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Where Is the Money? How to Control Electronic Spending

Debit cards, credit cards, and e-checks make it easy to overspend -- way too easy. Our experts explain how you can cut costs by being more vigilant about your virtual dollars.

By Richard Laliberte; Illustrations by Andrew Bannecker

Keep Tabs on Spending
paying bills online
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Andrew Bannecker

They're quick and painless -- and there's no writer's cramp or envelopes to lick. Electronic payments using credit cards, debit cards, or e-checks are more popular than ever, accounting for more than half of consumer spending. But convenience comes with a downside. "When you use cash or checks, you know the money is finite," says Mike Peterson, cofounder of the American Credit Foundation and author of Reality Millionaire: Proven Tips to Retire Rich (Reality Media). "Electronic payments take away that tangible feeling of spending, so it's harder to keep a lid on expenses," he adds. This out-of-sight, out-of-mind mentality isn't lost on credit-card companies and banks, which are experts at raising rates or sneaking in fees and extra charges when you're not looking. But while rising costs are eating up more of your hard-earned dollars, you can get a tighter grip on spending, whether it's plastic, online, or both.

Avoid monthly-statement shock.

View your credit-card charges online weekly or biweekly to keep better track of your balance, which will give you the opportunity to pull back if you're spending too much. Another plus: "You'll catch any fraudulent charges to your card more quickly," says Bob Sullivan, author of Gotcha Capitalism: How Hidden Fees Rip You Off Every Day -- and What You Can Do About It (Ballantine). Go to your credit-card company's Web site, find the personal accounts area, and use your card number to establish an online account. You can't do this with debit cards, so unless you log that spending in a ledger, you won't know how much money is left. For a heads-up on your debit-card balance, ask your bank to automatically send you an e-mail when your funds drop below a certain point. "A good buffer is at least $200," says Emily Davidson, who writes about personal finance at CreditBloggers.com.

Managing Finances Be an early bird.
spending journal
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Andrew Bannecker

If you pay your credit-card balance online, send the money at least two business days before it's due. Banks have their own schedules for downloading payments and if they receive them even a few seconds late, they shift the transaction to the next business day. "There could be a lag between when the bank receives your e-mail and when that information is passed along to the credit-card company," says Peterson. Either way, your payment could be tardy even if you hit the "submit" button on time, and you could be charged a $25 to $35 late fee, plus interest on the unpaid balance. "Building in a 48-hour buffer ensures your money will arrive on time," he says.

Read the fine print.

Open all mail from creditors like utilities and insurance companies and anyone else you've authorized to make automatic deductions from your bank account. What looks like junk might be notice of a lost or late payment that could generate fees and lower your credit rating, says Davidson. Call customer service right away to clear up any confusion, and a rep will likely update your account and waive the fee immediately.

Fill in the blanks.

When sending e-checks, don't use the feature that automatically fills in the amount of your last remittance. If that figure is lower than your current balance and you forget to change it, you could get stuck with a penalty. This is especially true with large deductions that tap your account once or twice a year, such as home insurance. Always review online checks before sending, then go back a few days later to make sure the payments went through. "If not, call your creditors immediately," says Peterson. "Most are willing to make a one-time adjustment for an understandable mistake."

Manage by merging.

Free online services like Mint.com link your credit card and bank accounts, and give you an updated balance and spending report daily. Iexpenseonline.com also tracks your spending in budget categories like food, utilities, and transportation, but you have to input your purchases into the program. For about a $100 annual fee, Mvelopes.com not only merges your accounts but also makes deductions from the appropriate budget column each time you make a purchase.

Credit Cards Know when to hold...

Resist the temptation to open store accounts so you can save 10 or 15 percent on purchases that day. You will you spend more to take advantage of the deal, and you'll trigger an inquiry into your credit history. Though standard procedure, any inquiry can cause doubts about your creditworthiness among other lenders, all of whom have access to your credit. As a result, opening a new card can drag down your credit rating and raise rates by 2 to 3 percent for more important debt like a future mortgage or car loan. If you must open a new card, scan the agreement for the words "universal default," which means that any problem with one card, like a late payment or error, is reported to all your creditors and can trigger across-the-board interest-rate hikes that could cost you hundreds of dollars a year. Call the company and ask to have the default provision taken off your account. If it refuses, find another that will honor your request.

...and when to fold.

Don't close cards you already have unless you're being charged an annual fee. This can also hurt your credit rating by lowering the grand total of spending limits allowed on all your cards, making you look like a worse risk.

Cash Is Your Friend

These days more people are flexing plastic to make payments of as little as $2 for things like coffee, newspapers, and parking fees. But all those mini-charges on your credit or debit cards quickly add up. Peterson recommends budgeting a certain amount of pocket cash per month and committing to spending only what you carry for small purchases. That will also help you curb impulse buys and save anywhere from $200 to $300 a month.

How much should you allow yourself? Peterson suggests keeping a "spending journal" for a week in which you scribble down the cost of all incidentals, then reviewing it to see what to cut. Budget wisely, but don't let it rule your life. "Budgeting is like dieting -- the stricter the diet, the harder it is to adhere to, and you might wind up gorging yourself on junk food in a fit of weakness," he says. "Allow for some give so you feel that you have breathing room."

Why do we buy less when using cash?

Your brain says "ouch." When you fork over a few bills and see your thinner wallet, the insular cortex, a region that registers negative emotions, becomes more active than when you use a credit card.

Originally published in the March 2009 issue of Family Circle magazine.

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