Your Financial Toolbox

How many bank accounts did your parents have when you were growing up? If you were considered mature enough to discuss financial ins and outs of the family, you probably remember a savings account, a checking account, and possibly a CD or two. Today, you may be on a path that is similar to your parents’ in the number and type of accounts you have, and your savings philosophy may include a few additional products (IRA, 401k, etc.). Your parents may have had a pension, you probably don’t. The landscape is changing.

In this section, we’ll cover the most common financial tools in the marketplace today and how they should be used. Many are far different than they were in my parents’ generation.

Cash

There was a day when cash was king. In today’s virtual age, however, that is no longer the case. Though dealing with cash eliminates the possibility of overdrafts, it lacks the ease of tracking exactly where your money is spent, which is critical for not just keeping your financial house in order, but also for keeping the IRS happy by providing accurate records. Case in point: back in the day, my father dealt only in cash. Wherever he went, he always carried about $400 in his wallet. He never had to worry about writing anything into a check ledger, or recording debit card receipts. However, he also never had a paper trail of where he’d spent his money at the end of the year. Though cash may never completely go out of style, it’s definitely losing favor.

Reasons Not to Use Personal Checks:

• Checks cost upwards of $15.00 per box
• Checks can get lost in transit
• To pay a bill by check, you must pay postage
• Checks list all identifying information on them, such as bank account and routing number, personal information, and signature
• Checks are an inherent risk to your financial well-being. The delay in them posting to your account can lead to overdrafts, and if they get into the wrong hands, fraud or identity theft can occur.

Checks

If I told you I haven’t carried a checkbook in 13 years and even longer since I wrote a personal check to pay a bill, would that clarify my disdain for personal checks? For me, the amount of risk associated with personal checks is not worth the convenience of the checkbook.

Let me explain. It’s the 15th of the month and your gas bill is due. You write your check for $35.00, put it in the envelope, put a stamp on and place it in your mailbox. Along comes “Joe,” who recently lost his job and was passing by your mailbox. Joe reaches in, grabs the envelope and takes it home. Guess what? Joe, twice convicted for check fraud, has a nice setup in his basement for taking full advantage of your bank account number, routing number, full name, address and phone number. Oh, and don’t forget your beautiful signature on the bottom right-hand corner. Desperate Joe now has everything he needs to access your account, and boy, does he. Why risk it? See the Online Bill Pay option later in this chapter for a great alternative to writing checks. The person opening the checks at the company you’re paying –all they need is a photocopy of that check and can go make those checks. Your account, signature. You go online, routing # and check # you don’t have to sign something.

Check Card/Debit Card

Check/debit cards are not a bad product per se, they just come with too much risk. First, if you’re going to use a check card for purchase transactions, you run the risk of an overdraft. How, you ask? Well, if you go to the gas station, fill up your tank for $40, then check your account balance, you’ll see in most cases that $1.00 was authorized for that transaction in what is known as a bank hold. If you’re in a hurry, it may not dawn on you that you put $40 in, not $1! So, you go to a fast food place for a quick $6.00 lunch, you only started with $45 dollars in your account and payday isn’t until Friday. The next morning, that $1 hold on the account is pulled and the full $40 charge is deducted, your $6.00 lunch goes through, and BAM! You’ve got yourself a $30.00 overdraft fee. These mistakes happen, even to intelligent people like us. In a blink, you misread your balance, and you pay dearly for it.

Prepaid Debit Card

A reloadable debit card is one of the most important things to have in your financial toolbox. Similar to a debit card, credit card, ATM card and personal check, all wrapped into one little package, the benefits are many:

• Extremely low fee structure, varies by issuer
• Accepted anywhere Visa is accepted
• Completely eliminates the possibility of overdraft fees
• Can be reloaded instantly, even from your cell phone
• Offers many of the same benefits a Visa credit card offers
• Card activity can be monitored online or via telephone

By using a reloadable card, you automatically rein in your spending and you become more accountable to yourself. It’s also a great tool for parents who are attempting to teach teens how to spend responsibly and be accountable, but who don’t want to add to the billions of dollars banks make each year on overdraft fees. A reloadable card may be set up for a teen leaving for college. Mom or Dad can fund the card from home if the student needs money and there is zero risk of unexpected fees.

Reloading

No being turned away for being over your credit limit or declined on your debit card for lack of funds!

You can check the balance on most prepaid debit cards by simply dialing in from your cell phone (usually before you get in line at the hardware store).

If you learn that you’re short of funds to invest in the latest and greatest in drill presses at a special reduced price, you can electronically transfer money from your designated master bank account almost instantly.

Happy drilling and pressing!

A simple way to catch fraudulent activity on your accounts:

I catch fraud three or four times a year by doing this: I always round up to the nearest dollar when paying bills or adding a tip to a restaurant receipt, etc. That way, when I’m skimming my bank and credit card statements and I see anything besides two zeros after the decimal point (say, $56.25), I immediately know something is awry. Yes, someone could leave the zeros alone and add extra dollars to my “payment,” but that can be easy to spot, too, if the number seems high.

In addition to catching fraud, the extra dollars I pay toward bills when rounding up are actually helping me build a reserve of funds. More on building a reserve at the end of this chapter.

Overdraft Protection or Line of Credit

Overdraft protection is another product that I do not advocate using. The purpose of this product is to make the consumer feel “safe” spending money that is not theirs to spend. It comes with great cost, however. That additional cost: fear that the account will become a totally funded line of credit that you can’t pay off and that you pay a high interest rate on. At this point, your line of credit has ceased to help you avoid overdraft situations and you’re stuck with another high-interest expense.

Overdraft protection is usually established one of two ways. First, a second account, typically a savings account, is set up as back up on the checking account. If a transaction takes the original account negative, funds are transferred from the savings account to the checking account. Sounds great, right? Well, there’s a catch. That transaction, with the transfer of funds, can cost upwards of $30 per transfer. If multiple transfers are made in a given month, you may be assessed another fee simply for having excessive withdrawals from your savings account.

The second scenario is to set up overdraft protection as a credit line. This too typically comes with fees for every transfer made into your checking account, plus the interest on any of the bank’s money you use. Again, your fees are twofold.

Cost of Protection

Here’s how lines of credit can create bank-fee nightmares similar to NSF fees:

Checking Account
$250	Balance
-400	Check
-150	Balance
+200	Deposit from Line of Credit*
$ 50	Balance
- 30	Transfer Fee
$ 20	Balance

* Some institutions have different requirements and minimums for making transfers. Some will only transfer funds in $100 increments. This can be frustrating when you have a $2 overdrawn situation, and your bank moves $100 from your savings account to cover it.

It’s also important to keep in mind where these transfers are coming from: your savings! At $100 per transfer, if you’re not diligent about repaying yourself, your savings account can quickly erode.

Loans – Student, Car, Mortgage, Personal

While most people don’t have the cash flow to save and pay cash for many major purchases, that would nonetheless be an ideal way to manage your money. If you can, put money into savings at every opportunity. Avoid financing as much as possible, even if it means putting purchases off until you’ve got the cash saved up. If you do find yourself in a position where you need to turn to a bank for financing, shop around. Look for the shortest repayment terms you can handle, and find the lowest interest rates you qualify for. Most importantly, schedule all payments to go out automatically from your bill-pay account on time, every month, versus giving a company authorization to access your money via ACH and exposing yourself to potential fraud. If you control it on the bill pay side you’re in control.

Online Banking/Bill Pay

Currently it costs $0.44 to mail a first-class envelope. Add to that the cost of the check, the risk involved just in placing your payment into a mailbox and that is one hefty expense. Online bill paying takes all the risk, and most of the costs, out of the equation.

Each bank is slightly different, but typically, online bill pay is free. Yes, free. That means no check cost and no stamp. Not only that, but you can schedule all of your payments automatically, again avoiding the possibility of being charged extra fees, because your bills will never again be late.

I pay all of my bills online. Yes, all of them. And, to take even more stress off myself, I have scheduled every payment that I can as a recurring payment. I never have to ask myself, “Did I pay the car payment? The light bill? The gas?” These are sent out of my account, each and every month, on time.

The true beauty of this arrangement is that I know exactly how much money I need to put into this account to pay my bills every month. I’ve taken the time, done the research, opened the envelopes, made the calculations and deposited the money; the bank does the rest. (More on this in Chapter 6.)

Paying your bills on time, all the time!

• Know your income cycle
• Know your bills
• Arrange for bills to be on a level-pay plan, whenever possible
• When level-pay is unavailable, find an average over 12 months, and pay that amount, which gives you the possibility of building a reserve (more on this in Chapter 6)
• Schedule all payments to go out automatically

Building a Reserve is Easy When You Eliminate Temptation

We’d all like a cushion of cash for rainy days, holiday spending, or what have you. But a lot of us have trouble actually putting money in savings—or keeping it there. We seem to believe that if there’s cash leftover at the end of the month we’ll put it aside, even as we find ways to spend it no matter what, every month.

If you recognize yourself in this scenario, I suggest adopting some much needed discipline in the easiest way possible: by prepaying all or part of your utility bills. You’ll remove pressure from yourself in two ways: you’ll be ahead on your payments, and you won’t be able to access extra money when you feel a new-handbag or fishing-rod urge coming on.

Say you pay an extra $5 per bill, per month, for five monthly bills. That comes to $25 a month, and you’ll have $300 after 12 months to do with as you please, while you skip paying full balances on utilities. (See the sidebar below for another example.) Or you can round up to the nearest $50 that you know you usually pay, just to be safe, and use automatic online bill pay without ever having to give your bills a thought. Instead you’re letting them build your reserve fund.

Example of Reserve Funds

Most companies allow multiple direct deposits. Send one deposit from your paycheck into your Spending Account and another deposit into your Bill-Pay Account. To build a reserve, deposit the amount you need to pay your bills, plus $100. The example below illustrates how someone with $1,000 in monthly bills can direct $1,100 into the account to build a reserve of $1,200 after 12 months.

Month	Deposit	Bills paid	Balance
January	+ 1,001	- 1,000	$100
February	+ 1,001	- 1,000	$200
March	+ 1,001	- 1,000	$300
April	+ 1,001	- 1,000	$400
May	+ 1,001	- 1,000	$500
June	+ 1,001	- 1,000	$600
July	+ 1,001	- 1,000	$700
August	+ 1,001	- 1,000	$800
September	+ 1,001	- 1,000	$900
October	+ 1,001	- 1,000	$1,000
November	+ 1,001	- 1,000	$1,110
December	+ 1,001	- 1,000	$1,200

If you can afford it, prepay a few months worth of bills. That way you’ll have a savings cushion for entertainment or investment, but especially for emergencies. I’m a few months ahead on my bills so that if anything happens to me, my wife won’t have to worry about paying bills for awhile.

Smaller Bucketfulls

By abandoning trying to keep track of all of your finances through one checking account, you can see at a glance where your money is by filling your buckets with smaller amounts: A checking account for bill-pay; a savings account for emergencies and goals; and prepaid debit cards for day-to-day purchases. And you can build a cash reserve by prepaying some or all of your bills. Just what you need, when and how you need it.