Doesn’t it seem rather counter-productive to charge someone a fee if they’ve overdrawn their account?  The balance is negative and now it’s going to be “more negative.”

Downtown Bank Building

Since I’ve never written a hot check, I did a little investigating.  I called some banks and asked what happens when a check is written for more than the balance.  Assuming you have no account tied to the checking account to cover the check, the bank will cover it for you, which will make your balance negative. Then they will charge you a fee for that service, making your hole deeper.  Well, I don’t want to lose you, but in all fairness, the bank is making your check good, so shouldn’t they be compensated?

Most banks and credit unions will automatically give customers “overdraft protection,” which allows checks as well as ATM withdrawals to overdraw their bank account.  The fee for that service ranges from $10 to $38 for each overdraft, according to a study by the FDIC.

Of the banks the FDIC surveyed, 86% had overdraft protection and 75% of those banks automatically enrolled customers in the program.  The most common instances where fees were charged were either customers in the age range of 18 to 25 or low-income customers.  Per The Wall Street Journal in an article on March 26, 2009, a research and consulting firm, Moebs Services, banks and credit unions earned $36.7 billion in consumer overdraft revenue in 2008, which makes up about 75% of their income.

Many times people don’t keep track of their charges in relation to their reconciled balance.  I’ve found in my consulting work that most people don’t even reconcile their bank account; most people simply look up their balance on line.  The danger with this practice is that there may be a very large (or small for that matter) check that hasn’t cleared the account.  That check is still outstanding, and believe me, it will clear your account when you are least suspecting and have forgotten about it.  So you think you have $1,235.89 in your checking account, only to find that immediately after you checked your balance on line, the check you wrote for $1,174.23 cleared your account, leaving you with a $61.66 balance.  So much for that $75.00 item you thought you could buy.

I believe a nice compromise would be to allow people to opt out of the service, thereby “bouncing” checks when there isn’t ample money in the account.  That way they won’t be charged the fee for being overdrawn, as long as the bank doesn’t charge a fee for returning the check.  Another problem is when several checks are presented at once; banks will process the largest one first, thereby making each of all the small checks incur overdraft fees, thereby accruing more income to the bank.  If all the small checks were able to clear, and they are presented first, then the bank would only be able to earn one overdraft fee, the one for the large check when presented at the end of the stream, makes the account overdrawn.

Try this: ask your bank if your account has overdraft protection.  If it does, then make sure your account is reconciled, and then you’ll know if a check will overdraft your account.  If you don’t reconcile your account, it’s something you might want to try; after all, it allows you to see where you stand.  You want to know where you stand in a relationship, I suggest you create an intimate relationship with your bank account; when it’s reconciled regularly, it will let you know where you stand.  If you don’t follow my advice on reconciling your account, or suppose you’re simply not good at it (not everyone is,) then I suggest if you have overdraft protection on your account, first ask your bank what the procedure is if you write a hot check with no overdraft protection, and if there are no charges, you then ask your bank to remove the protection.

Wanna play??

Today, so many companies have been forced to cut back on expenses just to make earnings estimates, and thereby not push down the price of its stock even further.  Salaries have been frozen; many people have even taken a cut in salary so that no one gets laid off.  The subsidy on benefits has been reduced, such as health insurance, so the employee pays more towards the cost, and may have even received a reduction in coverage.  This means take-home pay is less; a note or two about that a little later.

One of those expenses / benefits being cut is the match to the 401(k).  I’ve spoken to many Fortune 500 companies, most of which participate in a matching contribution.  This means when the employee contributes to their 401(k) account, the company will match it, up to a point, usually a percentage of the employee’s salary.  Recently, that point, for many companies has been lowered, and in many cases, has been eliminated altogether.

I’m a huge fan of 401(k)’s for many reasons.  First, the company match is free money.  If the company is matching, say 5% of the employee’s salary, the employee in effect is receiving a 5% bonus; however, the employee must put in the 5% in order to receive the match.  How cool is that??  Secondly, the employee’s contribution is tax-deferred.  This does NOT mean tax-free.  What it means is that the employee will not pay federal income taxes on their contribution.  So, if the employee makes $40,000 a year and contributes $5,000, their W-2 at the end of the year will reflect wages of only $35,000, thus saving taxes on the $5,000 contribution.  When the employee retires, and withdraws the $5,000, the amount is taxed at that time.  Hopefully, at that time, the retired employee will be in a lower tax bracket than when they earned the money.  Last, the amount in the 401(k) grows tax-deferred, so it can grow to a larger amount a lot faster, as Uncle Sam is not reaching in and taking his share of the employee’s growth.

For 2009 an employee can contribute up to $16,500 tax-deferred if they are 49 or younger; $22,000 if they are 50 or over.  (They have to have had their 50^th birthday by December 31^st.)

The tightening of the economy has put a big squeeze on 401(k) savings.  First, if the employer decides to no longer match the contribution, there’s obviously less money going into 401(k) accounts.  Some employees feel that there is no incentive for them to save if it’s not matched.  This simply isn’t true.  They should be saving more because they are no longer receiving any help from their employer and they need to make sure they’re securing their retirement.  Additionally, they still get to defer their income dollar-for-dollar for their contributions.  Furthermore, it still grows tax-deferred.

Have you ever done something you thought was a great idea, but it ended up not being so great?  I bought a condominium in 1983 for $80,000; at the time inflation was in the double digits, so the great idea was that if I buy the house today, it will be less expensive than if I wait a year.  This is just the opposite of a deflating economy, where no one buys anything.

I was too cool; my condo was in the swinging-singles area of Dallas, it was three stories, snuggled away in the trees and a living room looking out on the trees and over the pool.

Mirror, mirror on the wall...

About five years later the apartments across the street were condemned and turned Section 8.  Who knew?  The value of my property plummeted.  At the time I was paying a fixed rate of 12 ½ % on a 30-year mortgage.  Around 1990 mortgage rates started coming down to around 8% for a 30-year fixed mortgage.  I called the mortgage company, and they were unwilling to refinance.  Well…I could refinance, it was just that I would have to kick in $40,000 because they were only willing to lend around $40,000 because the value of my condo had dropped to about $50,000.  The only way out of my mortgage was to sell the house.

So I did…for $54,000!!  With around $5,000 in closing costs, I wrote a check to the title company for $30,000…and I’m the one selling, NOT BUYING.

Here’s the rub: at the time, a seller could NOT deduct the loss on a home.  However, I had to sell stock in order to come up with the difference between the value of my mortgage, $77,000, and the selling price of $54,000, plus of course, the closing costs.  I didn’t have $30,000 in my bank account.  So, I had to sell stock in order to come up with the difference.  Yes, you guess it!!  Although I couldn’t deduct the loss on the house, I still had to pay capital gains taxes on the gain from the sell of the stock.

Some of you out there are plenty angry about the fact you are diligently paying on your mortgage and some people who knew they couldn’t afford their houses when they bought them are walking away from those houses, and I might add, trashing those houses on their way out.

Some of you out there are upset that Timothy Geithner, the current Treasury Secretary, didn’t pay all his taxes and is in charge of the IRS.

Some of you out there are chapped at the fact that Tom Daschle, President Barrack Obama’s pick for Secretary of Health and Human Services, didn’t pay all of his taxes either.

If you find yourself in any of these groups that are unnerved about what is going on the country, take comfort in the fact that while you may make sacrifices, you pay your mortgage monthly, you pay your taxes, and therefore you honor your commitments.  I find this to be a much better position than having to face yourself in the mirror I hadn’t met my obligations.  Give yourself a gold star!!

Sometimes out of reach?

Chances are if you know someone in this economy who hasn’t lost their corporate job, they have undoubtedly lost some income.  Most employees would agree to take a cut in pay than have cuts in the payroll, as that cut might just be them.  I have seen this thinking stretch across the entire rank and file spectrum, from management all the way to assembly line workers, including union members.

Not only large and small companies are reducing pay for their employees.  Revenue for state and local governments has been drying up, as foreclosures mean property taxes aren’t being generated from those homes; spending has been curtailed by many individuals, some who have jobs and fear losing them, not to mention a depleted spending pattern for those who have indeed lost their jobs, which mean less sales tax revenue.  To make up the difference, teachers, police officers and firefighters have had their wages cut or have had to take unpaid furloughs.

The cut in pay doesn’t necessarily have to be a decrease in income.  It could take the form of decreased benefits; specifically, it could be an increase in the employee’s share of health insurance, which may as well be a decrease in pay, as net pay is smaller as a result.

As if that wasn’t enough, in order to remain competitive in a global economy, most employers have reduced, if not eliminated entirely, their contribution to employees’ 401(k) accounts.  Old fashioned pension plans, where a retiree receives a monthly stipend (called a defined benefit,) well, is a thing of the past, as only about 16% of American workers are still entitled to a defined benefit pension plan.  Translation: saving for retirement is now totally in the hands of the employee.  You really think Social Security is going to take care of you?  Think again!

With this tidal wave hitting every day Americans, there’s all the more reason to cut back on spending.  The ONLY way to accomplish this is to track your spending as you are spending, in real time.  This does NOT mean getting a report at the end of the month to see what you’ve done.  The key word here is done; you cannot go back and change it; it’s not unlike looking in the rear-view mirror.  You need to start looking through the windshield, so you can see where you are going.  That way you can make adjustments to your spending as you are spending, thereby allowing you to reach your goal.  So, you spent too much on groceries, and you find that out at the end of the month, what are you going to do next month?  Not eat?  I don’t think so.

Most people say, “Okay, that’s great, but how do I start a budget?”  Good question.  The best way is to write down everything you spend for two to three weeks; yes, I mean EVERYTHING.  That way you’ll know where your money goes.  That will form the basis for your budget.  You’ll see the error of your ways once it’s on paper.  You’ll see certain extravagances that you can easily live without, but you won’t know those things unless you write it down.  Throwing down the credit card at every purchase will not alert you to what you’re spending.  You think you’re going to examine that credit card statement when it comes?  Think again!  Even if you did, remember, it is in the past.  It is done.  You can’t change it.

If you find yourself in this pay cut squeeze, you might want to try your hand at a budget because you really need to make that paycheck stretch.

You know, these days all we seem to be concerned about is how much something is going to cost us on a monthly basis. “Yeah, I’ll buy that iphone, I’ll buy that HDTV, I’ll buy that new refrigerator…it’s not too expensive when I put it all on my credit card.” But look out – you may be paying for something several times over once it’s paid for and you’ve paid all that interest.

Don't be paying on your car when it looks like this...

For example, by the time you’ve paid off your 30-year mortgage, you’ve paid for your house 3 times!!!

Another expenditure we typically finance is our car. Here are money tips to remember when financing a car:

1. Know the real cost of extras. A good salesperson (or bad, depending on which side of the fence you happen to be on) will exclaim that the options you’re adding to the cost of the car will only cost you so much per month; they really don’t tell you the cost of the option. For that matter, they don’t even tell you the cost of the car; they simply tell you how much it will cost you per month. Researchers say few car buyers know the actual full cost of their vehicles or stop to consider how much more it’s going to cost them by extending their loan on the vehicle.

2. Shorten the time period of the car loan. I’m absolutely amazed at the length of some car loans. When I was growing up in the days when cars slept up to 9 people, 3 years was the longest one would ever consider paying off a car. Now days, one can finance a car for 8 or even 9 years.

Jonathan Welsh writes in The Wall Street Journal, if one extends one’s car loan from 5 years to 7 years, it will increase the average cost by about $3,000 in interest. The average maturity on a car loan today is 70 months, up from 62 months just a year ago, and those longer term loans carry higher interest rates.

Take a look at these figures: a 5 year loan at 6.05% interest will cost about $5,700 in financing, but a 7 year loan at 6.59% interest will cost about $8,850 in financing.

Longer term car loans also have auto manufacturers worried, according to an article in USA Today. With car buyers trading less often car sales decline and more incentives have to be provided to car buyers.

3. Avoid being upside down. As the average car loan increases, more people are trading cars in before they are paid off. Unfortunately, at that point you owe more on the car than the car is worth. In 2006 about 29% of car buyers who traded in a car to buy a new one were in this position. This statistic is up from 20% just 5 years ago. According to www.Bankrate.com, to avoid being upside down on your car loan:

• Make a downpayment of at least 20%.
• Do not finance taxes and fees.
• Take the shortest term load you can afford.
• Don’t take a loan for a term longer than you plan to keep the car.

4. Resist the new technology lure. One of the components of inflation is what I call “technology inflation.” Take cars for example. A 1987 Chevy Caprice is not the same as a 2007 Chevy Caprice due to all the technological advancements, such as satellite navigation and entertainment systems, once reserved for the premium vehicles only. This makes new cars that much more enticing.

5. Be practical. It’s not necessary to seek out the latest and greatest. When you buy a new car, all you have to do is drive it home and suddenly it’s worth a lot less than what you paid only a few minutes earlier – because now it’s considered a used car… and the first payment hasn’t even been made yet!

The good thing is that cars are being made better today. My suggestion is to buy a decent “pre-owned” car and purchase an extended warranty along with it. Let someone else depreciate it. You’ll be a lot happier in that you didn’t pay an arm and a leg for your car and you’re not paying for the rest of your life on the car!