"Earn it before you spend it."
Like most parents, I have been giving this basic money management advice to my two children since they moved beyond the pocket-money stage and started economic lives of their own.
Now the financial crisis has breathed new life into this old adage. As consumers, we're moving away from huge mortgages and over-loaded credit cards as a way of life and going back to the basic patterns of our late teens and early twenties: stash our earnings, spend some, earn more, stash more, repeat.
This is good. Basic money management -- spending only what we earn as opposed to digging ourselves into a big hole of debt -- will help solve a lot of personal finance problems. Because, as we all know, the interest on debt, especially credit card debt, costs a lot.
But eliminating debt is not enough. Even the basics of earning money and spending it using a standard checking account can cost a lot.
A recent study by management advisory firm Bretton Woods, Inc. measures the yearly cost of bank checking accounts between $200 and $350 based on basic usage patterns mentioned by the Office of the Comptroller of the Currency and by a Consumer Union Report in prior surveys.
So we're paying a median of $275 every year just to move money in and out of a basic checking account.
When we are young, before we start serious saving or equally serious borrowing to finance kids and buy houses, a checking account is our primary banking service. So, if, like my kids, you are one of 51 million people in the U.S. between the ages of 18 and 29, you are unknowingly spending a collective $10 billion to $17 billion in checking account fees yearly.
What if you kept those billions in your pockets instead of lining bankers' pockets? That would be a substantial and immediately useful stimulus package.
Beyond the Basic Checking Account
One alternative is to use cash for everything. But if you're cash-based, chances are that on payday your employer will give you a paper check that you will have to cash at some check-cashing place, where you will pay a substantial fee for the service. The same Bretton Woods study shows the cost of cash-only living to be between $165 and $315 per year. That's not much of an improvement compared to basic bank accounts.
Another alternative is to opt for prepaid card accounts. According to Bretton Woods, consumers who choose a network-branded prepaid card could pay 35-70 percent less in fees than if they use low-balance checking and debit accounts, making prepaid cards a far more cost-effective, valuable financial tool for many.
There are many sources of prepaid accounts. Some non-for-profit organizations like the Community Financial Resources offer a one dollar per month prepaid card, which, when used occasionally for ATM withdrawals, amounts to about $50 per year. Credit Unions also strive to offer lower-cost services than traditional banks. They tend to be less Internet-ready than larger institutions, but several of them have low-cost prepaid cards that you can manage online.
And a new generation of online-only prepaid accounts offers many of the same services of a traditional checking account but with fewer fees and constraints. If you shop carefully and choose a service that offers FDIC insurance, you'll get the same level of safety as a bank checking account. There's no retail bank to visit, but you can log in anytime via any Internet-connected PC or cell phone, and get email support at no cost.
How much exactly can you save? The example I know best is the iBankUP service offered by my company: its yearly cost for a usage pattern similar to the Bretton Woods study is $55. This is about $220 less than the median price of a checking account.
Using this kind of service instead of a bank checking account, the 51 million people in the 18 to 29 age range would collectively save $11 billion.
Finally, an $11 billion stimulus package from the banks to American consumers, not the other way round.