bill

Q: We are facing a challenge in regard to financing our son’s education. We are being asked to contribute $30,000 a year for a private college education. Is this really a wise move? We have a daughter who will be in college in two years. Help!A: A good education is virtually essential to success in today’s competitive, global economy. That said, there are plenty of ways to get a good education, and bankrupting yourselves on a too expensive college shouldn’t be one of them.

 

If you can’t manage this bill without sacrificing your own retirement plans or your daughter’s education, then you need to think about some options.

If your son has his heart set on this college, then he should be willing to take on at least part of the cost by incurring student loans. (He should be careful, though, to make sure that his total student loan debt doesn’t exceed the salary he expects to make in his first year out of school.)

Another option, obviously, is for him to attend a less expensive school for at least a couple of years, if not the duration of his education.

The fact that you’re asking this question just months before your son starts college indicates that you haven’t done enough thinking and planning, but it’s not too late.

Head to the bookstore or library and grab a copy of a college financing guide and explore your options. You might also use FinAid.org’s expected family contribution calculator, available at http://www.finaid.org , to estimate how much you’ll have to kick in once your daughter starts school.

Good luck.

How can safe deposit box horror stories be avoided?

Dear Liz: You’ve written a couple of times about how safe deposit boxes don’t necessarily keep your valuables safe. We wanted to tell you our story.

We recently went to put some papers into one of the two boxes we maintain at a bank where we’ve been customers for more than 20 years. We were given the box and I almost fainted when I discovered it was empty.

Apparently it had been drilled in error. After a week of searching, bank employees found part of our box contents tied up in a plastic bag. But property was missing that was historic, personal and irreplaceable. We had papers in there with our names on them, but apparently no effort was made to contact us.

It is a horrifying situation that a bank can be so casual and apparently unconcerned with property that most people assume will be secure. This should be made public more often.

Answer: As you’ve read here before, banks are required by law to make an effort to contact box owners before a safe deposit container is drilled and emptied, but sometimes those efforts are pretty cursory. (The fact that you were longtime customers and that your names were on papers in the box shows just how cursory.)

Some readers say they’ve tried to prevent situations like yours by putting their full contact information on a sheet of paper atop the contents of their boxes. In any case, you also should check on your box a couple of times a year and ask your bank during those visits whether you’re up to date on your box rental fees.

Many times, after a merger, banks begin to charge customers who used to have free box rental. Longtime customers may assume the charges don’t apply to them, because they’ve had free rental for so long, and fail to pay the bill. The bank could then decide the box has been abandoned and drill it open.

How to Stick to a Budget

Q: How do you stay on a budget? I have tried several times, and it never works. I’ll buy something on impulse or to take advantage of a sale, or friends will call and ask us to go out for dinner. My friends complain that I’m tight, but if I were so tight, I would have a lot more money in the bank. We are in our 40s, and I feel we are not where we should be at this stage in our lives. Plus, I am always thinking about money. How can I get a budget started and stick to it so we can finally see some savings?

A: Wouldn’t you like to stop thinking about money? Or at least when you do think about it, to feel calm and in control, confident that you have enough, that you’re making progress toward your goals and that you can handle any setbacks likely to come your way?

Managing your money well gives you the power to achieve what you really want in life while dialing back the anxiety that plagues people who live paycheck to paycheck.

Budgets tend to fail when people view them as an awful exercise in deprivation, instead of as a tool to help them stop wasting money on things they don’t really want so that they can get the things they do. Once you view your spending plan in this light, it’s easier to skip those sales and invitations.

You might want some inspirational reading. “Your Money or Your Life” by Joe Dominguez and Vicki Robin would be an excellent beginning. You might find David Bach’s “Start Late, Finish Rich” helpful as well. (Savings tip: Check these out at your local library or buy them used online.)

Let go of ideas about where you “should be” at this stage. You are where you are. Regrets about not having more, or being able to spend more, can lead you to chuck the whole idea of a budget.

You also may find it helpful to seek out a support group of people who are trying to get their finances under control. You might join an online forum, or the Simple Living Network at http://www.simpleliving.net can direct you to study groups in various cities that use “Your Money or Your Life” as their basic text.

You can do this. Good luck!