The subject line read: ACTION REQUESTED by August 15th to Avoid Changes to Your Account

As I opened the email – half-expecting it to be fake, false or phishing for personal information – I discovered it to be just outright misleading.

Yes, this letter was from my actual bank.

But what was it so breathless to have my action on?

“To avoid changes in the way we handle ATM and everyday debit card overdrafts on your account, we need to hear from you before August 15th.”

Yes. My bank is breathlessly trying to convince me that my world will positively come to an end unless I agree to allow them to enroll me in overdraft protection which they, in turn, can charge me lots of money if I ever overdraw my checking account.

There are so many things wrong with this I don’t even know where to start.

But let’s try this:

I don’t need overdraft protection. I am responsible with my checking account, I always have a pad of cash to cushion me from any problems and I have never overdrawn an account in the 15 years I have held a checking account.

For anyone considering opting-in for overdraft protection from their bank, I have to ask you: why?

It certainly is not worth the money they are going to charge you for the “protection,” (although I do realize you could be spared a returned check fee and potential embarrassment) .

You certainly should be watching your money coming and going and being sure you have enough money in the checking account to cover your expenses.

I also think you should have some extra money that should be invisible to you so that if you do “overdraw,” you are only overdrawing your own pad and not the institution’s money. (For an example of this, I like to keep $2500 in my checking account that never leaves. If I see my checking account balance is $5400 – I know it’s not really $5400. I know it is actually $2900 because I won’t ever count that cushion of cash there).

I am not thrilled with my bank for its desperate attempt to reign me in – but alas, most of the major big-banks are doing the same thing and it is just the industry as a whole looking out for its own best interest and – predictably  – not your best interest.

So, you learn something new every day.

And I just learned what 12b-1 fees are.

And if you do nothing else productive today – check your brokerage account and make sure any mutual funds you own do not contain any 12b-1 fees.

Why am I so alarmed about these?

It turns out the SEC allows mutual funds to charge their account holders the costs associated with marketing the fund to other potential investors.

The SEC itself describes 12b-1 fees as,

fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.

My opinion is that is simply insidious.

Fortunately I did take the time to log into my two brokerage accounts and was relieved to learn that neither of them charge 12b-1 fees.

So it’s easy for me now – I don’t have to do anything!

But had I found I was being charged money to help the fund market itself and get more clients – you can bet I’d be planning to fire my mutual fund and hire one that respects me a little bit more.

One sure-fire way to destroy wealth is to have kids. Thanks to the USDA, you can read about the Expenditures on Children by Families.

The government takes into account costs like housing, food, clothing, transportation, healthcare, education and the other day-to-day items that cost a lot of money (like haircuts, entertainment and presents).

This is the model the government uses to calculate how much it costs to raise a child:

Ei = f(Y, HS, CA)

The government does take into consideration a family’s household income and has a range of costs it will take to raise a child from birth to age 17.

For those in the lowest income group, expect to shell out $205,960.

If you’re already wealthy (and not likely to be reading this anyway!) then expect to pay out $475,680.

But let’s focus for a moment on a family with income somewhere in the middle.

For a child born in 2009 to a family with two parents, those parents can expect to pay $286,050 to raise their child.

$286,050!!

And note that the government stopped counting at age 17!

They didn’t even want to consider the cost of college!

Ok, so let’s do some numbers here.

Let’s divide $286,050 by the 17 years the government is counting.

We’re looking at $16,826 per year for that child.

Broken down further, that’s $1402 per month to have that kid.

I did a rough calculation on how much money you would have if you did not have a child but instead invested that money and received a relatively conservative 5% return on your investment over the course of 17 years.

The answer?

$451,247.76

So the moral of the story is: don’t have any kids. Actually, I don’t really mean that. But can you understand why this is an important financial exercise to go through?

My verdict is: have kids. But plan for them. And expect that they are going to cost a lot of money, so make sure you have adequate funds to pay for them, yourself and still have money to put away for yourself for later.

In previous posts I have emphasized how important it is to live within one’s means and find a way to save – no matter how little.

But that post may be more intended for people with decent incomes who have found themselves in a debt trap after not being disciplined enough with their finances over a period of time.

It is important to point out that many, many Americans make only enough money to pay for the bare essentials: rent, food and gas to put in the car.

For those people, saving is not a top priority nor is it necessarily that feasible.

But for this struggling population it is important not to fall into two traps:

1.- Payday loans

The Federal government sums up the trouble with these better than I ever could, so here is an excerpt from its warning about these providers:

A payday loan — that is, a cash advance secured by a personal check or paid by electronic transfer is very expensive credit. How expensive? Say you need to borrow $100 for two weeks. You write a personal check for $115, with $15 the fee to borrow the money. The check casher or payday lender agrees to hold your check until your next payday. When that day comes around, either the lender deposits the check and you redeem it by paying the $115 in cash, or you roll-over the loan and are charged $15 more to extend the financing for 14 more days. If you agree to electronic payments instead of a check, here’s what would happen on your next payday: the company would debit the full amount of the loan from your checking account electronically, or extend the loan for an additional $15. The cost of the initial $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

The Feds have several recommendations about what you can do instead, including working with a bank to get a small loan (its interest rates won’t be nearly as outrageous) or working with a particular creditor to whom money is owed to see if it is possible to make a smaller payment or defer a payment by a few days.

2.- Overdraft fees

While I am a big fan of having consumers put their money in the safety of an FDIC-insured bank account, some of the banks have hidden fees and don’t play nice as they try to make money.

Under federal finance reform recently passed, banks can no longer automatically enroll customers in an overdraft-protection plan. However they are eager to get people to sign up and consent to them or “opt in.”

Under such plans, a bank would agree to cover the amount of money you overdraw an account – and charge a fee for it.

For example if you didn’t balance your checking account correctly and forgot you’d gotten a $3.50 coffee and then paid your rent – and cam up $3.50 short, the bank would “cover” your overdraft, then expect you to repay the difference plus a fee on top.

It sounds like a nice feature – but if you didn’t have enough money in your checking account to cover the original transaction, where is the money for the overdraft fee supposed to come from?

For those whose incomes are so small that a bounced check is a daily concern, it’s even more critical for him or her to have an excellent grasp on finances to avoid falling into one of these traps which can lead to a damaging debt cycle.

We all know how hard it can be to get ahead of a credit card bill and finally pay it off.

Interest is still compounding as you move month-to-month.

One way to combat this is to put money towards your monthly balance four times a month – rather than once.

For example, my credit card company allows me to make a payment on my balance online. I can choose the dollar amount I want to contribute.

I can choose that option and enter in the amount of money I want to transfer.

So let’s assume I want to put $400 per month towards a credit card balance.

Rather than waiting until the credit card monthly billing cycle comes to an end and I get a statement, I could log onto the web site and choose to pay $100 per week.

That helps bring the balance down and it limits the amount of money the bank can charge interest on.

There is a similar principal at work here for people who make one extra payment per year on their mortgage: Since there are only 12 months in a year, you would think that there are only 48 weeks (12 months x 4 weeks per month). But the reality is there are 52 weeks in a year. (This is why someone paid bi-weekly can expect 26 paychecks per year)

If someone set aside money from every single paycheck to cover the mortgage payment, at the end of the year there would be enough money to total an additional mortgage payment which could be used to pay down the principal. Paying down the principal means there is less money outstanding for the bank to charge interest on which means paying down the loan faster.

This is the same principal I am suggesting for paying down a credit card – except I would suggest putting the money towards the card’s balance as soon as it is available, rather than letting the bank take advantage of charging interest for the whole month.

Be sure to read the terms of your credit card agreement. Also note that many will impose a limit on how many payments you can make per month – you don’t want to go over-budget!

And good luck continuing to whittle down your balances. Any little bit truly helps.

That cash happened to come from my emergency savings account. So it is now below the mark from where I would like it to be.

Since I am of the mind that it is really important to have cash stashed away for unexpected expenses (this is a case-in-point), what happens once you dip into that reserve?

For me, it means I have to stop any outside investing and redirect my cash flow over to my emergency savings account.

Yes, this is going to detract me from my lofty goals of consistently stashing away x-number of dollars per month every month for the next 35 years thus guaranteeing me x-number of dollars producing x-number of passive income each year.

And no, this is not helping me to build wealth since savings accounts are yielding such pathetic returns.

But once my emergency account is replenished (and yes, we are talking several months here before we get back to where it once was) I can return to my outside investing. And I will continue to be well-prepared should another undesirable expense arise.

Until then, it’s time to buckle down and repay myself the expense I just doled out.

Even if your dream-retirement only involves one week a year at a tropical destination, the vacation’s funds have to come from somewhere, right?

For large portions of Americans, a comfortable retirement is in jeopardy. The Employee Benefit Research Institute which studies how retirement-ready Americans are has put out an alarming report.

It concluded “Americans in the two lowest preretirement income levels will be running short after 10 years in retirement.”

Worse still, the EBRI study “also finds that after 20 years of retirement, almost a third (29 percent) of those in the next-to-highest income level will run short of money.”

The EBRI said it finds “nearly half of early Baby Boomers—those on the verge of retirement, currently ages 56 to 62—are at risk of not having sufficient income to pay for basic retirement expenditures and uninsured medical expenses, and nearly the same fraction of “Generation Xers” are in a similar position.”

This is a dramatic wake-up for anyone who wants to remain solvent in retirement.

Old age brings its own host of expenses, mostly on the medical side. And although many things may be paid off (like one’s home) by retirement age, thus reducing the amount of income needed to sustain one’s lifestyle – that’s no reason to slack off on retirement savings.

Plus, given the last decade’s dismal stock market returns, it’s up to individuals to continue stashing as much money as possible away in case investment returns continue to underperform their historical averages.

I finished paying off its loan in January of this year – and that means I own it outright now.

Of course, owning it outright after *5* years means it is bound to suffer mechanical problems.

As if on-cue, I just went through an extremely expensive repair on the car.

Since it is a 4-wheel-drive vehicle, it has a drive shaft that became loose and worn down and needed to be replaced.

The part alone cost nearly $900. Two hours of labor tipped the final bill close to $1200.

That is roughly equivalent to 4 monthly car payments.

I had to take a calculated risk.

As I’ve discussed here before, I am thinking about whether it is worth it for me to buy a new car. I don’t want to deal with the additional expenses: the taxes, the excise tax (a Massachusetts phenomenon for those not familiar with it), the interest, the car loan or the upkeep.

I also am trying to save as much money as possible. Plopping $5,000 down for a down-payment (I don’t have the funds to purchase a car outright) and have to reduce my monthly savings in order to afford a car payment is highly undesirable.

I am sure I will need to purchase a car sooner or later. I guess that’s pretty much inevitable.

Even though this most recent repair was costly, I feel like the car is in otherwise good working order and in a state of good repair. At only 85K miles, I am expecting Ford to have manufactured a car solid enough to reach 100K without further troubles.

The expensive repair should extend the life of the vehicle and allow me to recoup my spending through savings and continue to build my wealth.

Also, it was tremendously helpful to have an emergency fund to tap into. I won’t have to go into debt or pay a single cent of interest which would further add to the cost of the repair.

I’m poorer in the short-term, but optimistic that this is a calculated risk that will allow me to continue to replenish and grow my savings again in the coming months.

My all-time favorite, up until this point, has been the idea of freezing the card in a block of ice in the freezer.

You gotta wait for it to thaw out before you can use it.

Hopefully by the time the card is thawed out, the impulse to use it will have passed.

I saw another great idea in the Wall Street Journal this week.

Brett Arends relays this story:

“…my friend Vincent…sensibly writes the interest rate on the front of each of his credit cards with a Sharpie.”

I think that is a terrific idea. Every time you whip the card out to use it, you are confronted with the terrifying fact that the credit card company is going to charge you a rate of interest that is very high. So high, in fact, that an ordinary person could never get regular returns like that by putting money in typical investment vehicles available to most consumers.

We could even take it a step further and suggest you write the card’s balance on the card with a sharpie.

I imagine that might make you think twice before whipping the card out at the store where a cashier could judge you, or using it out at dinner with friends to split a bill and having everyone able to see, plain as day, your credit card debt.

It occurred to me walking home tonight how advantaged I am to be free of debt (aside from a mortgage) and that I can be saving. I am also more than 30 years old. That means even though I have many years to go to start saving, I have many fewer to watch my earnings grow had I really started an aggressive savings plan 7 or 7 years ago.

When I play with my financial calculators to project out how much my investments can be worth in 5, 10, 15, or 30 years from now (and the passive income I can expect from those investments) I always get to start my calculations from my current age, and with the advantage of already having a base of savings.

But if you are in debt, you really can’t start your savings projections out now. Sure, you could start saving and not aggressively pay down your debt. But the debt is like giving away money to another entity: that 15%+ interest rate on your credit card is killing the amount of free cash you have and lengthening the amount of time it will take to pay off.

So please, start debt reduction now. You would not believe how much of a freer person you will become when your monthly bills mean you pay yourself a handsome sum rather than handing the money over to a faceless corporate entity that charges high interest rates.