Over the last couple weeks we have been intentionally consolidating our financial accounts. The credit card I signed up for back in college to get a free t-shirt, gone. The bank account I opened to get a great deal on financing from a local car dealer, gone. It is actually empowering to eliminate the noise from your financial life. Less statements, less chance of identity theft, less balances and account numbers to keep up with.

However, there are good reasons to keep at least one bank account, and one credit card, that you don’t use often for physical transactions. These two tools make up your personal finance firewall, and provide a layer of protection between you and those trying to separate you from your money.

I first heard of a bank firewall account from Jim at Bargaineering. Since, like him, I complete a number of transactions online each month, I thought it sounded intriguing. I’ve implemented something similar in my own finance life, and even taken it a step or two further.

First, so you can get an idea where I’m headed with all this, check out the following video from Jim as he explains the concept of a bank firewall account. If the video doesn’t display for you, you may need to click through to the site to view the embedded video.

Jim Wang provides an excellent overview of the bank account firewalls concept.

Like Jim, I also think ING Direct is a great place to set up such an account because of their interface for transferring money, and the ease of creating multiple accounts. Of course, there are plenty of other top online banks to choose from.

Most fraudulent activity associated with vendors such as PayPal involves a thief obtaining the user name and password for a PayPal user’s account, and initiating withdrawals from the user’s primary bank account tied to that account. By only having one account associated with various online payment vendors, and keeping a very low balance in that account, you can minimize the amount of money exposed should your online payment account become compromised.

When the couple online deposits associated with business activities hit my bank firewall account I immediately initiate one transfer to my self employment tax sinking fund for roughly one-third of the gross amount. The remaining amount is transferred to my business checking account in the form of profit, from where I write myself a single check at the end of the month (after business expenses are paid) as sort of a bonus salary.

In addition to maintaining the firewall bank account for accepting electronic deposits, I also held onto a single low-interest, high-reward credit card to use specifically for making online purchases and regular monthly subscriptions or recurring bills (Netflix, cell phone bill, etc.). For these types of purchases, I prefer to use a credit card because I am exposing about 99% of the risk to the bank, rather than my personal bank account.

At the end of the month I receive a single statement for the credit card, review the list of transactions for accuracy, and make a single online payment to pay off the card. I choose to make the payment manually, because if fraudulent charges appeared and I did not yet have the transactions in dispute when the bill cycled, an automated payment for the full balance could easily wipe out my associated bank account.

Another benefit of using a single credit card is that I’m able to easily see a consolidated view of my recurring, monthly transactions. I like to play a little game each month and try to bring that total bill down as far as possible.

What extra service can I cut from our monthly routine? Which subscriptions are we just not fully utilizing? How can I shave more off my cell phone bill? The utility bill? It becomes a challenge each month to try to come in under the previous month, and having all the charges billed to a single card helps me see at a glance whether or not I’ve been successful.

If you work online, or receive online payments from a variety of sources, I’d encourage you to set up a bank firewall account to provide a buffer between you and your primary banking sources. Also, consider hanging onto one credit card once you are debt free, and simply running all recurring charges through the card. It makes for a simple billing process, and it allows you to play with house money, rather than your own.

Talk about kicking people when they are down.  Recent news reports have shed light on several large banks charging bank fees to customers for the privilege of accessing their unemployment benefits.  Many states are partnering with banks to issue funds on a prepaid debit card, rather than cutting paper checks, in an effort to reduce costs.  The problem is banks are then turning around and hitting unemployed workers with fees for everything from accessing their money to calling for balance inquiries.

From a recent Yahoo story:

Arthur Santa-Maria, a laid-off engineer who lives just outside Albuquerque, N.M., said he didn’t pay any fees the first time he was laid off, for several months in 2007. His unemployment benefits were paid by paper checks. He found a new job last year but was laid off again last fall.

This time, he was issued a Bank of American debit card — a “prepaid” card in industry lingo — but he was surprised to learn he had to pay fees to get his money. He asked the bank to waive them. It said no. That’s when Santa-Maria called back to ask how to check his account online. He logged on and saw that the call cost him a half dollar. To avoid more fees, Santa-Maria found a Bank of America ATM at a strip mall and withdrew $80 at no charge. When he got back to his car, he decided to take out the rest of his money — $250 — and deposit it in his bank account.

Afterward, Santa-Maria logged on to his account and saw a charge of $1.50 for two withdrawals in one day.

To play devil’s advocate, most banks do offer a free alternative to withdrawing unemployment benefits.  Customers may walk up to a teller and ask for a cash advance for the full amount on the card, and they should not be charged a fee.  The problem is most people are using the card like a debit card (after all, that is what it is marketed as) and making small purchases and withdrawals all along.

I am not totally against the idea of banks charging fees, after all there are costs associated with operating ATMs such as maintenance, and reconciliation of the funds.  However, it seems that an exception could be made in this case, especially since many banks recently received a portion of the billion dollar bailout!

With passage of the recent stimulus bill, unemployment benefits will receive a boost, which means banks will likely see an increase in the number and volume of these types of transactions.  I would like to see state governments work with both banks and consumers to find an alternative method of transferring money to benefits recipients. 

One idea would be to simply direct deposit the unemployment benefits to existing checking accounts where consumers bank.  Most recently-employed workers are probably familiar with this format anyway as they likely received paychecks via direct deposit before they were laid off.  This would be a more cost-effective method of transferring benefits than paper checks, and would allow unemployed workers to maintain their previous banking relationships and use existing debit cards and ATMs to access funds.

The other night on the way home I caught a bit of The Clark Howard radio show.  Howard is a consumer advocate and author with a great radio show that I don’t often catch because it is on after 6:00pm in my market, a time I’m usually spending with family after a long day at the office.  One call in particular really caught my attention that night, partly because of the situation the guy found himself in, but mostly because of the way he discovered the mess.

A Little Background

Hard to obtain all the details about the individual’s case in a five minute phone call, but here is a quick summary of the call.  According to the caller he owed about $5,000 on a credit card that was charged off a couple years ago.  Apparently, the creditor eventually got around to collecting (probably after they sold the debt for pennies on the dollar) and contacted him to work out a payment arrangement.

The caller agreed to send the collector $500 a month for 12 consecutive months to pay the debt off in full.  He faithfully sent along his payments for $500 each month, and at the end of the year he checked his statement and the outstanding balance was $5,400.  Apparently, the balance had actually gone up thanks to a 31% interest rate and various fees!  I’m not sure how accurate the guy’s numbers are, but his story serves as a great reminder for those dealing with collectors, or any creditor for that matter.

Always Check Your Statement

The caller’s story was troubling for a couple reasons.  First of all, if he could have scraped up a little cash (or already had some in savings) he could have probably settled the debt for a couple thousand dollars as settlement-in-full.  He should not have done anything without receiving the terms of the workout offer in writing from the collector.  And he definitely should have been checking his statement all along to make sure his payments were being correctly applied and his balance was reduced accordingly.

I can’t believe he actually waited a full year before checking, or requesting, an updated statement on his account.  Unfortunately, there are still a lot of people out there who trust banks and collection agencies explicitly.  The hard truth is that there are a number of unscrupulous agencies out there running around collecting old debt who use any number of tactics to separate you from your money.

I’m not telling you that every collector you come in contact with will lie to get money from you, but I am telling you 99% of them will. I know, I used to work in a call center environment (thankfully I didn’t have to do much collections, but I worked next to them).  It was common practice to use all sorts of pressure tactics to talk people into making payments over the phone, or give up details of their checking account for auto-drafts of their accounts.  The next call from that customer usually came to us in customer service–”Why did you guys wipe out my entire checking account, I only agreed to $25 a month?”

Of course, I had to tote the company line at the time, but secretly I wanted to tell these people, “They took out all of your money because they lied when they said they wouldn’t.”  Plain and simple.  So please, always get these work-out agreements in writing, and always keep up with your account statements to hold the collector accountable for following through on their end of the deal.

I received the following email from a reader and wanted to toss it out as an “Ask the Reader” post.  I’m certain there are people out there smarter than me on the subject, and can offer some solid advice for those holding money in banks such as WaMu.  From my limited knowledge and experience in the banking industry I do know that the FDIC insures the first $100,000 of money on deposit with banks.  Above that it gets dicey because while those with money on deposit in excess of $100,000 do get the opportunity to stake their claim to any remaining bank assets, so do creditors and a long list of other investors.

Unfortunately, I don’t have to worry about savings above $100,000 (yet).  For the amount we do have in emergency savings we keep up with our last statement just in case we are required to show proof of our account balance in the event of a bank shutdown or data loss.  In addition to the information savvy readers will share in the comments here, I recommend readers check out Trent’s recent post at The Simple Dollar, Will My Money Be Safe.  It provides a nice run down on the rules for various types of investments.

Here’s a copy of the message I received:

I just started a WaMu savings account for my growing emergency fund.  Now with the news they are next in line to be either bought out or bailed out should I be worried or moving my money?   I know my money is protected by the FDIC but I don’t want to go through any processes like that to get it back if something happens.  Should I just sit tight or should I be opening another account else where?

What advice do you have for this fellow reader?  Are you in a similar situation?

The results of an interesting survey recently conducted by CareerBuilder.com indicate nearly half of American workers are living paycheck to paycheck.  Combine this with the news in recent years that we actually had a negative savings rate for the first time since the Great Depression era, and it is easy to see why so many Americans are struggling with their financial lives.

Defining Paycheck to Paycheck

I don’t know that an official definition of “living paycheck to paycheck” exists, but since I’ve been there myself I can sum it up by the example of checking your balance the day before payday and breathing a sigh of relief that you are not overdrawn, even though the $1.81 left in your checking account doesn’t leave much breathing room.  Your credit cards are nearly maxed out, you have nothing in an emergency fund, and your wallet is empty.  Kind of reminds me of my own soggy hotdog story.

The Numbers

The survey revealed some interesting statistics:

• 47% of workers live paycheck to paycheck to make ends meet
• 21% of those earning over $100,000 also live paycheck to paycheck
• 25% of all workers reported they save nothing each month
• 33% do not participate in any retirement programs (employer-sponsored or otherwise)

The numbers are telling.  One in four workers save $0 each month, either because they don’t have any additional money, or because they choose to spend it.  While there are a few in the former category, I imagine a large percentage of those who save nothing could find something to save if they simply cut back on their lifestyle.  These folks probably pay for cable, have cell phones, go out to movies, drink beer or cigarettes, indulge in meals out, etc.  If only one or two items were cut from their monthly budget they could probably free up $50-$100 dollars to begin a savings program.

Start Saving, Something

I personally know several people who save nothing because the amount they have to save is perceived to be so small that it couldn’t possibly make a difference.  Not true.  Even $20 a month adds up over time.  In just a few months you will have built a $100 cushion in your emergency fund.  Here are a couple ideas on how to start a savings program:

• Find one or two monthly expenses you can live without and eliminate them.
• Open a high-yield savings account.
• Set up an automatic transfer each month in the amount you saved by reducing monthly expenses.
• Find some creative ways to earn extra money (complete surveys, start a blog, work part time, etc.).
• Add to your savings any additional part-time earnings you generate.
• As you receive raises or bonuses at work, hold your lifestyle steady and increase the amount you save each month.

The point is to start saving something–any amount you can scrape together.  You don’t have to be saving half of your income for your savings plan to be worthwhile.  As your savings accumulate you will slowly become less dependent on a paycheck to pay your next bill.  Eventually, you may even have a month’s worth of expenses saved.  It’s been said that having money in the bank is the softest pillow of all, and I couldn’t agree more.  No more staying awake at night worrying about the power being cut off.  No more feelings of desperation when your kids are sick, but you can’t afford to get a prescription filled.  And best of all, no more soggy hotdogs for lunch!