Wheaties for Your Wallet

Part of being an adult seems to be debt.  Whether it is credit card debt or a mortgage – most adults owe money.  I think the first real debt that we encounter is often student loans.  Like a mortgage it is often a good form of debt, and has relatively low interest.  When I graduated university in 1996 I had roughly $13,500 in student loans (which I think was the average back then).  My first job out of school as a media buyer paid $30,000 a year (I was thrilled to be paid so much) and with successive promotions I paid off the loan in three years.  I then lived debt free until I bought my home in 2003, but I remember how great if felt to know that what I earned was mine and not promised to someone else.

Recently interest rates for Stafford loans (the ones I graduated with) increased from 3.42% to 7.14% this change came about because of the Deficit Reduction Act of 2005.  The average student now graduates with $20,000 in student loan debt.  Generally students are given 10 years to pay off their loans and the target percentage of income is 10%.  Let’s run some numbers:

$20,000 @ 3.42% for 120 months = $23,642 and $3,642 in interest payments

$20,000 @ 7.14% for 120 months = $28,039 and $8,039 in interest payments

The difference is $4,397 in interest payments.  It also means that for a student to stay within the target debt ratio their first job’s income needs to increase from $23,642 to $28,039.

I think of this as a backdoor tax on recent graduates.  It doesn’t directly raise the tax burden but it closes a subsidy, so the net effect is the same.  It makes it harder for middle class college graduates to get out of debt, buy a home and save for retirement. A final note, 10 years later my good friend Brent’s younger brother just got a job as a media buyer – salary, still $30,000.

Hi, I’m Jason Knight, one of the co-founders of Wesabe, and I’ll be posting here occasionally along with Marc. When we started working on Wesabe, one of the things that immediately became clear is how isolated we all are when it comes to understanding how we spend money. My wife for example tells me how bad we are about managing our money. I think she is wrong — I think we do a good job, but it’s hard to know. Since I started Wesabe many of my friends have opened up to me about how they manage their money (I feel a bit like a priest). More than ever, I’ve come to believe that questions around money need to be moved into the light. By opening the conversation with your wife, your friends, each other… we can all better understand and get more for our money. Stakes are too high for us to be isolated, so I’m psyched that you are here and I look forward to the dialog.

Next Monday, I’ll be speaking at the European Open Source Convention (EuroOSCon) in Brussels, Belgium on “Startups 2.0.” This is a talk I’ve given several times, and it basically covers how developers can become entrepreneurs. It’s great fun to give, since I wind up meeting people with great ideas and enthusiasm for what they’re doing. I wrote up my last version of the talk as a post called “Entrepreneurial Proverbs,” which a lot of people seem to have enjoyed. If you’re interested in the topic, check out that post, and if you’ll be in Brussels, please drop by or drop me a line.

Pennylicious bills itself (no pun intended) as, “Finally, a funny money blog!” And usually, it is. Today, though, they post about the states where credit card companies are chartered, referring to a map from Frontline’s excellent show, Secret History of the Credit Card. The map shows that the credit card companies have chosen states with no or very lenient usury limits, so they can charge all of their customers — in any state — very high levels of interest.

Pennylicious! I am missing the funny in that post! And the previous post was about money from concentration camps! Come on, you guys!

(Seriously, they usually have great posts, and if there ever was a topic that needed funnier blogs, it’s personal finance. Pennylicious and Stop Buying Crap are both fighting the good fight. Today’s post wasn’t funny, but it’s good info — that Frontline report was excellent.)

Wesabe developer Coda Hale found this Joy of Tech cartoon that made us all laugh. Well, ruefully, at least.

I came across this bus shelter ad in San Francisco today, proclaiming that Bank of America has “Over 600 ATMs and 140 Banking Centers in the Bay Area.” Impressive! Until, of course, you go to their site and can only find 25 ATM locations in San Francisco. 600 ATMs in the Bay Area but only 25 in San Francisco?

The Wells Fargo site gives us a clue to this puzzle — they also have 25 ATM locations in San Francisco, but they helpfully list the number of ATMs at each location. Since most locations have multiple ATMs, they actually have 42 ATMs total in the city. Likewise for Washington Mutual, which lists 20 ATM locations in the city, but probably has at least twice that many if you count by ATM.

B of A’s ad is probably accurate, then, but isn’t really answering the right question. As a consumer, my questions are: how likely am I to find one of my bank’s ATMs when I need one? And if I can’t find one, what am I going to have to pay to get my money out of some other bank’s ATM? Number of ATM locations for a bank matters more to me than number of ATMs, but according to their web sites, these three banks don’t really differ by that metric (25, 25, and 20 locations respectively). On the second question, according to Bankrate.com, in 2005, the average fee for withdrawing money from another bank’s ATM was $2.91. (Remember, you probably are charged two fees, one by the ATM and one by your bank.) Bankrate.com also estimates that in 2005, American consumers paid “more than $4.3 billion in withdrawal fees for using ATMs not owned by their own bank.”

$4.3 billion dollars in one year. That’s a lot of money to pay for getting your own money.

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(Original photo by Kyle Flood.)

One of the easiest things to do when writing about being a consumer is to “go negative” and stay there. Finding good places to spend your money, and not feeling regretful about having spent money, are both very difficult. It’s extremely easy to want to rant about the bad experiences we’ve had (I’ve already done it once on this blog!). Take a look, for instance, at The Consumerist, which in many ways has a lot of great information for consumers — the only downer being that nearly every article is a complaint (emphasized by the black-and-red “Dracula” design, and the “Consumers Bite Back” tagline). I think it’s natural that consumers have complaints — in many ways, businesses hold power over them — but I don’t think it helps to complain as much as it would to find a solution for each complaint.

In building Wesabe, we’ve wanted to allow people to express frustration with the businesses from which they buy, when they’ve had bad experiences — but not to make that the emphasis of the site. Instead, we’ve taken the view that we should shine a light on the merchants that are stars, and simply ignore those that are terrible unless you ask about them explicitly. If you go looking for information about a business our members think is terrible, you’ll find that information — but by default, what we show you are the great deals and the great companies we know about, in your area and for your needs. The default view will be positive. Likewise, if you go to talk about businesses, we’re going to steer you first to tell us about the ones you love, or the replacements you’ve found for the ones that you didn’t like.

There are a million small ways that you can affect the feel of a site while making it — the same way that the words you choose in your writing subtly change the feel of what you write. We’re always in favor of the truth (as the members of Wesabe see it) being easily available — but when we have a choice, the first step will be to promote the businesses that do well for their customers.

(Original photo by Kyle Flood again. Thanks, Kyle!)

Here’s a question: let’s say you took all your expenses for the month, and put each into one of three piles: businesses I like, businesses I don’t like, businesses I’m indifferent about. Which pile would be the highest?

I did this tonight and was pretty shocked at the results. I deal with more businesses I don’t like than business I like or am indifferent towards. Counting by dollars spent, the results are better — primarily because I like my landlord. Factoring that expense out, it’s a lot worse. I spend a lot of money with businesses I hold in low regard!

This seems like a great goal to me: spend money at places I like. Isn’t that simple? Why is it so hard to reach?

Last month, I posted a comment about bank fees on J.D. Roth’s fantastic blog, Get Rich Slowly. (Get Rich Slowly is probably my favorite of the personal finance blogs — J.D. combines excellent, level-headed advice with frequent updates, and has drawn a strong community around the blog as a result.) The comment was about how Washington Mutual made off with $180.00 of my very favorite dollars:

I once set up a Washington Mutual savings account, and they told me the minimum balance was $1,000. I put a little more than that in the account. At some point I needed to withdraw a bit from that account, and it went below the minimum. For months, I would get a $10 “low balance� fee charged against that account, and I’d blame myself for not doing a better job of saving.

Finally I brought the account over $1,000, and waited to see the fee go away the following month. But it didn’t. “Oh, I must have deposited too late in the month,� I thought. The next month, the fee was still there. What the hell? So I called Washington Mutual, and they said, “We raised the minimum balance to $3,000.� Aha. That’s quite a trick! (It would be called “bait and switch� were in not for the miracle of fine-print terms & conditions bill inserts!) Now I have my savings in a bank with no minimum (USAA — in my experience, a great bank).

You can lose a lot of money by blaming yourself for fees, charges, and penalties. In fact, many businesses are set up to profit generously from blame that you turn on yourself, when really you are being set up to fail. This is a great personal finance tip that is dirt-simple to catch, as soon as you know to look for it: whenever you see a fee, blame the company that charged you for it, not yourself.

A news story about Washington Mutual (WaMu) from a few years ago (I believe in the Wall St. Journal) taught me about this. The article talked about how WaMu was increasing the amount that it charged customers for bounced checks, and said that they were leading a change in the way banks viewed these charges. Rather than seeing customers who bounced checks as a problem, WaMu had started to see them as a source of profit. Once, too many bounced checks would get you a stern letter from the bank warning you to manage your finances better. Now, no such letter would arrive, but WaMu would charge you more than nearly any other bank (currently, $25.00) for each bounced check. The article described the push as trying to get consumers to see bounced check fees as “short-term loans” — mind you, loans with absurd, usurious interest rates. Of course, they knew that you’d feel so badly about bouncing a check that you were very unlikely to complain.

My experience with the low-balance fee is another good example of this. Did the cost of providing savings accounts suddenly jump, so that WaMu needed to change the minimum balance from $1,000 to $3,000 to make ends meet? Hardly — instead, changing the minimum allows them to collect low-balance fees from more people, like me, who turn the blame for the fee to themselves.

Banks and credit card companies make up to one-third of all of their revenue from these kinds of fees — not including interest. Likewise, you’ll find various fees tacked on to nearly every bill you regularly pay (if you’re not afraid to lose your appetite, take a look at all the fees tacked on to your local phone bill). As a consumer, your question should be, what am I getting for that money? Nearly always, the answer will be, “nothing,” and the only way they can sell you something of no value is by making it seem like it’s your fault, not theirs, that they charged you for it. Don’t buy it.

I took my experience and my money to a bank (USAA) that has no minimum balance, and in fact also reimburses me for ATM fees charged by the ATMs I use — killing two fees with one stone. When you learn to look for these fees, you’ll see that: (1) they’re everywhere; and (2) you almost always can avoid paying them. Look for a bank that is hungry for your business, not one that’s so well-established that they need to drive up fees to make more money. The hungry banks are more likely to be a good deal.

There’s a lot of financial software out there I think of as “Tamagotchi software.” If you don’t remember Tamagotchi, it was a late-90s toy fad. Kids carried around small, egg-shaped electronic toys that showed a deranged mutant bunny on screen. The deranged mutant bunnies would grow into other forms of mutant bunny if their owners played with them regularly; otherwise, they would die.

There was something brilliant about Tamagotchi. The designers did a great job of rewarding kids for small actions, and yet making it hard for them to get to the top levels of mutant bunnydom. The result was addictive — sometimes I couldn’t help but wonder, when I saw a kid seemingly about to break out a personal day-planner just to schedule their Tamagotchi activities, which was the toy and which was the owner. Eventually, though, the game got old, and even the most devoted owners would send their mutant bunnies to the dump.

I always think of existing personal finance software as falling into the same category. If you’re really devoted, and play with it every day, your spending pie charts will get very colorful. If you walk away for too long, though, they fall over and die. Two of my fundamental beliefs about the failure of personal finance software to date are that: (1) less than 1% of all consumers are willing to put up with that model; and (2) even if you are willing to put in the work, all you get at the end of the day is a picture of where the money went, which is very different than getting actual help.