Threats to Your Money

When I was 21, I was married and had a child. I’d graduated from Washington University-St. Louis with a major in finance and marketing and I worked for a bank. Despite that, I had no idea how I was going to support my family and pay my bills. My hard-earned money was being eroded by bank fees every time I fell behind.

I didn’t want to go to my dad for advice (and show that I didn’t know what I was doing), so I called on my uncle to help straighten out my finances. He sat me down and said, “Just make it simple. Separate everything.” This wisdom is the foundation of my system: By separating your expenses and spending into a few simple “buckets,” it is easier to filter your money to the right places, and keep track of it:

• Fixed expenses such as rent/mortgage, utilities, car payment.
• Variable expenses such as copays for healthcare, car maintenance, groceries
• Discretionary spending like gifts and entertainment
• Savings and Investments – options available after you get a handle on your expenses and spending, above.

These buckets (which will end up being separate bank accounts) will give you a clear picture of how much money you have spent, and how much you have leftover. And Banc Smartz gives you a simple system for making it happen and sticking to your plan.

Many of us need such a system. A 2006 study by Pew Research showed that the average family paid $360 to $400 each year in bank overdraft fees. That’s a lot of money.

Even after 25 years in banking, I’m impacted by overdraft fees. I have eight daughters whom I’m teaching to manage money, and I get those phone calls like any other father: “Dad, I’m out of money, and I bought something.” And just like that, I’ll have an $80 charge on my account for two overdrafts.

Financial Hope

I’ve talked to hundreds of people who’ve lost their financial hope, some of them thinking they’re close to bankruptcy; another bank fee has devastated their paycheck-to-paycheck lifestyle; or they’re worried about not being able to buy groceries. These concerns grow into burdens that seem like they’re never going to go away. Getting ahead will never happen.

But there is hope:

• You must understand where you are financially.
• Even if your bank balance is negative, you can fix that.
• When you know where you are, that becomes hope.

It isn’t the mountains ahead to climb that wear you out; it’s the pebble in your shoe.

— Muhammad Ali

I also see a lot of people who can’t qualify for credit using a debit card tied to their checking account. They enter this process of having bank overdrafts accompanied by the associated fees.

I don’t want to pay those fees, and I don’t want you to either. With Banc Smartz, you’ll learn how banking works, how to work within that system to your own advantage and to keep the whole process simple, thus maximizing your success—and eliminating unnecessary fees.

New Precedents

Consumer activist groups are trying to address disparities in how bank fees are processed.

A California lawsuit against Wells Fargo Bank should set a new precedent across the country.

U.S. District Court Judge William Alsup released his 90-page opinion on August 10, 2010, confirming that Wells Fargo violated California law, noting “Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole, motive was to maximize the number of overdrafts.”

Wells Fargo was found to be deducting largest charges first, instead of chronologically.

“For these unfair and deceptive business practices, (Alsup) Wells Fargo must pay $203 million back to customers.”

How Bank Fees Drain Your Bank Accounts

Every store merchant processes transactions differently. When you use your debit card at the major super stores, the money comes out of your account almost before you get to your car. But when you go to the gas station and swipe that same card to pay for your gas, it may not affect your balance for two or three days. Sometimes the transaction comes out of your account for $1, but it isn’t taken out of your account until a couple of days later. It’s even harder to track balances when a check is taken out while you’re traveling, because different states have different processing rules. If you’re traveling through several states on a vacation, some transactions may take as many as seven days to reflect on your account, making it very challenging to track your true balance. This puts you at high risk for an overdraft.

You may think that all of your transactions have cleared, so you pull out cash. Then, one of these slower processors draws on your account for a purchase that you made days ago—maybe even a week. The next thing you know is you’ve bounced into an overdraft situation.

A Tale of Two Banks

In 2010, banks made in excess of $70 billion in overdraft-related fees (overdrafts, coverage of transfers, etc.). How does this happen? Some bank systems are programmed to make money, not save you money.

Suppose you have four transactions this month that are going to trigger an overdraft situation because your account only has $1,100 available:

• $50 Gasoline due January 2
• $100 Utility due January 11
• $100 Snow Removal Service due January 21
• $1,000 Mortgage due January 31

The examples below compare two scenarios: one processing bank fees in the bank’s favor (largest charges first), and the other to the consumer’s advantage (chronologically). As you can see, processing the largest charges first makes more money for the bank, and more overdraft fees for you:

Seeing Red

Total the NSF fees at the bottom of the ledger above and you’ll see red!

The scenario recording the largest charges first triggered two NSF fees on four transactions—at $30/incident, this amounts to $60.

The chronological scenario, however, didn’t create an overdrawn situation until the fourth transaction, incurring only one $30 NSF fee.

I’ve seen people end up with several hundred dollars in NSF fees, most often due to the largest-charges-first method that banks use to remove funds.

Opt in or Opt Out?

Based on new legislation, consumers have the right to opt in or out of check cards.

The opt-out option tells the bank not to pay for purchases or “requests to pay” that create overdraft situations—so the customer is not charged an NSF fee.

If they opt in, however, the bank will process requests that create overdraft situations, and charge the customer corresponding NSF fees.

A consumer who is trying to maintain spending habits within their means and to live fee-free would opt out, to avoid being burdened with excessive fees.

The Right Tools: Your Accounts

I’ve been a banker, mostly on the commercial side, since 1986. My experience opened my eyes to the enormous difference between managing personal finances and how it’s done in the business world. Businesses have countless tools to help them: highly technical software programs, CPAs. They even build entire departments to help collect payments (accounts receivable) and to pay their bills (accounts payable).

But in our personal lives, we don’t have that kind of structure and sophistication. Many of us gained our independence as young adults and lived paycheck to paycheck, since we didn’t have a lot of cash or assets when starting our careers. Then we never unlearned that habit. Living on the edge like this wasn’t as costly or confusing in the cash-dependent world my father lived in. But today we rely on checks, credit cards, debit cards and electronic fund transfers, which can confuse matters and carry hefty fees.

Since we don’t have staff and accounts payable departments in our personal lives, and we don’t have cold, hard cash as a primary currency, it’s best to stick to a simple, well-structured system for managing our money.

Keeping It Simple

I pay bills out of a checking account. My wife and I each have a prepaid debit card for purchases, which we load twice a month with our predetermined allowances for discretionary spending. We also have a savings account for emergencies and long-term goals. With eight daughters, the rest of the money goes into prepaid debit card accounts for them.

Having a few of the right accounts/buckets for your money is the best way to keep things simple. Each account should be used strictly as intended. (See the start of this chapter for a recap on types of expenses and spending):

Basic account package:

• A checking account with automatic bill-pay ability for fixed and variable expenses
• A savings account for long-term planning
• A prepaid debit card* for each person in the household who engages in discretionary spending

*Prepaid debit cards are not tied to an account—unlike your regular debit card that draws funds from your bank account. You can only spend the amount of money that’s been loaded onto a prepaid card, so there are never overdraft fees (or any other fees) associated with them. They are more secure than cash because a PIN is required when using it.

Prepaid debit cards are available and reloadable at some retailers, such as Walmart. Most banks offer them too; they can be reloaded at any branch or through their online banking systems.

Prepaid Freedom

Some banks don’t want you to be able to reload a debit card if you’re using it for purchases, because you’ll NEVER have an overdraft on a prepaid debit card. Prepaid debit cards eliminate the risk of bouncing a check and the temptation of carrying a balance, because you can only spend what’s on it.

With a typical check bankcard, you move money into your account each week, you drain it, and you put more money in it. A prepaid debit card can work very much the same way. In fact, if you have the right issuing company, you can take your smart phone or device out, transfer money when the balance on the card hits $0, swipe it again, and your purchase is done, and it didn’t cost you overdraft or transfer fees!

If your bank doesn’t offer reloadable cards, you can find them at many superstores.

Counting Your Silver

You weren’t born knowing where to keep your silverware, but hopefully you were taught. Most likely, you grew up with a silverware organizer in your kitchen. Maybe you were in charge of setting the table or doing the dishes, matching each piece of flatware to its silhouette on a daily basis. Thanksgiving at my house presented an annual dilemma: We had 12 guests and 12 forks. This meant we had to keep an eye on the fork slot in case any forks were used to prepare the meal. The silverware organizer let us know exactly where we stood. When it was empty, we were out of forks. Then it was time to stop and wash any that had strayed, so they’d be ready for the big meal.

Regrettably, most of us did not grow up in a home where we were exposed to how the family finances were organized—certainly not the way we were taught to wash and dry the dishes, day after day, until it was drilled into us that forks do not belong in the spoon section, and that knives never, ever mingle with the salad forks.

Banc Smartz is designed to help you practice sorting your finances until it is as much a habit as putting away your silverware. A quick glance at your “money drawer” will let you know where your money is, any time you need it.