Easy Money: Setting Up Your Financial Life
There’s a problem with managing your finances the old-fashioned way—it just doesn’t work. By the time you get a statement telling you your bank balance, you’re already overdrawn by three checks. By the time you get your credit card statement, the thief who has taken over your account has wreaked havoc. Your quarterly 401(k) statements might tell you how some of your investments are doing, but how does that account tie in with your spouse’s workplace retirement plan and your IRAs?
And then there are all the fees. Late fees. Over-limit fees. Failure-to-keep-minimum-balance fees. One slip in your money management can cost you plenty.
Monitoring your finances in today’s complex world needs to be more real-time. You need to be able to anticipate problems, spot fraud, and move money quickly from place to place as needed.
Fortunately, if you’ve got a computer and access to the Internet, you’ve got the tools to simplify, streamline, and safeguard your finances. Do it right, and you’ll have a bulletproof system that ensures every base is covered and that significantly reduces your money stress.
Here’s what you need to do to get started.
Your Financial Toolkit
The following are essential components for streamlining and simplifying your financial life.
Sign Up for Online Access
Internet access is essential to smart, timely money management. You need to be able to see, 24/7, your balances and recent transactions in your bank, brokerage, credit card, and investment accounts.
Phone access to your accounts is better than nothing, but it’s a poor substitute. You’ll have to write down balances and transactions rather than being able to see them in front of you. You may also be more limited in how far you can look back; calling up historical information will certainly take more time than if you were using Web access.
Link Your Accounts
Think about how you could get money from one account to another in a hurry. With online access at your bank, for example, you can typically transfer money from savings to checking and back with a few mouse clicks. But what if you need to get cash into the IRA at your brokerage account, and the April 15 deadline is a day away? Your brokerage may offer a service that links electronically to your checking account, making such transfers easy.
Many people link their credit cards to their checking accounts for quick, convenient payments, although the need to do that is lessened if you use online bill paying, as I recommend later.
Allow Your Paycheck to Be Deposited Automatically
Your time is too precious to waste it standing in line at an ATM or teller’s window. Besides, it isn’t safe to run around with checks or excessive amounts of cash in your wallet. Sign up for direct deposit and have your paycheck safely and automatically plopped into your checking account.
In fact, almost any amount of money you receive regularly is a candidate for direct deposit. You just need the payer to cooperate, and many will, since processing electronic payments is typically a lot cheaper for them than generating and mailing checks.
Set Up Overdraft Protection
Protect yourself from bouncing checks by asking your bank or credit union to set up overdraft protection for your account. With true overdraft protection, money is automatically drawn from a line of credit, credit card, or savings account if you write a check and there’s not enough cash in your checking account to cover it. You typically pay an annual fee of $20 to $50 for the service, plus interest on any amounts borrowed. Usually, the total cost is less than one or two bounced checks.
By the way, overdraft protection is different from “bounce protection,” which is a different and much inferior service that’s offered automatically by many credit unions and banks. With bounce protection, you’re allowed to overdraw your account, but the money doesn’t come out of your savings or a line of credit. In essence, the bank is lending you the cash but charging you rather hefty fees for the privilege. I’ve heard from people who have racked up literally thousands of dollars in bounce protection fees in a single year.
Also some financial institutions play dirty by automatically adding the amount of your bounce protection to the balance you see when you check your account at an ATM. The result is that you appear to have hundreds of dollars more in your account than you actually do. This just increases the chances you’ll overdraw the account and owe the bank fees.
If your bank is pushing bounce protection, try to opt out in favor of real overdraft protection. If you can’t, start looking for another bank.
Open at Least One High-Yield Savings Account That’s Electronically Linked to Your Checking Account
You’ll want to keep your money working hard for you, and that means getting a higher rate than you’ll find at the typical brick-and-mortar bank. You don’t have to switch banks, though—just look for an online bank that allows transfers to and from your current checking account.
Three good places to check are ING Direct (http://home.ingdirect.com), HSBC Direct (http://www.hsbcdirect.com) and EmigrantDirect.com. At this writing, all three offer high-rate, FDIC-insured savings accounts with no account minimums and no monthly fees. ING and HSBC also offer free checking accounts that pay a decent interest rate and offer free bill pay; see their Web sites for details.
You may decide to have more than one high-rate savings account to keep track of your money. As you’ll read in the next chapter, many people find it convenient to have one account for emergency savings, another for irregular bills, and a third for “fun money.” As long as you don’t have to mess with account minimums or fees, you can set up as many of these accounts as you like.
Consolidate Your Accounts
Generally, the fewer accounts you have to keep track of, the better.
If you’ve got 401(k) or other retirement accounts scattered among your last few employers, for example, see if you can roll all the balances into your current plan. If your employer won’t allow that, or you don’t like the investment choices in your plan, you can roll the balances into a regular individual retirement account (IRA).
If you’ve got a wallet full of credit cards, single out one or two for everyday use. You needn’t close the others—in fact, you probably shouldn’t if you’re trying to improve your credit scores or if you’re in the market for a major loan. But reducing the number of cards you use regularly means you’ll have fewer due dates, interest rates, and terms to keep track of. (See Chapter 3, “Get the Most Out of Your Credit Cards,” for how to select the best card or cards for your spending patterns.)
Bank and brokerage accounts also tend to proliferate. Ideally, you’d have only one checking account to monitor, but that’s not always possible. For some couples, both partners have a separate checking account as well as a joint one. If you run a business, you’ll need separate accounts for that. And, as noted earlier, some people really like to open individual accounts when they’re saving for specific purposes, such as having one savings account for an emergency fund and another that’s dedicated to a future home purchase.
You might be tempted to consolidate all your financial accounts, or at least as many as possible, at one bank or brokerage. Your financial institution would certainly like that; many are trying to capture as much of their customers’ money as possible. Banks have brokerage arms, brokerages offer home loans, and everybody’s hawking credit cards.
The problem I’ve always had with the one-stop-shopping approach is that no single financial institution does everything well. Your bank may offer free checking, a nice online bill pay system, and a great ATM network (like ours does), but it may have lousy rates on savings and mediocre rewards programs for its credit cards (like ours does). Your brokerage may offer low-cost access to great mutual funds but too few ATMs and high rates on loans.
Instead of having clear advantages, this kind of consolidation involves compromises, which means there’s a cost to you. You might decide to go ahead anyway but remember to review your situation at least annually to see if redeploying some of your accounts elsewhere makes sense.