MONEY MANAGEMENT 3
Financial Tools to Help You
Getting what you want becomes easier when you have developed a detailed plan and when you know about and understand the various financial tools that are available to you.
You can pay for your monthly expenses in a variety of ways, including cash, money orders, checks, debit cards, and credit cards. Each form of payment comes with its advantages and disadvantages; knowing them will help you to determine which financial tools you will use.
Cash is quick, convenient, and works well for making small purchases. However, it isn’t typically a good idea to use cash to pay larger bills unless you get a receipt and keep that receipt in a safe place. Carrying large amounts of cash can also be a liability—it’s much safer to keep your money in a bank or credit union savings or checking account.
Money orders work well for those payments you do not want to make in cash and for which you want or need to maintain a receipt. Money orders aren’t as convenient as other forms of payment because you must travel to a business that sells them and purchase one each time you need to pay for something. Money orders are most commonly purchased from grocery stores, post offices, banks, and credit unions. The cost for obtaining a money order can range in price anywhere from $.50 to $5.00 each, depending on where you purchase them and the amount of the money order.
Using a check or a debit card is probably the most convenient way to pay your monthly expenses. Debit cards are cards that automatically draw the payment out of your account and can be used at a variety of businesses. Checks can be easily sent in the mail with your bills. Since the passage of the Check Clearing for the 21st Century Act, commonly called Check 21, which became effective in October 2004, checks can be cleared immediately from your checking account. You cannot count on a few days delay when paying with a check, as funds may be immediately subtracted from your account. Your checks, debit card receipts, and statements provide proof if you ever need to verify that you made a payment.
Banks and credit unions typically offer checking accounts and debit cards. You should keep in mind, though, that having a checking or savings account at a bank or credit union is a privilege, not a right. If you abuse the privilege by overdrawing your account, you may find that the bank or credit union closes your account, and you may not be allowed to have an account at any other bank or credit union.
In order to ensure that you do not overdraw your checking account, you need to keep a register to track your deposits and withdrawals and reconcile your account each month. Some people believe it isn’t necessary to reconcile their account. It is easy to miss recording a check in your checkbook or to write the wrong amount on your register. Banks and credit unions can also make mistakes. The only way to catch mistakes is to reconcile your account.
Some of the information recorded in a bank’s or credit union’s system may be entered by hand, making it possible for mistakes to happen. Don learned this first-hand. He had made a deposit at his credit union that did not show up on his monthly statement. After reconciling his account, and doing some further research, he found that the credit union had credited his deposit to his father’s account. Had he not taken the time to reconcile his account, he may never have realized he was missing a deposit.
Elaina, too, noticed that the balance on her bank statement was lower than what she thought it should be. Upon reconciling her bank statement, she noticed that the bank cleared one check to a department store twice for $90 from her account. She immediately notified the bank, and the $90 was credited to her account. Had Elaina not reviewed and reconciled her bank statement, she would have lost $90. Reconciling her bank statement was one way Elaina was looking out for her financial best interests. She kept careful track of her expenses because her goal was to remodel her home. Paying extra for things she didn’t want or need was not part of her plan.
Keeping careful track of your account can also ensure that you do not have to pay extra fees. Larry deposited his paycheck one afternoon, just after three o’clock. Because the deposit was made after 3 PM, the deposit was credited to his account until the next day. Larry had four checks that were deducted out of his account earlier that day, leaving him short $11. This caused four checks not to be paid by the bank, and the checks were returned to the retailers as non-sufficient funds (nsf) or insufficient funds (isf) checks. The bank and the retailers charged Larry fees for each check. By the time Larry received notice in the mail, three more checks were returned. Larry ended up with $350 in bank service and retailer charges for the checks that did not clear his account.
Larry is now careful to track the balance in his account so that he does not incur any extra fees. He has also added overdraft protection to his account. Overdraft protection is a service that extends you a line of credit should you not have enough money in your account for a check you wrote. Using overdraft protection is often less expensive than incurring fee for returned checks.
Learning to comparison shop is another way you can keep from paying too much for things that will keep you from reaching your goals.
Advertisements are all around you, trying to convince you to purchase a product or service. Advertisers want you to spend your money, and they want you to spend it now, regardless of your goals.
Some consumers mistakenly believe that they can purchase the same item for the same price at every store. This simply is not true. You need to shop around to make sure you are getting the best deal.
Bill wanted a power sander for Father’s Day. A newspaper advertisement featured one at a home improvement store for $59. Bill’s wife, Latoya, had to go to the hardware store to pick up some supplies, so she decided she would look at power sanders while she was there. When Latoya arrived at the hardware store, she was surprised to find that the power sander her husband wanted was $99. Latoya decided she would stop at the home improvement store on her way home from the hardware store. As Latoya’s experience demonstrates, comparing prices of an item at two or more stores can save you money.
It is good to comparison shop with groceries, too. In most stores, items will have a label on the shelf that tells you the price per ounce or the price per weight. Sometimes purchasing larger volumes will result in savings. You must compare the price per weight, however, as this may not always hold true. Keep in mind it isn’t wise to purchase a larger volume even if the cost is less if you are unable to use that amount before the item spoils.
Clipping coupons is also a way to save money. Most Sunday newspapers have coupons. If you were able to save $5 a week with coupons, that would amount to $20 a month or $240 a year. This is money you can save for your goals.
Working a budget, comparison shopping, and tracking expenses are all ways to help you reach your goals. Keeping accurate records will also help you. Deciding what records to keep and what records to discard is an important part of organizing your finances. It is important to set up a home filing system to keep track of your finances.
You do not need to spend a great deal of money on an elaborate filing system. You can set up an effective system with a few file folders and a box, though if possible, it’s preferable to maintain records in a small, locking file cabinet.
You need folders for the following items:
• Bills to Pay
• Bills Paid
• Bank Statements
• Credit Card Information
• Tax Records
• Home and Property records
• Medical Records
• Insurance Records
• Receipts for Large Purchases
• Automobile Records
• Warranties for Purchases
• Retirement Information
• Personal Family Records
Bills to Pay: As bills arrive in the mail, put them in your folder labeled Bills to Pay. Open the bill and circle the date the bill is due. Once you pay your bills, transfer them into your Bills Paid file. This is the folder where you should keep the payment book for your car, home mortgage, or student loans. This folder should only contain current bills that need to be paid.
Bills Paid: Once you pay a bill, put the bill in this folder. Unless you need the information in this folder for tax purposes, keep the information in this file for one year.
Bank Statements: In this file, keep your monthly bank or credit union statements. You should keep these statements permanently.
Credit Card Information: Keep a file that contains the contact information and card number for each of your credit card accounts and maintain credit card statements in this file for at least one year. Once or twice a year, make a photocopy of your credit cards and put it in this file. (Because there are so many mergers between credit card companies, once a year may not be often enough, as your information may not be current.) If your purse or wallet is ever stolen, you will be glad you have this information on file.
Tax Information: Keep all supporting tax documents in this folder. This includes records of all income, pay stubs, W-2 forms, receipts for donations, and any other record you need to verify income or exemptions on your tax form. You must keep tax information for a minimum of three years, but it is advisable to keep tax records for six years.
Home and Property Records: Keep all records, bills, and other documentation on home purchases and improvements for as long as you own the property, plus an additional three years.
Medical Records: Keep these records for one year. If you claim medical expenses as a tax deduction, keep all supporting medical records for the same length of time as your tax records.
Insurance Records: Keep all the information regarding your various insurance policies in this file. Keep the documents as long as they are in force.
Receipts for Large Purchases: Keep receipts for large appliances and other large purchases for as long as you own the items.
Automobile Records: Keep automobile titles, bills of sale, receipts for work done, and maintenance information for as long as you own the automobile.
Warranties for purchases: Keep a folder with all the appliance manuals and warranties for as long as you own the item.
Retirement Information: Keep information regarding retirement investment information and rules on Social Security, IRA’s, and other investment information in a permanent folder.
Personal Family Records: Keep the following items permanently: birth certificates, wills, Social Security cards, citizenship papers, military service papers, marriage licenses, divorce decrees, adoption papers, custody documents, child support information, pre-nuptial agreements, court documents, diplomas, bankruptcy records, and passports.
Keeping your files in a safe place has always been important. It is especially true today, as identity theft has become a serious problem. If identity theft happens to you, it will create havoc in your financial life. Identity thieves steal your personal information and use it for their gain without your permission.
You should take precautions to lower your risk of being a victim of identity theft. Put all of your financial records away, keeping them out of plain sight in your home. Do not leave financial information, deposit slips, receipts, checks, etc., in your car.
Don’t leave credit card offers lying around. If you receive credit card offers in the mail, and do not intend to reply to them, shred the offer. If you do not have a shredder, tear the application up into small pieces. Whenever you are throwing out old information from your files, shred or tear up the documents you are discarding for safety’s sake.
You should also look for common warning signs that someone has stolen your identity. After Pat returned home from her vacation, she opened a letter from her credit card company verifying her change of address. Since Pat did not and was not moving, she immediately contacted her credit card company. They informed her that someone in another state had already used her credit card number to purchase $5000 worth of electronic equipment. Pat immediately filed a police report, closed the credit card account, and called the three national credit bureaus to put a fraud alert on her credit report to prevent the thief from opening any new accounts in her name.
Pat spent hundreds of hours cleaning up the mess the identity thief caused her. She believes that the only place the thief could have found her credit card number was on a credit card receipt she had left on a table at a restaurant when she was on vacation. As a result of her experience, Pat is careful to safeguard her financial information and no longer leaves her receipts on the table.
Keeping accurate financial records is important for many reasons. When you file your taxes each year, you will need to have complete and accurate information. If someone were ever to steal your identity, you need to have ready access to all your account information to report the theft to your bank or credit union and credit card company. If you have a major appliance that is still under warranty and needs repair, you will need to have the sale’s receipt to verify your purchase. Maintaining careful records is important in any sort of dispute over a product or service you have purchased. Whenever you send correspondence to a company, including your bank or credit union, any of the three credit reporting agencies, your insurance company, or the manufacturer of a product you own, be sure to keep a copy of the letter in the appropriate file.
Keeping good financial records is important to your financial health, so is learning to use credit wisely. Having access to credit can be important for making purchases that might not otherwise be possible and can give you the convenience of buying something now and paying for it later. In the next chapter, you will learn about the types and costs of using credit and discover ways credit can enhance your life.
Chapter Review
• Having a checking account at a bank or credit union is a privilege not a right. If you abuse the privilege, you may find that you are unable to have an account at any bank or credit union.
• The Check Clearing for the 21st Century Act, commonly called Check 21, allows for the immediate clearing of checks from your checking account.
• Comparison shopping is a way to keep from paying too much for things you purchase. The same item is not always the same price at different stores.
• Maintaining good financial records will help you stay on track to reaching your goals. You don’t need an expensive filing system; a few folders and a file cabinet will work.
• Keeping your financial information in a safe place will help protect you and your family from identity theft.