A blog about spending wisely in your twenties, with advice on everything from cooking to saving money on gas; how to teach yourself to save money instead of spending it, traveling without breaking the bank, and much more.

Monday, March 24, 2008

The $37 Latte

Until I was about 20, I ignored overdraft notices. My mother would call and point out the pile of matching envelopes arriving at her house (the address I still used for banking purposes for a while after I moved out), and I would shrug them off or rationalize them. The older I get, the more I realize that this phenomenon is not unique to me. Granted, not everyone racks up tons of overdraft charges, but I believe there’s a fairly significant number of the 18-25ish set who not only rack them up, but also live in complete denial of the havoc overdrafting is wreaking on their finances.

I don’t know of any hard numbers on just how many of us get into this awful habit, and I can only guess as to the reasons. Perhaps we’re embarrassed, perhaps we’re in denial. We want to seem financially solvent, even if we’re not – often we don’t care about the numbers on our bank statements as long as our debit and credit cards clear when we’re buying overpriced goods & services that we don’t actually need.

In a perfect world, the bank would just reject our attempts to purchase items that we haven’t actually got enough money for, but banks are businesses and charging fees to the financially illiterate or irresponsible is their bread & butter. We start to play beat-the-bank, thinking we’ll deposit more before the transaction clears, and we begin to believe that it’s ok to overdraft. After all, the bank let you charge whatever it was you thought you needed in the first place, right?

Let’s say you’re like I was, and you are completely in denial about the notices flooding your mailbox. Let’s say that one of them was the result of having not quite enough for the $5 latte you wanted. You have $3, and you go ahead and charge the $5 on your debit card. The bank catches this, of course, and hits you with a $35 fee. You just paid $37 for an already overpriced $5 latte.( $5-$3 you already had = $2 +$35 fee = $37). You could have made a normal cup of coffee at home for pennies on the dollar. Even more amazing, somewhere between buying that latte and getting the notice, we manage to convince ourselves that they’re unconnected.

How much are those “little” $35 charges hurting you? Let’s say you make $15 an hour. (Lucky!) and you’re getting 6 overdrafts a month. 6 x $35 = $210. Six overdrafts a month means $210 you don’t have. And $210 ÷ $15 per hour = 14 hours. $210 worth of overdraft fees is the equivalent of 14 hours of work for you, that’s almost two days of hard work- completely down the drain. Unless you are very, very lucky you probably don’t even like your job that much. And yet you have just wasted 14 hours of time there. That's fourteen! hours! you worked just to have the money float away into BankFeeLand. That $210 could easily pay almost all of your utilities if you’re living with roommates. It’s almost FIVE TANKS of gas in a compact car, if gas can be found for $3.70 a gallon anywhere near you.

So how do you kick the habit? Well for one, start actually OPENING the notices. Tack them up somewhere where you’ll see them everyday, so that they are staring you in the face. Each time you get another, add together the running total on the most recent notice. Every so often, look at that total and think about what you could be buying if you’d SAVED that $35 instead of giving it to the bank. After a while (it may take longer for some), you’ll begin to find yourself unable to deny or rationalize the money that you’re just giving away- money that you’re most likely working your butt off for. Once you’ve learned to be honest with yourself about overdrafting, start following these tips:

Know your available balance. Don’t just have a vague idea of what you think you might have in the bank. Know what you have available to you, after deposit holds, automatic bill payments, and anything else that you might not immediately think of when you’re excited about payday. You might deposit $600, but sometimes only $100-$200 is available for spending same-day. In the era of online banking, there’s no excuse to not know your available balance.
Don't play Beat-the-Bank. Most banks will still hit you with a fee even if you deposit money before a transaction with overdraft potential clears.
Set up overdraft protection. Get a savings account and link it to your checking account. Put $100 in it and set up overdraft protection. Never, under ANY circumstances withdraw that $100. You might feel that $100 is a lot of money to leave in a low interest account, and you might want to use it for an impulse buy. Don’t think of that $100 as YOUR $100. Think of it as $100 you paid to your bank to never charge you an overdraft fee again.
• If all else fails- if your will power, self control, and knowledge of your account balances aren't enough to make you stop overdrafting, call your bank request that your debit card be JUST a debit card. Most debit cards can be run as credit cards- and this will allow merchants to approve many transactions that would otherwise be rejected for Not Sufficient Funds, forcing you into overdraft. If your card can only be run as a debit card, most banks will only approve transactions for which you have sufficient funds.
• And above all - Curb Your Spending. Obviously this aspect of avoiding overdrafts is bigger than this entry, but it applies – big time. If you can manage to stop, or at the very least cut massively back on, impulse buying and overspending, you’ll be gambling your bottom line less often, which means risking overdraft less often. If you find yourself with $3 in your account, get the smaller $2.85 latte if you aren’t strong enough to get out of the line and walk out of the coffee shop. But please, please don’t let yourself spend $37 on a latte ever again.


klm said...

until you were about 20? OK, sure, that's pretty close. Love, Mom

tehnyit said...

Very wise advice! I like the way you have equated the wasted overdrafts in terms of working hours. It certainly put things into perspective.