If not, here’s a quick version.  Let’s say you have a savings account that earns 1% per month.  (Don’t laugh too hard.  My dad had one that paid this rate at one point.)  Let’s say also that you put in $1,000 at the start of 2012, and never add anything more.  According to the Rule of 72, after about 72 months, I’ll have about $2,000.  In another 72 months, I’ll have $4,000.  In another 72, $8,000.  The amount in the account doubles each 72 months it sits there.  This happens because the amount that I’m basing the 1% earnings on increases a little bit each month, until some day, it gets really fun.  Almost like magic.

The amount of magic depends on the amount of the rate

Are you still laughing about when I proposed an account that earns 1% per month?  I wouldn’t blame you.  Some of the higher interest rates for checking accounts now are about 1% per year.  About all we can say about these kinds of rates is that they’re better than nothing.  (If you’re earning nothing on your money, try to earn something on it.)

At rates of 1% per year (or less) the magic still happens, but the magic isn’t exactly making-a-jet-plane-disappear magic.  The doubling would still happen, but it would be almost the end of the century before that happened.  And to boot, your $2,000 might only barely buy a nice suit.  Break out the champagne!

Banks are scared to lend now.  They’re reeling from the shakeout in 2008.  As a result, interest rates on savings accounts and checking accounts goes down as well.  And the fees get tacked on.  It’s just not a magical time to be a saver.

What’s the key to building wealth, then, if it’s not through saving money?

Putting money in the bank is low-risk, but it’s also low-reward.  Now, it’s extremely low-reward.

The key, I think, is to take calculated risks, and work to produce something.  Find a need, and serve customers to fill the need.  If you can deliver on time for the price agreed on, that’s a lot more than many businesses do.

This isn’t “stick money in a bank account and it grows while you watch Twilight” easy, but that’s what the times demand.  There’s barely any reward for doing it this way today.

Maybe the magic will come back into compounding, but until then, make your own magic.

Sign up for the Mighty Bargain Hunter Newsletter!

Everybody’s looking for business — even banks and credit unions

Black Friday, the quasi-official start of the holiday shopping season, has taken on a life of its own the past few years with door-buster deals, super-early openings, lines around the building, hot chocolate for diehards, “leaked” circulars weeks prior, and much more.  With the economy not really recovering with bells on, retailers are needing more than ever to capitalize on tradition.

The same is true for banks and credit unions.  Despite all of the bad press that banks have gotten for raising their fees, loans are their bread and butter.  And like retailers, they occasionally run promotions to encourage more business.  (The rate I got on my used car loan was a promotional rate, and it’s pretty hard to beat.)

Handle with care!

I’m not debt-free.  I do have an auto loan out there now.  Although I would have preferred to pay cash for the vehicle, we do plan to retire this auto loan ahead of schedule, and the total interest paid won’t exceed 6% of the loan amount in any case.  (Like I said, it was a great loan.)  All in all, if we had to take out a loan, this was the best way to do it.

Borrowing money to spend on holiday presents is a bit different, though.  It’s so easy to overspend during the holidays, and it’s tough to find things that don’t depreciate heavily after you buy them (especially from retailers).  So the $2,500 is gone, and then it’s $217 per month for 12 months, and that lasts the whole year.  (A lot of the presents bought with that money have probably worn out their welcome by March at the latest — maybe New Year’s Eve?)

Everyone wants to sell you a bargain.  It’s certainly a good deal for the person selling you the bargain, especially this time of year.

It’s up to you to determine whether the bargain is a good deal for you.

Sign up for the Mighty Bargain Hunter Newsletter!

It’s clear that the representative could use some education in the making friends and influencing people department, but what is also revealed is a shocking dose of candid insight:

… The rep said it wasn’t the bank’s fault, and blamed the government. She said the federal government capped overdraft fees, and so they just “had” to raise these fees to “cover their losses” ….

Price controls make everyone worse off in the long run.  Capping overdraft fees is a form of price control: the price a bank can charge a customer for the privilege of spending more than they’re allowed to in their account.  The government got involved as the result of backlash from something or other — people ask or even beg the government to get involved in matters! — and the profitable “frequent fliers” of the bank customer pool aren’t quite so profitable anymore.  So, the bank needs to find ways to make other customers profitable, such as the responsible ones who spend within the confines of their balance.

Prices like to move freely so they can arrive at the price that’s best for everyone.  With controls the price must settle somewhere outside of optimal, and other prices must adjust around the controlled price.  Like $3 or $5 monthly fees where there were none before.  Overall, there’s not much that we can do about it.  We can vote with our feet like the Reddit poster did, but even though he made the point that some other banks and credit unions haven’t upped their fees yet, I tend to side with the bank rep:

… The rep got a little anxious, too, when my wife asked about the procedure for closing our account, and actually started arguing with my wife, saying that it was pointless to move our money because “other banks and even the credit unions are going to do it too!” ….

Whether the additional cost comes in the form of a monthly fee or something else, the cost will show up.  The overdraft income was gone with the stroke of a pen (and a whole bunch of yea votes).  Now we all adjust.

Sign up for the Mighty Bargain Hunter Newsletter!

What was a bit unusual, though, was that the check didn’t have a recent date on it.  The date was in September of 2010.  The check had gotten lost in the mail for over ten months.

So, I took it to our credit union to see if I could even cash the thing.  Customer service looked at it, and asked if there was a stop payment put on the check.  Since there wasn’t, the lady said that there shouldn’t be a problem cashing it, but also told me to check with the teller to make sure.

The teller takes a look at it, and gives me the definitive answer that it might go through.  (Ha!)  It could go through just fine, or the issuing bank could refuse it and I could be hit with a returned item charge of $10.  Yay!  I’ve always wanted to take a gamble when I deposit a check.

The better thing to do is to call up the issuing bank about the check.  I was told that they’d be able to talk to me about it if I gave information about the check.  I could then ask them if they’d honor the check.  The teller at my credit union seemed hopeful, since all that really happened was that it got lost in the mail for a long time.  Since it was a cashier’s check, the money had already been withdrawn from my friend’s account, so it’s now in some account of the issuing bank.

Anyway, if you find a cashier’s check in the bottom of a junk drawer, or in the mail like I did, and it’s as old as the hills, call up the issuing bank before you deposit it.

Sign up for the Mighty Bargain Hunter Newsletter!

Automating the paying of bills has a number of very compelling advantages for customers:

1. It’s convenient. No more signing checks, or licking envelopes and stamps.  The charges appear right on the monthly statements for easy tracking.
2. It’s reliable. Once in place and left undisturbed, the payment comes out before it’s due, every time.
3. It’s less costly. Stamps and envelopes cost money.  Getting the things ready to mail costs time.

These advantages also apply on the business end:

1. It’s convenient. The money just magically flows into the account.
2. It’s reliable. Once set up, not getting the money requires some action on the customer’s part (they have to opt out or not have enough money in their account).
3. It’s less costly. There are fees associated with the transactions, but they’re generally less than what it would cost to pay staff to process the checks.

For all its advantages, though, auto-pay isn’t quite “set and forget.”  It’s very good on convenience and reliability, but not perfect.  Why isn’t it?

Blame it on physics!

I sneaked the caveat in while your back was turned.  (Sorry.)  But it’s very much similar to Newton’s First Law of Motion:

Newton’s First Law of Motion:  Every body tends to remain at rest or in a state of uniform motion unless acted on by an external force.

From this stems Mighty Bargain Hunter’s Law of Auto-pay Continuity:

Mighty Bargain Hunter’s Law of Auto-pay Continuity:  Every automatic billing agreement tends to continue reliably unless some billing action acts to halt the agreement.

The caveat is here:  Auto-pay is reliable once in place and left undisturbed.  Any number of things could disturb this agreement, and it usually involves some change in some part of the billing process.  The conditions of these changes may be buried in the service agreement for the autopay, or they may not, but in any case, the Corollary of Auto-pay Pessimism holds:

Corollary of Auto-pay Pessimism:  Failure to pay for services rendered, even if failure to pay is due to an auto-pay agreement that was halted suddenly or even silently by the company, is the fault of the customer.

Case in point:  A user on the money StackExchange site had his credit rating drop when something got mucked up with the automatic bill pay of his utility company.  He claims that his automatic bill paying stopped, without any notification to him, when he opted in to paperless billing.  I don’t have any reason not to believe him — and it does suck a little that this happened to him — but I still think that in this case it would have been up to him to be vigilant about making sure the payments were still coming out of his accounts on time.

Companies protect their interests, but they’re not evil

The service agreements, and automatic bill-paying agreements, are written by the companies for the benefit of the companies.  They have verbiage that places burdens like these on the customers, and absolves them of liability.  So, even if halting the bill-pay agreement was flat-out wrong and done without any notice, it’s still on the customer to pay.

At the same time, I don’t believe that companies are malicious, and even if they were, they wouldn’t deliberately cancel someone’s auto-pay agreement just to wreak havoc.  They want to get paid on time.  Forcing things to collections, notifying the credit bureaus of late payments, etc., all cost them money.  It would be stupid of them to do things to interrupt the smooth flow of money into their coffers.

This being the case, it makes most sense for customers to double-check that account actions don’t have unintended side effects. Any account action outside of normal operations — change of address, change of bank account, change of credit card, change of service, and maybe even change of billing preference — should be followed up with verifying that everything else is still in place.  If there are side effects, then they’re caught sooner rather than later.

Any other horror stories about bill-pay that you’d like to share?

Sign up for the Mighty Bargain Hunter Newsletter!

Meanwhile, in other parts of Bank of America, foreclosures are being halted all over the country to make sure that documentation related to foreclosures was filled out properly.

So is Bank of America being schizophrenic in its foreclosure dealings?  Not at all.  It’s completely self-consistent.  Here’s why.

In the case of the local man who drowned, there was virtually nothing else for them to do except foreclose, as his wife could not afford the payments herself.  Waterfront property has location going for it, so it would likely go more easily than other properties.  It was in the bank’s best interest to sell that property.  It stood out amongst competing properties.

On the other hand, the foreclosures of many other properties have been halted because there may be serious problems – criminal ones, even – with the paperwork.  Since these problems have been brought to light, doing nothing to verify the correctness of the paperwork would be negligent.  So, it was in the bank’s best interest not to sell these properties.

Even with our own foreclosure purchase we saw the lender dealing with us as it benefited them.  We were jerked around from the moment we made a verbal offer to within a half-hour of closing.  They were already taking a hit on the property we were buying, so they put as much of the burden on us as possible to reduce their loss.  Again, in their best interest.

It’s of course horrible for a mother and three (soon to be four) children to lose her husband suddenly.  I’m sure there’s substantial support for this family in this time of grief.  But the bank’s foreclosure of the house, and her eviction from it, have nothing to do with the circumstances from which they arose.  Banks cannot take their customers’ problems into account when the rubber meets the road.  Everyone who gets behind on their mortgage payments got there as a consequence of some problem, whether within their control or not.  Banks would lose their shirt if they capitulated with every customer problem.

It appears unfair how this woman was treated, as compared with how the people with “postponed foreclosures” are being treated.  The average time a delinquent Bank of America borrower has been in default is not three months, but eighteen months.  That’s the average, so some of their borrowers have been delinquent even longer than that.  So how can this possibly be fair?  It is fair, since the decision when to foreclose – even if to foreclose – is the bank’s, not the borrower’s.  Borrowers are bound to the terms of their mortgage note, and this gives broad discretion to the lender as to how they handle the situation when payments on the note stop.

Is there anything that Needs To Be Done About This to make things better?  No.  I’d much rather have businesses – banks included – to have the leeway to exercise contracts as markets will bear and as how they see fit.  Restrictions, even if they appear to benefit consumers, will hurt everyone eventually.

Sign up for the Mighty Bargain Hunter Newsletter!

I have a 5-year ARM at 4.5% APR. I can renew the rate at 3.25%. However, the cost of is going to be $800. The current loan value is $156,219. Is it worth it for me to do the rate renew? How long would it take to recoup the $800? I am planning on refinancing at (or selling the home before) the 5th year.

Please, I do not want this to degenerate into a discussion of how ARMs are not good, etc. Let’s just assume I know that a 30/15 year mortgage would have been “smarter”.

I bolded the last section because this person knows the risks involved in taking on an adjustable-rate mortgage instead of a fixed-rate mortgage.  The initial rate is lower, but that’s because after a certain number of years (five in this case) the interest rate floats to a new amount based on the prevailing market rate, and can reset periodically for the rest of the life of the mortgage.  The borrower assumes the interest rate risk instead of the lender.

The questioner discloses that (s)he plans to refinance or move within the initial lock-in period.  But one of the comments beneath the question (by Jim) is interesting:

Despite your note, an ARM is a really good idea for your time frame. Rates are going to be low for a long time.

Rates are going to be low for a long time?  That’s a bold statement.

Mortgage rates are incredibly low now.  Tightened lending standards have decreased demand, and lenders have had to compete for these fewer qualifying borrowers.  Rates have gone down to meet this demand.

Now, how long they’ll stay as low as they are depends on a few things, such as how long the overnight lending rates at the Fed stay low, how long banks continue to have strict lending standards, and how long consumer demand stays low.  Basically, as long as demand for mortgages is low, mortgage rates will remain low, all other factors being equal.

Could demand remain low for months?  Years?  I don’t know.  A recovery would get people borrowing again.  The homebuyer incentives worked while they were active to spur sales, but they’re gone.  It will take something else to see them up again.

Rates are low.  I wouldn’t want to guess when they’re heading up again from their historic bottoms.

Sign up for the Mighty Bargain Hunter Newsletter!

“Wasn’t a provision of the financial reform bill that passed this July that store owners are now legally allowed to not accept a credit card charge for less than $10? I’m almost sure it was.”

I hadn’t gotten wind of this at all, but I dug around to try to verify Paul’s claim.

Sure enough, Paul got it.  Payment card networks are no longer allowed to demand that merchants accept all payments, regardless of total amount.  They can only demand that merchants accept all payments not less than $10.

The bill Paul was referring to is  HR 4173:  Dodd-Frank Wall Street Reform and Consumer Protection Act, and was put into law on July 21st, 2010.  Section 1075 of this law (beginning on page 693 of this printing of the new law) amends the Electronic Fund Transfer Act of 1978.  The part that restricts payment networks as to the minimum charge they can force merchants to accept (which, up until about a month ago, was $0.01) is detailed in Section 920(b)(3)(A)(i)(II) of the amended EFT Act.  Beginning with the amended section 920(b)(3) (page 698 of the new law, for those of you who are following along):

(3) LIMITATION ON RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.  (A) IN GENERAL.—A payment card network shall not,
directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability (i) of any person to set a minimum dollar value for the acceptance by that person of credit cards, to the extent that (I) such minimum dollar value does not differentiate between issuers or between payment card networks; and (II) such minimum dollar value does not exceed $10.00 …

That is how the law is now.  In the amended section 920(b)(3)(B), it further goes on to say that this amount may be increased under certain process.  Meaning: There are avenues for making the allowed minimum greater, so down the road merchants could require $20, $30, or more before I can pull out my credit card.

If that was a bit hard to follow, I don’t blame you.  Here’s a simpler way of expressing the impact of this.

Let’s say a merchant has a sign next to the cash register that says “Minimum Credit Card Charge $10.”  Prior to July 21st, 2010, he would be violating both Visa’s and MasterCard’s merchant agreement, and could face heavy fines from the issuers if he refused to accept a smaller payment, and the customer reported it.  After July 21st, 2010, the merchant doesn’t have to worry about a customer ratting them out, because the issuers can’t demand it.

This is a game-changer, and not a good one, I’m afraid:

• It’s not at all a win for consumers, even though the law is advertised in part as “consumer protection.”  Ten dollars is not a particularly small amount.  I can easily get lunch out for less than $10.  It ultimately places restrictions on credit card use.  It forces consumers to carry debit cards, or cash, for some small purchases.  Payments may become more inconvenient.  Do you pay $10 at the pump for the $8 worth of gas you use to fill your motorcycle, simply because the merchant isn’t obligated to accept your $8 credit charge?  Or do you have to walk in to pay cash?  It’s more costly, less convenient, or both.
• It might be a small win for businesses that are not payment networks, as they have protection against merchant account agreements that demand that the merchant accept payments so small that they are a net loss for the business.  But if the merchant opts to avoid these kinds of transactions to the full extent of the law, then they could be turning away more profits than what they’re saving in losses by avoiding the small credit transactions.
• It’s a clear loss for payment processors. Their total transaction volume will go down, and along with it their fees.

This regulation hasn’t hit the stores a whole lot yet, but it will.  The law is barely a month old.  As a former eBay seller, I know how much these fees can run, and it’s likely not much different for brick-and-mortar stores.  I’m sure store owners will take secret pleasure (and relief) in being able to turn away customers that have been abusive with small credit card transactions.

The only advice I can give is to carry around more cash for the little things so you’re not caught by a nasty surprise when a store won’t accept your credit card.  Sorry!

(Thanks to Budgeting In The Fun Stuff for including this post in the Carnival of Personal Finance!)

Sign up for the Mighty Bargain Hunter Newsletter!

Now, if I still had that mortgage, it would almost be a no-brainer for me to refinance to a 15-year mortgage.  I saw that rates were 3.875% for a fixed 15-year mortgage!  Refinancing my 30-year mortgage with the principal balance at what it would have been at the beginning of year 10, to a 3.875% 15-year mortgage, would have been only $35 more per month!  It would knock six years’ worth of payments off just like that.  That’s telling, because I didn’t have a bad rate to begin with.

You may have seen advertisements in the past for similar low rates (in the low 4% range or even less) but those loans were likely adjustable-rate mortgages.  The advertised rate was a teaser rate, and it was subject to change after a certain number of years.  People with these kinds of mortgage were shouldering interest-rate risk.

The low-4%, even below-4% mortgages available now are extraordinary because they’re fixed-rate.  The difference between fixed-rate and adjustable-rate mortgages is just that:  fixed-rate mortgages cannot vary over the life of the loan!  There is no tease in that rate.  It is the rate!  Fixed-rate mortgages haven’t been this cheap in my lifetime, and I was born in the early 1970s.

Now, this shouldn’t be an excuse to run out to get a house as fast as you can if you aren’t in the market.  But if you are in the market, or if you’re in the market for a refinance, comparing mortgage rates now will likely be very pleasant.  It’s a fixed-rate gift from the cheap money fairy, if you will.

(Thanks to Provident Planning for including this post in the Carnival of Personal Finance!)

Sign up for the Mighty Bargain Hunter Newsletter!

Smithee was celebrating this law.  Part of his celebration revolves around perceived greater consumer choice:

From what I could tell, there should’ve been a third option between paying overdraft fees several times a year and carrying some kind of man-purse [to carry around a check register and receipts]. That third option is now here: you can turn off overdraft protection. Even better, it’s being turned off for everybody unless they turn it back on. All the law does is give consumers more options.

Our credit union has had a similar overdraft privilege for a while.  I was opted in automatically, but I had the ability to opt out at any time should I not want it.  It wasn’t mandatory like Bank of America’s.

So, in a way, Smithee’s cause for celebration is a bit off.  The consumer choice was always there — just not necessarily at every financial institution.  If my credit union allowed customers to opt out, then I’m sure others did as well.  If a customer really had no use for overdraft privilege, then they could simply part ways with Bank of America to choicier pastures.  Banks can’t be all things to all customers.  So what?

Now, though, banks and credit unions aren’t free to enroll their customers automatically into overdraft privilege.  They must get positive opt-in.  It’s a business restriction.  It gives banks and credit unions fewer options for offering service to their customers.  Because banks and credit unions must get permission from each and every customer — even current ones — it will affect banks’ bottom lines negatively.  It has to.  Having overdraft privilege service arrangements with only a quarter of your customers can’t be as profitable as having that arrangement with all of your customers (or most of them, if they were allowed to opt out).  (Hat tip to Sun’s Financial Diary for the Huffington Post link.)

Every bank and credit union is taking it on the chin, and that means that it will be bad news for all banking customers.  The frequent fliers — the users of overdraft privilege services who are most profitable to the bank — may or may not opt in, and that revenue will be gone, which in turn will affect the level of service that it gives to all of its customers.  Fees go up, customer service wait times go up, ATM fees go up, credit card rewards go down, minimum balances for interest-bearing checking go up, etc., etc.  Everyone loses, because every financial institution is less able to treat its customers like the adults that they are:  free to choose how they manage their money, and responsible for the consequences of how they manage their money.

Mandatory overdraft privilege, may you rest in peace. You weren’t for everyone, but people didn’t have to run too far to get away from you.  You were a fixture of a freer, less regulated time.  What you stood for will be missed.

With your passing, a little bit of the free market died.

Sign up for the Mighty Bargain Hunter Newsletter!