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Don’t Change Yourself, Change Your Financial System

Posted By Jim On 08/04/2010 @ 7:27 am In Personal Finance | 15 Comments

How old are you? Unless you’re under the age of 20 or 25, chances are you will not change.

I don’t care how much willpower you think you have, the vast majority of people will not change their habits once they’ve become an adult. This is why the government created rules to prevent cigarette companies from marketing to minors (Joe the Camel?).

In fact, your only chance of changing usually comes on the heels of a very “shocking” event. How many stories have you heard of people getting their finances on track because their brother’s house was foreclosed? How many people lose weight because their doctor warns of impending health problems? While I don’t wish a “shocking” event onto anyone, sometimes we all need one to get us back on course!

In the absence of a shock, what can you do to help your finances? Don’t try wholesale changes to yourself or the way you do things, change your financial “system” so that it works better with You. Below are a few ideas to help you do this.

Overdrafts

In 2009, banks earned nearly $40 billion dollars in overdraft fees, nearly all of which came from 10% of their customers. If you’re one of those, either opt out of overdrafts or find a bank that doesn’t change you $35 each time you overdraft.

ING Direct has a checking account product that does overdraft protection using a line of credit, usually up to $500. When you overdraft your checking account, they extend you a short term loan at Prime + 2%. The rate is in the single digits right now, which means the monthly cost of overdrafting your account by $100 is less than a dollar. While it would be better if you didn’t overdraft your account, it’s even better for you to switch to a less punitive bank while you work things out.

Credit Card Debt

If you are bad with credit cards, don’t use them. Credit cards can be very valuable financial tools if you’re able to use them properly. Like a circular saw, you can cut beautiful pieces of wood or you can chop your arms off. If you can’t stop yourself from chopping your arms off with a credit card, don’t use one!

You may have read me earlier this week when I said that cash and debit only households are basically paying credit card households [3] a few hundred dollars a year. While that stinks, it’s better to pay a few hundred in invisible costs than a few thousand to a credit card company.

Budgeting

We can all agree: budgeting is boring. Not only is it dreadfully boring, it’s not fun. Who wants to carry around a notebook and record every transaction you have? Not many. The people who do it don’t necessarily enjoy it but they realize it’s part of keeping a tidy financial house. You can’t get ahead if you constantly spend more than you earn. You can’t know for sure if that’s happening if you don’t track your spending. You can’t plan for the future if you don’t plan what you’re doing today. That’s why budgeting is important, so how do we make it easier?

If you use debit or credit cards, you can use a personal finance tool, online or offline to help you track and categorize expenses. You can use a variety of free budgeting software packages (or simple envelope budgeting [4]) to help you plan your spending.

Take a close look at the things you’re having trouble with and try to change your system. Sometimes it helps to meet in the middle, making a small change in your behavior with a small change in your system, to give you the little extra edge.


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[3] cash and debit only households are basically paying credit card households: http://www.bargaineering.com/articles/cash-only-consumers-pay-for-credit-card-rewards.html

[4] envelope budgeting: http://www.bargaineering.com/articles/what-is-envelope-budgeting.html

Thank you for reading!