Overdraft fee? Are you #$!@% kidding me???

Overdraft fee 9

Overdraft fee on our account?

 

I am truly embarrassed. Just few weeks ago I rambled in lengths on how you should avoid getting overdraft fees by knowing when payments are supposed to come out of your account, and always making sure you have enough money in it. “Oh, only extremely dense people would let their account get overdrawn! You’re better than this!” 

Well, guess what. I log into Mint.com (which is the best money management website ever, just FYI) on Friday, and I see that we’ve been charged an NSF fee. What the hell?

 

Overdraft Fee

Overdraft Fee

 

Why did this happen?

 

For ages, my paycheck came into our account on Thursday night. On Friday morning, our mortgage payment would leave our account. I specifically picked every other Friday for our mortgage payments just so it is the same day as payday and I knew we would have money in our account. It’s always been like this, and it never changed once.

In fact, I started counting on this lately. Because we have rather aggressive savings goals this year, last few weeks I’ve been living a bit on the edge. I would move money between our checking and saving accounts trying to hit our goals rather aggressively, to the point that sometimes I would leave almost nothing in our chequing account. Out of my determination to hit our goals which borders on stubbornness, I flew a bit close to the sun. Counting once again that my paycheck will appear first in our account followed by our mortgage payment, I left our account too skinny.

But this Friday Murphy’s Law prevailed, and our mortgage payment showed up before my paycheck. Boom!

It doesn’t matter that my paycheck arrived shortly after. We didn’t have enough money in the account to cover the mortgage payment. And as a result, our bank refused the payment, issued an overdraft fee, and when I saw this I almost spilled coffee on myself. After all the hard lessons that I’ve had in my life when it comes to finances and preaching on my part how you should always be aware of your cash-flow, did I just cause an overdraft fee on our account?

 

Whose fault was this?

 

I’m not going to make up excuses for myself. It was 100% my fault for letting my stubbornness get the best of me. Yes, it’s great to have goals for your finances, and work hard on hitting them. But you should never leave your net empty, when you send your best players across the field to score some goals (yes, this is a hockey reference). This can have very dire consequences.

To add insult to injury, just few weeks ago my wife checked our account and noticed we’re flying unusually low to the ground – meaning we have unusually low account balance. She expressed concern about it, but I brushed it off. “- Don’t worry, honey. Your man will never let anything bad happen, I’ve got this!”

Overdraft Fee

Overdraft Fee

What a perfect I-Told-You-So moment. Kill me now.

 

First results:

 

$45 overdraft fee courtesy of President Choice Financial (our checking account) already been charged.

$75 NSF fee courtesy of Macquarie Financial (our mortgage holder) that will follow.

A huge load of embarrassment for me. Is this what crow dinner tastes like? Yuck!

 

I jump into action!

 

Fueled by my own embarrassment, I jump on the phone. Obviously, I can’t just ignore this rather negative event, but I also know that if I’m pro-active, it’s possible to avoid paying some of the fees. My plan is to beg for forgiveness until they stop me!

First I call our mortgage company and explain the mix-up to the best of my abilities.

Me: – Hello! My deepest apologies, but it seems to me that we’ve bounced a payment this morning. I just wanted to let you know that I’m truly sorry about it, and you can already debit our account for the full amount.

Very nice CSR: – Oh, I see. Thank you for letting us know and saving us time. We’ll debit your account shortly, and since this is the very first time you’ve bounced a payment, we’ll waive the NSF fee.

Me: – OMG, thank you so much!

 

Next, I call our bank and talk to them:

Me: – Hello! I just wanted to apologize for overdrafting our account this morning.

Very tired and emotionally withdrawn CSR: – Uhmmmm…ok.

Me: – Any chance you can remove the overdraft fee? This is the first one on our account.

Very tired and emotionally withdrawn CSR: – Not really, no.

Me: – I’ve been a client of this bank for a very long time; we have a number of products in our name. What can you do for me?

Very tired and emotionally withdrawn CSR: – Well, let’s see. I can probably meet you half-way. How does $20 instead of $45 sound?

Me: – Not nearly as good as a zero charge. Give me a break, it never happened before.

Very tired and emotionally withdrawn CSR: – Oh, fine. But next time you overdraft your account, this trick won’t work.

Me: – You’re the best. Won’t happen again!

 

Final results:

 

– President Choice Financial reimburses the overdraft fee within days:

Overdraft Fee

Overdraft Fee

– Our mortgage company sends us a postcard. How nice:

Overdraft Fee

Overdraft Fee

We avoid paying $120 for my stupid mistake.

Lesson #1: No matter how bad I want to hit our financial goals, I can’t live on the edge, and we should always have buffer in our daily account. Ideally, at the beginning of the month I’d like to have enough money in our account to cover all our expenses for the month. This way we never have to “time” our bills and paychecks.

Lesson # 2: You can talk your way out of some overdraft fees. Of course, this won’t work if you constantly overdraft your account, but if you make a stupid mistake once in a while, banks can be surprisingly forgiving.

Lesson # 3: My wife is one smart cookie 🙂

 

Overdraft fees by the numbers:

 

Average overdraft fee charged by major banks is $34.

– Overdraft and non-sufficient funds fees accounted for 61 percent of total consumer deposit account service charges in 2011

– The amount in annual fees, on average, for accounts that had at least one overdraft or non- sufficient funds fee – $225

 

My 13,940% risk-free investment

returns 2

What if I said there is a risk-free investment with 13,940% profit over time?

 

Now, at this point you would probably laugh at my face. First of all, the return figure is way too high and comes close to that of Apple. Second, there is no such thing as risk-free investment besides GIC’s and money market accounts (and they return around 2% these days – barely keeping up with inflation).

But my investment does exist. And the returns are real. And they are indeed risk-free! And I’m not even Steve Jobs.

 

My 13,940% investment

 

Risk-free Investment

Risk-free Investment

 

Now, before you close this page and/or start writing me an angry email about being misled, hear me out:

– I’ve always had short hair, at least since high school. Longer hair doesn’t look good on me. So, at some point I just started getting my head shaved. Every two weeks, I’d stop by a barber to make sure it doesn’t get out of hand – but then an idea of doing it myself and getting an electric razor popped into my mind.

– My initial investment on it was $20. You can get it cheaper, but I went with quality in mind. And the quality paid off – the thing never let me down.

– I used to visit a barber to get my hair trimmed every two weeks, or 26 times a year. Each barber visit costs roughly $12.

– For the last 9 nine years, I’ve been trimming my own hair thus saving me $2808 in total (26 times * 9 years * $12)

Let’s plug these numbers into investment calculator to find out the return on my initial $20 investment:

 

Risk-free Investment

Risk-free Investment

 

Total investment return: 13,940% (just below Apple’s stock returns of 15,000%)

Annualized return: 73.2% (average stock market return – 11%)

Risk factor: NONE (but the risk of being mistaken for Bruce Willis still exists!)

 

On a more serious note

 

Of course, I’m not trying to say that buying an electric hair trimmer is a real risk-free investment. The whole thing is meant as a joke, relax.  It’s not really an investment, it’s just a razor that happens to save me money because I’m not very touchy about my looks and it makes my life easier. And I’m not trying to say that everybody should start shaving their heads to save money! I sure would not like if my wife started shaving her head – even if it made her look like Sinéad O’Connor (not that she would ever willingly do that no matter how much money it saves).

I think my main point is that if you are struggling with money or have goals of reaching financial freedom one day, you have to start thinking with long term in mind. I didn’t have a good start when it comes to finances, but I’m still trying to reach my goals by changing my financial habits.

Every single transaction/event in your life is either a benefit or a detractor to your financial well-being. You have to pay attention to them and know their long term effects when it comes to your financial picture. For example, ask yourself how these events affect you in the long run:

– Does getting your daily morning coffee on the way to work benefit you financially?

– What would going back to school and getting an advanced degree mean to your income and how it would stack up against the short term expense of school fees?

Is getting a brand new car a sound financial decision and can you truly afford it along with higher expenses it brings?

– What makes more sense – paying off your mortgage earlier by throwing more money into it monthly or investing extra money and getting a higher return on it?

– Is commuting 50 kilometers every day to a higher paying job worth it despite higher transportation costs?

 

Biggest mistake people make

 

Just from talking to people and observing their decisions, I’ve noticed that most people don’t think their financial decisions through, no matter how big or small they are. Most people act on impulse, follow the herd, and don’t really pay attention to their financial picture. And this is the biggest mistake people make – not paying attention.

Maybe all of us should become a bit financially nerdy – start paying attention to our expenses, weigh options against each other, and think of long-term repercussions of our actions. You might not want to calculate the return on investment of a simple hair trimmer like I did today or calculating amount of money lost on smoking, but just paying a bit more attention to your financial health will be beneficial to you and your family in the long run.

 

Do you calculate returns of your everyday “investments”?

 

Financial lessons I’ve learned in my 20’s

Financial Lessons 2

Financial lessons can be learned in different ways

 

Just like all life lessons, you have to learn financial lessons somehow. Life lessons can be taught by your parents if you’re open to them. They can also be learned in school if the school program includes financial basics for youth. Unfortunately, in my case I had to self-teach myself financial literacy through trial and error. This usually is accompanied by great financial pain.

As I’ve explained before, I didn’t have a good starting position for myself in my life journey when it comes to financial literacy.  Being an immigrant from another country where economy and money function in a completely different fashion, it was literally like being an alien from another planet (but no lightsaber). I didn’t have basic knowledge of personal finance when I’ve arrived. I didn’t know what one is supposed to do with money. Economy as a whole was a complete mystery to me. Unfortunately, my parents were in the exact same position so they couldn’t teach me Personal Finance 101. I was also too old for high school where they teach it.

When it comes to personal finance, some of the concepts that are familiar to any average  Canadian were in fact completely foreign to me. For example, I didn’t know how credit cards work and how much they can cost you if you don’t pay attention to your balance. I had no idea bank will lend you the money for just about anything as long as you pay it back with steep interest. Saving for the future retirement seemed unnatural since my grandparents back home were enjoying government provided pensions for life. All of a sudden, I had to learn all of it – and sometimes through great financial pain.

Financial Lessons

Financial Lessons

But sometimes pain is exactly what you need. If you burn yourself on a stove once or twice, you learn to avoid touching it at all cost. Your brain will scream at you “Hold on there, sport. Last time you did that it hurt like hell!” Financial lessons for me were exactly the same. Sometimes painful, but as long as they taught me something they were be quite useful. I’m glad for all the pain they caused me; I just wish I could have learned these financial lessons sooner:

 

Live on a budget

 

As a young man of twenty something, living on my own and fresh to this beautiful country, I didn’t know how to handle money. More importantly, I didn’t know how to control what little money I had. Money was coming in, bills were coming out. It was a never ending cycle of debits and credits to my account with no rhyme or reason.

My only limitation to spending money was my bank account. If I had money in my account on Friday night, I would go on spending it. If I didn’t have any money in my bank account, I would stay home. Same principle for all purchases, really. Basically, I would make my decisions on what I had at the time. As a consequence, sometimes my expenses would be much higher than my income.

Then I discovered a new way to live financially. I’ve started to base my decisions off what I had coming in. If I had $2,000 coming on one particular month, I would map out how I would spend this money ahead of time without paying attention to my bank account. Two thousand dollars comes in, two thousand dollars get spent. Bank account money doesn’t get touched as it would mean spending more money than I have coming in – and that is unacceptable.

People usually cringe when somebody mentions “budget” because budget means limits and boundaries. But if you think about it, budget just means putting together a plan on spending your money. It’s actually quite liberating.

Once I’ve learned how to budget and changed my perspective on spending, I’ve started putting more thought into planning my everyday finances. Saving towards big purchases became a second nature to me as I’ve started automatically set saving goals for myself. Need a new laptop for school? Figure out how much you want to spend on it, how much time you need to save it, and how much you should be putting away monthly towards it. Now some of my paycheck is going towards the laptop – instead of me just checking my bank account to see if I can buy this laptop right away or even worse – borrowing money for it (more on this later).

I didn’t learn budgeting overnight. Little by little, I figured out what works for me and what makes most sense. But if I could have learned about budgeting earlier, I bet me and my family would be further ahead in life right now. But hey, as long as we’ve learned it at some point.

 

Say “NO” to acquiring stuff

 

You don’t really need a lot of stuff in your life. Some items are quite necessary such as transportation, shelter, and basic clothes. But anything above your basic needs is not essential and spending money on acquiring more and more stuff can turn your happy existence into a vicious cycle of never-ending work and spending.

Imagine yourself camping and sitting next to a fire. A few small logs can provide you with ample heat for the night. You don’t need to shove more and more logs into the fire; while big fire might be impressive, it doesn’t match your needs. On top of it, you’ll have to work very hard on controlling it and continuously running into the woods to get more firewood. Why bother?

Same approach with money. You can make your life all about earning more and more money, and spending it all. Your 4,000 sq. feet house will be surrounded by beautiful landscaped land, German cars will sit in your 5-car garage, and you will spend 360 days at work while stressing over your financial situation and never seeing your family.

Financial Lessons

Financial Lessons

I’ve learned that I prefer simple life (and I don’t mean that awful TV show with Paris Hilton). It doesn’t mean that I want me and my family to live like monks. But driving a used car with much lower expenses as opposed to leasing a new BMW can be quite beneficial as it gives me more money to invest, and lowers the stress by improving our financial situation.

We can probably afford a bigger house for ourselves if we borrow as much as bank will give us. Still, we’ve decided against it because living in a nice condo meets all our needs. Sure a big house would be nice and would probably impress our friends – but big houses come with big problems and higher expenses, once again. For example, we can easily repaint our little townhouse ourselves over one weekend. What if we lived in a 4,000 sq. feet house? Repainting it would probably require hiring professional painters and thus opening our wallet and saying goodbye to a considerable amount of money. Simple just makes more sense for me.

 

Invest early and regularly

 

It took me quite some time to understand the importance of investing. For this, I had to completely change the way I was thinking about investing.

This is the way I used to think about investing:

” You work all your life and get a paycheck every two weeks. You put away money for your retirement. A little of your paycheck goes towards your life in your senior years. You slowly build up a retirement fund for yourself and your family, and once you have enough you start taking from it and can stop working. As long as your money outlives you, you’re golden!”

But what twenty something person really thinks about senior years? The prospect of buying something cool right now outshines any future needs. Especially when you’re talking about your paycheck – after all, we all work very hard for our money and want to enjoy the paycheck right away. My senior years are so far ahead of me that saving for them just didn’t make sense. Let me in my 20’s enjoy life a little bit, perhaps me in my 30’s or even me in my 40’s will take care of me in my senior years! For now, New Sony Playstation, here I come!

Here’s how I think about investing now:

“You work every day and get a paycheck every two weeks. A little of your paycheck goes towards your freedom fund. The money collected in your freedom fund starts producing income. If you have a little freedom fund, it produces a little stream of additional income. If your freedom fund is substantial, it produces a substantial stream of income. Whether or not you still work, it still produces income. If this income is high enough to live off, guess what – you can stop working and still receive paychecks in the mail every two weeks. Income without work is a beautiful thing!”

For some reason, this way of thinking about retirement really changed my perspective about investing. Imagine being able to cover all your living expenses with your investment income instead of working to pay your expenses when you’re old and retired. If you live a simple life, you don’t really need a lot of money to retire – a moderate stream of income will cover all your expenses without waiting till you’re in your 70’s to retire.

So now I think of investing as building that addition stream of income. Saving money towards it feels meaningful and investing became one of our primary goals.

 

Never borrow money.

 

The concept of borrowing money from a financial institution was quite foreign to me when I arrived in Canada. Up until then the only borrowing I’ve done was through friends – very small sums of course. My parents would sometimes borrow money from their friends when our funds run out at the end of the month to buy groceries. But Canadian borrowing is much different.

Here you can borrow money for pretty much anything. School classes, everyday purchases, vehicles, clothes, housing, and even home pets. Yup, apparently some pet stores will lend you money to buy a puppy.

What did it all mean to me back then? FREE MONEY! Everybody wants to give me money so I can buy stuff, how awesome is this? I can buy stuff right away, and pay it back later once I make money by working! I’ve borrowed money for night school – and boy, was it easy. First day on campus, a major bank was giving out credit cards – and I’ve signed up right away. Then I borrowed money on it to buy everyday things – as long as I could afford minimal payments on it. My paychecks (already pretty low) were spoken for by the time they hit my pocket. Fairly soon, I’ve started falling behind. Soon after, I’ve learned what it’s like to receive a phone call from a collection agency.

Just like the proverbial hot stove, I’ve burned myself on borrowing money a few times before I’ve learned my lesson – never borrow money. If you have to borrow money, it means you’re broke and don’t need whatever you’re about to buy. If you can’t pay for something in cash, you can’t afford it, so move on. Major financial institutions make serious money by lending it to people, and by borrowing money you’re willingly handing over your cash to them just to enjoy something right away.

You don’t need to hand over your cash to a bank just so you can buy a puppy – just save money, and buy it yourself. Remember that when you borrow money you have to pay it back. If you want to buy something for $100 but choose to borrow it, you have to pay back the original $100 PLUS $20 in interest. Interest becomes an additional expense to you and a nice source of profit for your bank. Don’t you have better use for your $20?

I don’t know about you, but I don’t like my bank enough to give them money for nothing. Housing would probably be the only exception to this rule.