Category: Uncategorized

Payday Lending 101

 What is a payday loan

A payday loan is a short-term, high interest loan (generally for $500 or less) that is designed to help bridge the gap between the borrower’s paychecks.

How it Works:

The borrower typically writes a personal check for the dollar amount borrowed (including finance charges) and receives cash in return. The payday lender will have access to the borrower’s checking account either electronically or through a post-dated check. If the borrower doesn’t repay the loan on or before the due date, the lender can cash the check or electronically withdraw the money from the borrower’s account.

Requirements to get a Loan

The process to take out a payday loan is quick and convenient. The only requirements for a loan are a driver’s license, a Social Security card, proof of income and a bank account number.

Payday Loan Example:

Imagine your car breaks down and you have to borrow $500 from a payday lender for the repair. The payday lender will loan you the $500 but will charge you an additional $50 in financing fees. You will write a post-dated check for $550 to the payday lender and the lender will advance you the $500. After a set period of time (usually 2 weeks) you will be required to pay back the payday lender the $550 or to write another post-dated check for the amount you cannot pay back plus an additional financing fee.

APR (Annual Percentage Rate):

APR stands for Annual Percentage Rate and is the cost of borrowing a certain dollar amount including the yearly interest rate you’ll pay if you carry a balance (i.e. do not pay back the loan when due). A lower APR translates to lower monthly payments. A lower APR translates to lower monthly payments. APR is a useful metric which can be used when comparing different types of loans (car, mortgage, payday).

APR Calculation Example:

You take out a payday loan for $500 to pay for your car repairs and you have to pay a fee of $50 to take out the loan. The loan must be repaid within 14 days. What is the APR?

See attached Excel Sheet to understand how APR is calculated.

Sample APR

The result is you are paying an APR (annual percentage rate) of 260%. APR tells you how much it will cost you to borrow for one year. If you pay back the loan in less than one year, you will pay a lower rate. If you didn’t pay off the loan for a year, you would end up paying 260% of $500, which would result in you paying $1,304 for a $500 loan.

Shocking Facts about Payday Loans:

I’ve compiled some of the most shocking facts about the payday loan industry from the Milken Institute report below:

Source: http://www.milkeninstitute.org/publications/view/601

  • In the U.S. 12 million people borrow nearly $50 billion a year through payday loans.
  • The rates charged on payday loans can be up to 35 times the rates charged on credit card loans and 80 times the rates charged on home mortgages and auto loans.
  • The average payday loan is $375 and is typically repaid within two weeks.
  • Most borrowers owe payday lenders for five months out of the year and end up paying $800 for a $300 loan.
  • The estimated annual percentage rate on payday loans in the U.S. ranges from a low of 196% in Minnesota to a high of 574% in both Mississippi and Wisconsin.
  • To put payday loans into perspective, the interest cost of using a credit card to finance $300 of debt is roughly $2.50 for two weeks and $15 for three months. In contrast, the fees for a payday loan are $45 for two weeks and $270 for three months.

 

Financial Goals Update

July has been a low month for saving for my mini-retirement. I put away $1,500 in June but will not be able to do that in July. Circumstances seem to be changing so the current plan is to hold off on the mini-retirement and continue to work my day job and save as much as possible. Major July status changes include:

Last minute trip to Ibiza

In early July I took a last minute trip to Ibiza which set me back ~$2k. Luckily I have a travel slush fund which allows me to take last minute trips (in which I tend to pay a little more), but that’s just the way life works. I would rather go and splurge a little than stay home and miss out on the experience. Disclaimer: If traveling will put you more into debt or make you miss certain payments if you are paying off debt, then this might not be the best decision. When you are ready, you can put away a rainy day travel fund for any last minute trips that may come up.

Apartment rent to increase:

I am currently leasing an apartment and the lease goes through April 30, 2018. However, it appears that my rent is going to go up $200-$400/month when the lease is up (based on similar situations with neighbors). The market is great where I live and the building is renovating apartments when people move out, so I guess the rent increase is justified. New appliances and floors = $2,400-$4,800 year increase (yeah right!). Inflation/cost of living increase at my current job will not cover this. So I need to figure out what I will do come spring. Worse case I budget for an extra $5k (annual) rent increase. But maybe it is time to buy a condo as well…Thoughts?

New Short-Term Goal

Beginning August 1 (to make tracking easy) I am going to go on a 4 week saving spree. August goal is to save $2,000.

U.S. Financial Diaries Book Review

 

This book challenged me to think differentially.

U.S. Financial Diaries is not about extreme poverty, but about the middle class. Before reading this book, I tended to think of poverty or financial instability as linear situations. If people only changed their spending habits, saved more money and did more budgeting/planning then they would have more money for essentials like food, rent and transportation.

Using numerous families as an example, U.S. Financial Diaries takes the reader through the reality of income volatility. Too often in defining poverty, we rely on national income data without realizing that what they get is a broad picture of income distribution on a yearly basis and that actually hides all the variations that occur throughout the year in people’s daily lives.

U.S. Financial Diaries explores the seasonal impacts on salaries and lack of access to financial services while arguing that the majority of poor experience illiquidity versus insolvency. Standard statistics do not show us any of this. Taking an annual income figure doesn’t reflect the rollercoaster ride families go through all year and the resulting stress and anxiety.

My only negative critique of this book is that the author focuses on those who are periodically poor and portrays this class in relatively positive terms. Hard workers and good parents suffering cash shortages due to bad luck, bad policy and macroeconomic changes. It leaves me questioning though, was their not anyone in the study who was suffering cash shortages because of poor decisions and bad spending habits/choices?

The author leaves us with a few suggestions on how we can overcome expense volatility. My own suggestions on this topic will be explored in a later post in this blog.

http://www.usfinancialdiaries.org/

Financing a 3-6 month mini retirement – Step 1

I have this idea that I want to take 3-6 months off of work beginning early 2018. I anticipation of this, I have been taking a deep dive into my current monthly spending and what I can do to cut back. I typically charge all my monthly expenses to my American Express card because there website has great features that lets you track your spend by category, etc. See below. To start the analysis I pulled all my transactions from Jan 1, 2017 – April 30, 2017. Amex automatically categorizes my transactions into their predetermined categories.

This is great for a quick glance, but I wanted to do the categorization myself. One – to re-review of all my historical transactions and also to make sure they were properly categorized as I would view them. For example, I wanted to separate my “Grocery” expenses (need) from my Restaurant purchase which are more of a want (not necessary). I want to understand my true monthly “survival” expense vs. what is a luxury and could be cut out on a limited budget. The Amex website allowed me to easily do this by downloading the individual transactions for my selected time period into an Excel file.

Results:

My 4 month avg. trend data showed that I am spending approximately $1,500/month excluding my rent. My spend by category is displayed below. The biggest component of my monthly spend is Groceries (~$300/month). This is fine, this is a need. What was alarming to me is how much I am spending per month on Clothes, Entertainment and Restaurants! Approximately $500 when you add them together. To me, this was shocking. I didn’t believe it as first, but this is why I downloaded the individual transaction data. That way I can go back and see which purchases I assigned to the individual categories. This allows me to answer questions like, Is the $200/month in clothes due to multiple individual purchases/items? Or did I make one big purchase (i.e. perhaps a winter coat) that may be skewing the true monthly average?

Also, I can get a high level idea of what an average monthly spend would be should I cut out a lot of my wants. If I cut out Clothes, Entertainment and Restaurants completely, I would be closer to $900K in monthly spend.

Action:

By analyzing my historical spend, I am able to benchmark where my monthly trend has been. This exercise has also allowed me to be more conscious of each and every transaction I make. Ultimately, the goal of this exercise is to understand where I am at, so that I can reduce my monthly expenses go forward. My goal in my monthly reduction will be the subject of a future post as it will correlate to my new monthly savings goal that will allow me to take this 3-6 month retirement.

Follow along to see what my goal is!

Waiting 2 days to make an online purchase saved me $34.20

Patience and non-emotional buying can save you money!

This week I was trying to purchase some sheets from Brooklinen.com and I became frustrated when they wanted to charge me ~$7.99 for shipping when I was already going to spend over $200 on their product ($228 to be exact). So I began googling “Brooklinen discount codes” and “Brooklinen free shipping codes”. There were a few floating out there via a google search but none of them worked for me at checkout.

So, I left my items in my online cart and continued on with my day. Then the next day I get an email from Brooklinen saying that I can get free shipping when I checkout.

I was too busy at work to go to back to the website to complete my checkout, so again, I ignored the email and put off my purchase.

Then, the following day (2 days later from when I had everything in my online cart ready to go but didn’t hit purchase) I get another email from Brooklinen for $15 off my order. This peaked my interest so I clicked on the email which took me to the Brooklinen webpage where my items were still in my cart.

However, to my surprise, it appears that the site was having a 15% off sale (+ free shipping). I am not sure if the 15% is due to the “reminder” email from Brooklinen or just happened to be a coincidence. But, it suckered me in and I finally completed my purchase with 15% off and free shipping.

 

Moral of the story is, if you can wait to make your purchase, discounts may come your way.  Disclaimer that the savings and this savings tactic may vary by site. I suspect the company got my email, etc, when I placed my items in my cart and that they were able to track that I had items waiting but did not make a purchase. Waiting 2 days saved me $34.20!

 

Stop Trying to be Perfect, Just hit the ball!

“So please stop feeling sorry for yourself, and stop telling me he’s too good, and for the love of God, stop trying to be perfect! Just see the ball. Hit the ball”. One of my favorite quotes form Andrew Agassi’s book Open, a book that parallels both the mental and physical game of tennis with life.

I’ve been hesitating to start a blog because I have a vision but am not quite sure of all the details to get there. I have been painstakingly trying to figure them out over the last months before moving forward with this blog. However, I was rereading Andre’s book last night and the above quote really resonated with me. The blog doesn’t have to be perfect from day one. Just take steps and move it forward, start hitting the ball. Just like taking control and understanding your personal finances. You don’t have to be an expert, but just starting thinking about the topic and taking baby steps.

With that, here is my first blog and the beginning of Fluent in Finances.