To Bank or Not to Bank? Is THAT the real question?

December 1, 2010

National Financial Education Center at Debt Reduction Services Inc-Advantages of Bank AccountsI recently met with a couple who were dead set against ever having a checking account again. It’s not that they didn’t understand the value of a checking account but that they had gotten themselves into trouble writing checks for more money than their account had. They have decided to use cash only or, only if required in the future, use a prepaid card. For them, seeing their money was the only way of knowing how much they had left to spend until the next paycheck.

Their plight underscores the challenge that many couples face. How can you get two adults to work together on responsibly spending and tracking day-to-day household and personal expenses? They seemed to have a legitimate concern for how two people could manage one bank account. Just one bounced check fee, let alone five or six during difficult times, is enough to discourage many couples from moving from a cash only system to becoming a banked household.

I think the issue for such couples is less one of whether or not they should have a bank account but how they should approach the day-to-day management of their homes. Here’s my take on the situation:

Being banked is ALWAYS better than being unbanked.

Having a bank or credit union accounts (checking or savings) can go a long way to preventing the heartbreakingly tragic situations that could come by losing a pocketful of cash or having the cash stolen from your home or off your person. Such events happen, and when cash is involved, there is no getting it back…EVER.

The challenge for many couples who have fled from checking accounts is setting up a proper system for managing their money on a day-to-day basis. Here are a couple of simple solutions that don’t even involve checking accounts. They DO require you to set up one or more savings accounts, which generally have no monthly fees but do have restrictions on how many withdrawals you can take during a month:

  1. At bare minimum, set up one savings account. Deposit your payroll or SSI check into the savings account at no cost (even better, have it deposited directly into the account by your employer/the government). Withdraw only the cash you need each week. To avoid additional fees, do NOT apply for an ATM card associated with the account. If you do get an ATM card, make sure you NEVER use an ATM that charges you a fee. This scenario will save you any check cashing fees you’ve been paying without a bank account. These fees may be anywhere from $3 to $30 per month. That may not seem like much, but that’s about $40 to $360 a year. Plus you have a security of having your money in an account insured by the US Government. Even if your bank or credit union failed, your money would be guaranteed for up to $200,000.
  2. Set up multiple savings accounts, such as: 1) General expenses, 2) Groceries, 3) Leisure/Entertainment, 4) Medium-term expenses like vacations, appliances or furniture replacement, and car repairs, and 5) Personal expenses. Set up an automatic monthly transfer from your General expenses savings account to each of the other accounts.  Automating these transfers ensures that you avoid spending money in your General account that should be destined for other expenses.

If you don’t use a checking account, you’ll likely need to purchase several Money Orders every month for bills. Five money orders through the US Post Office for monthly bills will likely cost you $5-$6 each month. That’s $60 to $72 per year, not including postage for mailing the MOs.

National Financial Education Center at Debt Reduction Services Inc-Real Dollar Advantages of Checking AccountsAs these indirect costs of being unbanked add up, you can see the real dollar value of opening and responsibly using a checking account. If you’re still worried you’d end up bouncing checks, don’t be afraid to go into your bank or credit union and ask for help. You’ll usually find the staff willing to help educate you and guide you in your efforts to develop effective checking management skills. Plus, you can usually check with a local nonprofit credit counseling agency like Debt Reduction Services Inc. for help.

And remember to shop around for the right financial institution to work with. Find a bank or credit union that has fees (or lack there of) that fit your situation. You’ll likely want to work with one that has a physical location close to your home and/or your place of work. Visit the branch and get a feel for how you’re treated. If you feel like you’re just an intrusion into their work, find another bank or credit union close by.

After several months (or perhaps a year) of properly managing your savings account(s), you’ll find that your bank or credit union will be more likely to open a checking account for you, even if you’ve had a less-than-stellar record with them previously. However, at that point, just remember that you’ll need to develop the checking account-specific skill of managing a checkbook register. Spending plans, as always, will also be key to success.

Please let me know if you have your own simple banking success story to share of moving from a cash-only household to one using a bank or credit union account.

Best wishes,

Todd

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

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Published in: on December 1, 2010 at 4:29 pm  Leave a Comment  

Overdraft Options

So come August 15, 2010 (this Sunday), financial institutions may not assess any overdraft fee unless the consumer has opted in to the financial institution’s overdraft program. At an average of $30 a pop, we’re not really going to miss those fees much, are we?

With billions of dollars of revenue on the line for banks and credit unions (over $38 Billion in 2009 just for banks), it’s no wonder that we here at Debt Reduction Services Inc have seen some pretty fancy and creative marketing materials designed to entice consumers into opting in to the bank’s or credit union’s overdraft program.

These slick flyers and brochures tout the benefits of maintaining a fee-based overdraft protection account. The top two so-called “advantages” usually include having access to overdraft in cases of emergencies and avoiding the embarrassment of having your purchase declined while in line at a store.

First of all, depending upon a $30-fee-per-incident program (like overdraft) as an emergency plan is as ridiculous as using a payday loan to “fill” the financial gaps before your next paycheck. Both options take an obviously bad situation and make it far worse.

Second, if you’re afraid of the embarrassment caused by a declined debit card, take that fear and use it as motivation to spend at least 15 minutes every week getting to know your finances better. Set aside 15 minutes every Saturday morning or Monday night, or Thursday at lunch (make it a habit) and ensure that your account is balanced and determine what bills need to be paid in the upcoming week and how. This 15 minute “financial check up” can do wonders for your financial health, both in preventative and restorative terms.

Finally, when it comes to options to overdraft, consider (probably in order) the following as a few of several possible solutions:

  1. Planning your spending (budgeting) so that you don’t go near your account balance in the first place;
  2. Dealing emotionally with the possibility of a declined purchase;
  3. Linking your checking account to a savings account so there is no charge (or only a minimal one) for overdrafting your checking;
  4. Linking your checking account to a credit card that you would then pay in full if you overdrafted your account, thereby avoiding interest charges.

As with most financial challenges, controlling your own money is the key to avoiding problems (and fees) related to overdrafted accounts. Remember, if you’re not planning how to spend your own money, then be warned that someone else is likely planning a way to take it from you. And with overdraft fees, there is no benefit to you that you could not have improved upon with just a few minutes of attention to your finances each week.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
Facebook: MoneyDay2Day
Twitter: Day2DayMoney

Published in: on August 9, 2010 at 1:57 pm  Leave a Comment  
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