Beating Broke

Create Your Own Layaway Plan

October 31, 2011 By MelissaB 9 Comments

The stores are already starting to advertise for the holidays, and several major retails are pushing the option of layaway as an option to finance your gift giving. While layaway was not offered in stores for years, it is making a comeback due to the current economy. You can choose to use layaway or not this year, though it is certainly a better option than financing gifts on credit cards, but why not also start your own layaway program?

One idea that revolutionized the way I budget is to set aside money each month for recurring expenses. I used to be a teacher, and I could choose to teach classes in the summer or not. Sometimes I did teach the classes, but a few summers I chose to take off, which also meant that I was choosing not to get a paycheck for three months of the year. Considering I was the sole breadwinner at that time, summers could pack a painful punch.

However, I began to enjoy my summers off and not suffer financially when I began setting aside money for monthly expenses. At the time, we required on average $2,500 a month to live, so that was $7,500 I needed during the summer months to survive without a paycheck. I received a paycheck nine months of the year, so I automatically deducted $833 a month into a special account to live off of during the summer.

Even if you have a regular paycheck coming in all year long, you can benefit from this plan. For instance, I know that over the course of a year I would like to spend $500 on gifts. Some months I may not spend anything, and other months I may spend $100 or more. To make sure I have the money set aside, I would take $500 and divide it by 12. Then I would put aside $42 a month for gifts. It would be its own little gift fund, and I would draw from it when I needed to purchase gifts.

Likewise, my energy bill is very low in the winter because my landlord pays for the heat, but the electric bill is high in the summer because I have to pay to air condition or drafty apartment. I set aside $50 a month for electricity. During the winter months, my electric bill may only be $25. The remainder of the $50 after I pay the monthly bill goes in savings in a special fund to help cover the high summer electric bills.

If you set your monthly budget up based not just on your exact expenses for that particular month but for the average you will spend all year long divided by 12, you essentially create your own layaway plan. On months that may have higher expenses, you simply dip into the money you have already put aside. This type of budget makes your monthly outflow much more stable and protects you from the highs and lows of creating a budget based on each month’s actual monthly expenses.

photo credit: robertstinnett

Back to a Cash Economy?

October 21, 2011 By Shane Ede 12 Comments

With the recent increase in new fees at banks, and the backlash it has caused, people are starting to determine what the alternatives are. At the moment, there are still banks and credit unions that are maintaining their current fee structure without adding anything new. Many of those are also maintaining their “free” accounts. But, if the Durbin Amendment remains, it may be only a matter of time before they buckle under the costs and start removing “free” accounts and adding fees.

What then? It that happens, we might see a financial world where all debit cards have a monthly fee. We might see more annual fees on credit cards, and higher interest on credit cards. We might see more and more checking and savings accounts having a minimum deposit amount and/or a monthly fee.

As a card-carrying member of the NGPAF (Not Gonna Pay Any Fees) club, that might just make me decide that I don’t want to use any of their services anymore. My depository institution might just have to become the coffee can in my backyard. Seriously, though. If all of those services become services with fees, we might see a pretty drastic increase in the usage of cash again. Many of us don’t use cash all that much. I know I don’t.

And what happens if we return to a cash economy? The banks get even less transaction fees. Their income drops because of it. And we all see what happens when their bottom line is threatened. More fees. It could send the banking industry into a never ending spiral of more and more fees until the only people who still use banks are the ones who don’t feel comfortable keeping thousands of dollars in a coffee can in the backyard.

Luckily for me, I belong to a credit union that isn’t likely to add any additional fees anytime soon. What about you? Do you belong to a Credit Union or Bank that hasn’t added fees recently? What if they did? How long do you think it will be before we have to choose to either pay fees or carry cash?

photo credit: flattop341

Are Banks Getting a Bad Rap?

October 19, 2011 By Shane Ede 5 Comments

As I was traveling to the Financial Blogger Conference a few weeks ago, all the news was talking about how Citi had announced that they would be charging more fees on debit cards. In fact, there have been quite a few banks that have announced an increase in fees over the last few weeks and months. There are very few that have free products like free checking or free savings anymore. All told, there’s a lot of anger aimed at the banks right now. But, is it all their fault? Or, are they getting a bad rap? Let’s examine where all of this fee increase stuff is coming from.

Durbin Amendment of the Dodd-Frank Wall Street Reform Bill

The Dodd-Frank bill did quite a bit, but the bit we want to look at is the Durbin amendment. The Durbin amendment was an amendment added with the intention of creating some competition in debit card processing fees. Specifically, it’s goal was to “To ensure that the fees that small businesses and other entities are charged for accepting debit cards are reasonable and proportional to the costs incurred, and to limit payment card networks from imposing anti-competitive restrictions on small businesses and other entities that accept payment cards.”

Which doesn’t really explain it all that much. I’ll try, but no guarantees that you’ll be any less confused. (NerdWallet does a really great job of explaining it, actually.) When a credit card/debit card is used as a payment, it gets swiped through a reader. The reader reads the data, and then sends the data along with the purchase data to a card processor. The card processor then routes the data and purchase data to the institution that holds the account the card is attached to. So, a Ally bank’s card and transaction would get routed to Ally bank. The institution accepts or declines the transaction and sends that back to the card processor. The card processor sends that on to the merchant. For it’s (necessary) work as the middleman, the card processor charges an interchange fee. Basically, a fee for all the routing it did. The Durbin amendment put a cap on how much that fee could be. The end result is that some of the larger card processors have to charge larger fees. Fees that are paid by the banks. The banks had two options. They could charge the merchant a larger fee to make up for it, or they could start charging fees to the user (that’s you) and cease many of the “free” programs that were previously supported by the profit margin they were making on the cards.

If they had passed all of the larger fees on to the merchant, many merchants would have likely stopped taking their cards. So, believing that the majority of users would lay down and take the extra fees and loss of “free” accounts, they passed the added fees on to the user. Again, that means you. What they didn’t count on was the size of the backlash they would get from the added fees. An educated user base, that has direct access to so many public outlets like social media, is making far more out of the situation than they ever thought would happen.

Does it really mean anything?

Here’s the funny part. (not really) There will be a small percentage of users who will move their business to Credit Unions and online banks who are absorbing the added costs and keeping their “free” accounts without adding any additional fees. But, the majority of users will pay the fee, complain about it, but, ultimately, do nothing. The new fees will become normal after a year or so, and things will continue on like they were before. Just with less “free” accounts and more fees.

You should be mad as hell!

But, not at the banks. They are merely doing what makes the most business sense to them and trying to maintain their profit margin. Credit Unions don’t work on a profit margin because they are not-for-profit businesses. Online banks have a higher profit margin due to not having any physical buildings and fewer staff. The people we should be mad at are our representatives in Washington. There’s a bill about to be introduced in the House of Representatives that aims to repeal the Durbin Amendment. If you feel strongly enough against the fees, you should send your state’s representatives (house and senate) a note (or make a call, email, whatever) and tell them you support the repealing of the Durbin Amendment.

Whatever you do, don’t just lay down and take the fees. Call, email, or write your representative. And, in the mean time, find a Bank or Credit Union that isn’t passing the added costs on to their users. Open an account at one of them and move your business. My personal favorites are ING Direct, Ally, and PerkStreet, but a local Credit Union would be great too.

photo credit: kevin dooley