Monday, June 3, 2013
Four Kinds of Money
When I graduated from college in 1973 there were basically two kinds of money cash and checks. A few rich kids had credit cards, but that was an anomaly. Anything that was under $20.00 or thereabouts was a cash purchase. Rent, utility bills, and major purchase required a check. Now these two forms of money have been overtaken by credit cards and debit cards. They are certainly more convenient, but are they an improvement? I write this blog for a wide audience. Some of my readers are just starting out on the path to financial freedom. Some of us are further down that road. No matter where you find yourself in this material world, let me ask you to stop to consider how you use the four kinds of money. I once knew a man who was skilled at his trade. He was a nice guy, everybody liked him. As far as I could tell he was a decent caring husband and father, but he had a problem. Alcohol destroyed his marriage and his career. Today, I am told, he lives by himself in another city in a dumpy apartment. He rides around on some kind of moped because he lost his license. Sometimes he finds work at a fast food restaurant. Multiple DUI convictions have landed him in jail on more than one occasion. If you find that you are carrying a balance on your credit card or you are a frequent victim of late charges, please put it away. Consider the possibility of cutting the thing up. Like a couple of beers didn’t exist for the man in the previous paragraph, credit cards might not be for you. I would give similar advice to those who use a debit card. If you find it is too difficult to balance your checking account using a debit card for multiple minor purchases on a daily basis, put it away except for major purchases and travel expenses. I know of a number of college students who got themselves in serious trouble with debit cards because they didn’t understand the concept of a balanced checkbook. Turn off the overdraft protection feature. If you don’t have the money in your account, don’t spend it. You don’t need to have $35.00 overdraft fees added to a $5.00 cup of coffee. If your overdraft fee machine doesn’t have an off switch, find a new bank. There are a lot of good things to be said about the two old kinds of money. As I work with more people, I have found that I return again and again to the concept of an envelope system for some parts of their budget. There is something physically and mentally reinforcing about using cash taken from an actual envelope. If you find you have a problem with some particular financial area (like eating out too often) decide how much you want to spend this month. Put that much cash in an envelope. When it is gone; no more restaurants until next month. Psychological studies indicate that parting with cash lights up the pain centers of the brain to a greater extent than using plastic. Letting go of cash is hard. Using plastic is easy. The judicious use of cash will probably help limit your discretionary expenses. Golf money, poker money, and entertainment generally are good candidates for a cash envelope. Writing checks is also a painful and time consuming process. If you are attempting to limit the cost of your lifestyle consider writing more checks. Be sure to enter the check in the check register when you write it, even if there are people behind you in line. It seems the greatest danger with the checkbook is the illusion of a balance. Even though there are a couple of thousand sitting in your account, that money is really already gone. Even though the checks haven’t been written, those funds are already allocated to rent, utilities, and groceries. That money can’t be used for a new set of golf clubs. If you can handle balancing debit card activity on a daily or near daily basis, adding automatic debits to pay your regular bills and fund saving programs can really help simplify and automate your financial life. I am particularly a fan of automated savings. A debit of even $25.00 a month to a low cost index fund can produce very significant results over time. Likewise, sending predetermined amounts automatically to special funds, like vacations or Christmas will guarantee the money will be there when you want it. I am too old school to take advantage of all the options available to people who use electronic banking. I still want to feel the pain of writing a check for my monthly electricity bill. However, I have seen wise young people use debit cards and electronic banking with considerable skill. I don’t have a debit card. Today I use my credit card for things like gas, groceries, sit down restaurants, and travel expenses. I still pay most of my bills by paper check. After we move in a couple of months, I think I will set up automatic debits for at least some of my bills. I still use cash for anything under $20.00, but $20.00 ain’t what it used to be. I am fanatical about paying off my credit card balance every month, sometimes so early the computer isn’t quite sure what to do with me. The only reason I am sticking with the credit card is security. Debit cards are not covered by the Fair Credit Bill act that protects customers from fraudulent charges to their credit cards. If a debit card is compromised, the customer is liable for $50.00 of unauthorized charges if reported within two days. If such a report is filed after two days, that amount increases to $500. If reported after 60 days the customer could be held responsible for the entire amount. Some banks offer their debit card customers the same coverage as their credit card customers, but they are not required to extend this protection to your debit card. They can change the terms of this offer whenever it suits them. Because credit card companies can end up footing the bill for a compromised card, they are pretty quick to shut your card down if they suspect fraudulent activity. Banks are slower to react if a thief might be spending your money from your checking account. Credit card thieves recommend checking your credit card balance on a daily basis. I should check on my credit card more often than is my current practice. I do go through every charge on my credit card every month, reconciling each charge to a physical receipt. I recommend this practice no matter how automated your accounts.