NEWS: The U.S. avoided a predicted recession in 2023, and Americans celebrated by spending more than ever during the holiday season. Also, the Consumer Financial Protection Bureau is proposing new overdraft fee rules.
WHAT IT MEANS TO YOU: Once again, it’s time to hunker down and figure out how to get your finances in order. Pick one thing to fix. And if you pick a second, include depending on overdraft fees.
Last year’s first column of the year discussed five small things you can do immediately to fix your finances. That stuff, of course, is still valid. But this year, for those of you who just couldn’t make it happen, I’m offering a new approach.
How about doing just one thing?
Getting on track financially can feel overwhelming, especially if you’re living paycheck to paycheck. Rather than try to do a bunch of things at once, which if you’re like me is pretty much permission to do nothing, try to target the one thing that’s causing you the most pain.
Full disclosure: Anything you do will involve creating some kind of budget [I know! I’m a broken record] and also assessing your financial literacy and doing something about it.
We’ve talked about budgeting a lot in this column, but I’ll repeat that it doesn’t have to be anything fancy or onerous. At the very least, do the work to figure out how much money you have coming in every month and where it goes. What necessary bills you can’ t avoid paying, and how much you have left over.
You don’t need an app to do it, or fancy software. Apps may seem cool, and they work with your commitment to them, but keep in mind the initial work of inputting every single account is more than some people want to deal with. Like me.
I just budget old-school with a Google doc that I look at several times a month. I list my income for that month as well as all the bills that I know are going to come out of my account, with their amounts and date they’re coming out. To make things easier, I’ve scheduled almost all my bills for automatic payment at the first of the month. That way I know when it’s coming and how much I need in the account.
The trick is to make sure you have enough money in there when the bills come in. The second trick is that whatever is left over is the money you have for the other stuff. Be sure you’re realistic about how much you’ll need for food, gas, and other costs that aren’t actual “bills” that you pay every month. Find some hacks for that in this column, where I go into more detail on how to budget.
Once that’s done, try to live within that framework. Easy peasy! Right? No, I know it’s not if your bills are higher than what you make, especially if you have kids or other family to support.
That’s where financial literacy comes in. I wrote about it in December, so won’t go into a whole thing, but understand that knowledge is power. You can sit around wondering why you never have any money, or you can figure it out. You don’t have to take a course [though there are many resources available if you want to]. It’s as easy as checking it out online. The New Hampshire Banking Department has a resource page with financial literacy links.
That’s where we come to the one thing to do. Figure out what is causing you the most financial pain. If it’s not having enough money, try to whittle that down. Are you paying a lot toward credit cards? Do you spend too much at the grocery store? Is your car payment too high?
Once you zero in on the top problem – I know it’s likely not the only problem – you can figure out how to attack it. This may have a domino effect and involve other issues and strategies, but that’s because each financial issue you have is not in a vacuum.
There are many financial literacy resources that focus on specific issues – eliminating debt, buying a house – but they all call for budgeting and understanding how finances work. Any solution will also likely call for some pain on your end. Whether it’s reining in your food budget, undertaking a debt management program that will mean no more credit card use, or even getting rid of the big expensive gas-guzzler in favor of a small used economy car – finances don’t magically fix themselves. It takes hard work and knowledge.
I can’t tell you how to fix your financial problem. Everyone’s situation is different. But what I can tell you is there’s no upside to wondering why you never have any money or can’t pay your bills. There is one, though, to trying to figure out how to fix it.
CFPB takes aim at overdraft fees
Way back in December 2021, in the first It’s Your Money column, we talked about bank overdraft fees and some changes that had been made.
Many banks temporarily eliminated overdraft and not sufficient fund (NSF) fees during the worst of the COVID pandemic, or made other changes, including grace periods or lowering the fee amount. Some of those temporary changes became permanent.
Now, the Consumer Financial Protection Bureau has issued proposed regulations that would limit what large banks can charge for overdraft fees and set other rules. This would apply to very large banks, ones that have assets of $10 billion or more. The proposal is in the hearing process.
If you don’t carry a large balance in your checking account, you know how an overdraft fee can cause a domino effect that puts your finances into chaos. There goes the budget! Some banks charge fee on top of fee, so one fee puts you further in the hole. Too many and the bank may close your account.
Of course, the people hurt the most are the people who can least afford it. A 2019 study by the Center for Responsible Lending found that losing a bank account because of too many NSF fees can have long-term effects on finances, particularly for Black and Latino consumers, who “are disproportionately harmed by ejection from the financial mainstream.”
People who don’t have bank accounts have to look for other places to cash paychecks, pay bills or borrow money. These places often charge for services that banks offer for free. This has a big impact on the ability to build wealth for people who most need to, keeping them in a low-income spiral.
Banks look at overdraft fees as “helping” customers by offering overdraft protection. If they didn’t, the payment wouldn’t go through. This protection is technically a loan, one with pretty high interest. Large banks typically charge $35 for an “overdraft loan,” even though the majority of debit card overdrafts are for less than $26, and are repaid within three days, the CFPB said.
The fees originated decades ago to cover bank costs when people used paper checks, but now with electronic banking the practice has become a loophole that CFPB Director Rohit Chopra called “a massive junk fee harvesting machine.”
The CFPB estimates 23 million households pay overdraft fees annually. The new rule would save consumers around $3.5 billion or more a year, or an average $150 for household, the CFPB said.
The loophole the agency is trying to close is that even though overdraft protection is technically a loan, and the fee is the cost, they’re not covered by the Truth in Lending Act. That law, which was enacted in 1968, requires lenders to disclose the cost of credit to a borrower.
That law went into effect, of course, when financial transactions were done by check, often through the mail, with no idea when the check would hit the bank.
“When a bank clears a check and the consumer doesn’t have funds in the account, the bank is issuing a loan to cover the difference,” the CFPB explained. The Federal Reserve Board created an exemption that if a bank customer “inadvertently” overdrew their account because of a check clearing at the wrong time, the bank was just covering the check and it wasn’t really lending them money.
Back then the fees weren’t major profit drivers for banks, the CFPB said. But once people started using debit cards, financial institutions “began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions.”
In 2022, Wells Fargo and JPMorgan Chase accounted for one-third of overdraft revenue reported by banks, more than $1 billion, the CFPB said.
Recent policy changes at some banks have lowered overdraft fee revenue to about $9 billion annually. This came after the CFPB issued policy changes to root out illegal overdraft practices, such as fees to consumers who had enough money in their account to cover the transaction when the bank authorized the fee.
The proposed rule would require banks to disclose their fees and also keep the amounts in line with costs, or at a benchmark set by the CFPB, proposed at $3, $6, $7 or $14.
Again, this is only for big banks. But banking competition being what it is, if the big banks have to change, the smaller ones will likely follow. Your bank or credit union may have already quietly changed without a lot of fanfare. During COVID that my small local bank stopped charging overdraft fees for the first two, then it’s one charge of $10.
Of course, the big banks are fighting back, saying that overdraft fees are a service that customers appreciate. While customers likely appreciate a payment going through that would otherwise be rejected, they probably wouldn’t appreciate being charged onerous fees for a bank’s profit if they were aware that’s what was going on.
If you do think your bank is doing you a favor, add better account management to your list of new year’s financial changes. In the era of digital banking, where your balance and transactions are available literally at your fingertips, there’s no good excuse to be overdrawn.
I know that sounds judgy. Don’t take it that way. It’s a lesson for me as well. But it’s all part of becoming financially literate. The banks make money off our inclination to be lazy about finances. If we start paying attention, it’s only going to benefit our bottom line.
Scam of the month
There are a lot of articles out there telling you what scams to watch out for in 2024. I’ve got news, they’re the same scams as 2023, just with slicker (in most cases) techniques.
One I’ve written about a lot, but is worth repeating, because it causes a lot of agitation with recipients, is the fake invoice scam. I probably get a few of these a week. The way it works is the scammer sends you an “invoice” for some service for several hundred dollars. I tend to get ones for computer protection purportedly from Norton or Best Buy.
The scammer is banking on the recipient saying, “Wait, I never bought that!” then contacting the number to tell them there’s been a mistake. The person on the other end of the line will then send you into a further state of panic while skillfully getting account information from you, or having you transfer money through Venmo or some other method into crypto, or buy gift cards or whatever.
You can avoid all that by being savvy.
The first step is to check your bank account and make sure no money came out related to the invoice. It probably didn’t, and won’t, because the invoice is fake. It’s not about them stealing the money on the invoice, it’s about tricking you into giving them account information.
The second step is to delete the email and not do anything, unless you want to fill out a scam report with the Federal Trade Commission or another reporting agency. I did this for the first few, but I get so many that now I just delete them.
The ones I get, though they all look different, have some telling features. Here’s what to look for if you get an invoice that you think is a scam:
- If you click the arrow past the sender name, you’ll likely see it’s a gmail address. Norton, Best Buy, Walmart, your bank – you name it – no big business like that is going to send you something from a gmail address.
- A long list of recipients. One scam email I got just a few minutes ago had 416 recipients. And if you click on the arrow next to your email address, you can see all of them. No business worth its salt is going to send an invoice with any other recipient but you listed. If you are the only one, see if you are a BCC, this means that there are likely other recipients, but you can’t see them. That’s also a red flag if it’s an invoice. A real invoice is between you and the business you bought a product or service from.
- Unprofessional look of the message. The one I got today (see attached box) is particularly unprofessional looking. Some look more professional than others, and use logos and other things that may look real, but they’re not.
It’s better to be safe than sorry. Never ever call the phone number or text a number on any communication that you aren’t absolutely positive is legitimate. This goes for emails, texts and phone calls. If it looks like it’s a legitimate business, find the real customer service number to call, don’t use the one on the communication.
This may sound pretty square and Boomer-ish, but I actually keep the phone books that still get dropped off at my house. I know that the phone numbers for local businesses are real, and not some Trojan Horse set up to get my account information. I got the bright idea to do that after I got a scam invoice that looked like it was from the company that provides my heating oil, but had a gmail return address. It was a scam, with a fake phone number.
I know that keeping a real phone book may seem extreme and crazy to anyone younger than me, but guess what? More and more young people are being scammed because they’re so used to responding to digital things. Do what you have to do to be smart.