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Okay not exactly riches but certainly substantial savings and a warm, fuzzy feeling about the positive impact you’re having on the environment.

With the astronomical price of gas and the growing gridlock on our roads and streets (especially during the already frustrating morning rush hour and evening drive back home) a respite from having to drive your own car will certainly be welcome. Sure, carpooling isn’t as great when you actually start getting into a routine (loss of privacy, inability to always set your own schedule), but the rewards (financial and environmental) clearly outweigh these minor nuisances:

• Lower your gas bill
• Less wear and tear on your own car
• Reduce pollution and traffic congestion

Start carpooling today with these great resources:

• eRideShare.com is a free service to connect you with travelers going the same way as you in your area.
• CommuterPage.com has a great list of tips for successful carpooling.

There is no such thing as a free lunch, but you can come awfully close to it at your local library. Because it is funded by the city or state or province that you reside in, the local library is able to provide its services for free.

 
Image by victoriapeckham

The really great thing though is that it’s not just books that you can find at the library. Did you know your local public library is also a great place to find audio CDs, movies (VHS and DVD), language guides and much more - all for free? Now granted they won’t have the most recent movie titles or your favorite gangster rap record, but they’ll have a lot of popular titles, including the classics that you always wanted to rent but ended up going with the latest release instead.

At most public libraries, all that is required is a driver’s license or some proof of identification that shows you are a resident of the city or state. You can then borrow to your heart’s content. Even extending the time you can keep the book or movie is free. Plus with a library card (for which you may be charged a minimal processing fee e.g. $5) you can get free Internet access.

Your taxes pay for all these services, yet it’s a pity how much of what we pay for never gets used. So this weekend, head down to the library, browse and bulk up on some reading material - I know I certainly will and plan to enjoy every minute of it.

Payday loans are small loans (often between $100 and $1,000) made for a short period of time for a fee. They also go by other names such as “cash advance loans”, “check advance loans” and “deferred loans”.

Image by Orin Optiglot

Payday lenders have begun to spring up more and more, especially in lower income neighborhoods where most households run tight budgets and struggle to make ends meet. A recent study found that young families were three times more likely to use payday loans than those that had an income earner aged 35-44. The likelihood of using payday loans was also high in families that reported little savings or no credit cards (particularly those that that been refused one before) and in families that reported having no one to turn to if they faced financial difficulty.

Payday lenders tout these loans for their convenience and as a solution to a temporary shortage of cash, but the costs involved are much higher than at first seem apparent.

How Does a Payday Loan Work?

Let’s say Alex has a $100 cell phone bill due at the end of the month but doesn’t have the cash to pay it. She figures if she can borrow $100 for two weeks she can pay it back when she gets her next paycheck.

To borrow $100 from the neighborhood payday lender, the lender will ask for proof of employment (to confirm Alex can pay them back), identification (to come after her if she doesn’t pay) and a postdated check. The check will be for the amount borrowed plus a fee (e.g. $20) and dated two weeks out. At this stage Alex will owe $120 to the payday lender.

While $20 may seem reasonable for the immediate convenience, it works out to a ridiculously high annual interest rate - far higher than even a high-interest credit card. But the problem doesn’t stop there. Most people who get a payday loan do so because they had trouble budgeting for expenses in the first place and failed to maintain an adequately funded emergency fund. Chances are that by the time the two week payment date comes up these problems won’t be fixed and the borrower (Alex in this case) will not have the funds to pay the amount due. But here’s where the payday lenders get smart. Instead of sending the loan to collections or negotiating a payment plan, they allow the borrower to extend the payment date by another two weeks for a second fee (say $20 again). This results in a total fee of $40 on an original loan of $100; that’s 40% of the loan in fees in just one month!

Unfortunately for most payday loan customers this vicious cycle never stops and they end up owing more in fees than even the original loan itself destroying any hope of recovering from the mess.

Alternatives to Payday Loans

Payday lenders target people that are already struggling with finances as they will be the ones most attracted to these loans. This group of people includes:

• Younger individuals or families with limited understanding of financial planning
• Those already in debt struggling to make ends meet each month
• Those that fail to budget and live beyond their means

The United States Federal Trade Commission suggests the following alternatives to payday lenders. While not ideal, they provide safer and less expensive options to get a loan.

1. Small loan from a local credit union
2. Loan from family or friends (with payment terms in writing)
3. Credit card charge or advances
4. Requesting an extension from the creditor (i.e. asking for more time to pay)
5. Pay advance from your employer

The best way to stay clear of payday loans is to exercise sound financial planning. Of course this is easier said than done for those struggling with making ends meet each month, but some basic strategies go a long way.

• Create a budget and stick to it - knowing how much money comes in and tracking expenses is the first step to avoid being broke before the month is out.
• Find ways to cut costs and save money - look at the 101 ways I saved money this year for inspiration
• Setup an emergency fund - a rainy day fund to pay for financial emergencies prevents the need to take out a loan in the first place

A few days ago Adrian emailed me to ask:

“I have bills coming due at different times each month. Managing these is turning into a full-time job. Can you help? How do you pay your monthly bills? Do you cut checks each time or have you automated the payments somehow?”

Great question Adrian. I struggled with efficient bill payment for a long time until I finally managed to get it under control.

 
Image by Fr Antunes

I use credit cards to manage payment of most of my bills - of course, I pay the balance in full each month. Most of the companies that I deal with accept plastic as method of payment and I have given them permission to charge the amount due to my credit card each month. As a result, monthly bills for my cell phone, cable television, long distance calling card and favorite charity are all billed directly to the card. I prefer this approach over cutting checks for a number of reasons:

• Manage cash flow - I know I make enough each month to pay all my bills, but the bills may come due before I get paid. Using a credit card allows me to smooth the outflows and prevent an unexpected bill from torpedoing my checking account.
• Track expenses - I can track my spending history very quickly and get a quick snapshot of my monthly expenses without having to query multiple records (bank statements, checks, etc.)
• Dispute charges - It’s easier to dispute charges or discrepancies in a bill when the amount has been paid via a credit card as opposed to a check. Any dispute that you cannot resolve with the company directly can be brought to the attention of the credit card company which will then suspend the payment and help resolve the issue on your behalf.
• On-time payment - I know I will never be late for payments as the amount due is charged to the card automatically by the company itself.
• Points - I love the fact that I get credit card points for expenses I would’ve incurred anyway - credit card or no credit card.

The only recurring bills that I do not charge to the credit card are those that I cannot. Or more accurately, those that the company in question would not accept credit card payments for. This includes my mortgage payment, car payment and insurance premium. These three bills are debited from my checking account by the company directly. Because these bills have known amounts and due dates, planning for these is a cinch - I just need to ensure my bank account is adequately funded when these bills come due.

Where I can, I avoid cutting checks. I hate the exercise and licking envelopes gives me a headache. Besides, why spend money on stamps when the company is willing to accept payment via credit card or direct bank debit for free.

Adrian, I hope this gives you a few ideas to help manage your bills more efficiently. Readers may submit their own financial questions by leaving a comment below or emailing me. Questions will be answered in future posts.

When I was a child, I used to get the equivalent of $25 in allowance each month. At ten years old - for me at least - this was a goldmine. Upon receipt, I used to immediately start planning how this newfound wealth was going to be spent. Was it going to be a movie with friends this weekend? Or a new video game? At age 10, these were significant life-altering decisions.

I have since come a long way both in terms of income and what I consider to be life-altering decisions. Yet, I always missed the simple pleasure that came with relishing how unencumbered money was going to spent - no matter how small the value.

So a few years ago, I decided to make a change. I started giving myself an allowance again. Nothing big - only $25 a paycheck. Two paychecks a month, and I had $50 to use as I saw fit. Some months I spent it (I can’t even remember on what, but it was probably something silly). Other months I actually plunked it into my online savings account. And one month I indulged myself in impulse buys (shameful, I know). Yet, the best part was that for once, there was no strategy. No method to the madness. No stress associated with feeling compelled to save every penny for retirement. Just the simple pleasure that came with deciding the fate of those $25.

Unsurprisingly, I found this to be an emotionally healthy and rewarding exercise as well. Having programmed myself to “earn, spend less, save more” and to think in financial categories and buckets all the time made getting back the freedom to decide what I do with a mere $25 absolutely refreshing. Even though I was saving at a healthy clip, I hadn’t had this sense of fulfillment in years.

Consider using this strategy yourself. If $25 is too much for your paycheck to bear, just take an allowance of $10. The only rule is to treat it as an allowance - and for a couple of times each month to let the 10 year old in you take over again.