Fees and surcharges seem to be an unavoidable part of living in a world where banking is big business. If you keep your financial situation simple, diligently shop around, and keep an eye on your money, you can avoid may of the more common fees. In theory, you could increase your fee-avoidance ability by keeping your money outside of the banking and investing system, but that’s an extreme approach that just isn’t feasible for modern life in the United States.

Even the most diligent savers and frugal minds can find themselves faced with fees. They tend to lurk behind corners, waiting in the fine print, for the right time to strike, taking consumers by surprise. Other times, the fees present themselves up front but seem unavoidable.

The fees banks charge their consumers serve several purposes. The first purpose is simply to increase revenue. The second purpose is to modify their customers’ behavior. Well-publicized fees can dissuade customers from partaking in an activity the bank would like to avoid, while the purpose of carefully hidden fees is generally to increase profit. Rationalizations for fees fall into these two categories.

The reason banks charge a variety of fees is simple. They do it because they can. Customers like to complain about paying more money than necessary for the services banks provide, but unless they’re willing to close accounts and find alternatives, banks can continue to operate as they are. And don’t worry; if you want to vote with your feet, there’s probably a fee for that.

That happens to be the first fee I’ll discuss in this compilation of the five most annoying banking fees. These are all fees that I’ve experienced, even after I was more attuned to my personal finance situation. The fees I’ve included in this list are pervasive; many, but not all, institutions may assess these charges. In addition to their pervasiveness, these fees are unnecessary from the customer’s perspective. They are usually avoidable with some research or planning, but once you find yourself faced with a fee, there is often little you can do to avoid it.

1. Account termination or closing fees.

Account closing fees are prevalent with investment accounts, although some savings banks will also charge account closing fees if you don’t maintain your account for a minimum period of time. I experienced this unfortunate event when I came to the realization that I was paying too much for my weekly investments with Wachovia’s discount brokerage. At the time, Wachovia announced a $50 annual fee, making the account too expensive for my tastes, especially when there were free options available.

I had been progressing on a path towards making better financial decisions, and I wanted to transfer my relatively small investment out to a better discount brokerage. I selected Scottrade. Wachovia was also planning to increase their account termination fee from $75 to $95, creating more of an incentive for investors to keep their accounts open and pay the $50 annual fee. I transferred my money out of Wachovia as soon as possible, and I sent a sharply-worded but ultimately ineffectual letter to the CEO.

Account termination fees aren’t limited to just banking. Cell phone and cable television operators use these in their long-term contracts. The rationalization is that mobile phone companies sell phones at a loss (or at least less than market price) with the intent of earning a profit on the monthly service plans for a predefined amount of time. But like in banking, these fees serve mostly as loyalty-enforcers, preventing customers from deserting one brand for the competition in a highly competitive marketplace.

2. Savings account monthly maintenance fees.

Banking is an interesting concept, and since the growth of major national banks and especially during and after the recent recession, we’ve forgotten why banks exist. It may not be apparent since the credit crunch, but the purpose of banks is to lend money. When you open a savings or checking account, you are doing the bank a favor. You are increasing the bank’s ability to give out loans. The loans, in turn, help businesses thrive, moving the economy forward. At the same time, banks in theory earn revenue from these loans, which they can, relatively easily, turn into profit.

The bank should be thanking you, not charging you for your money. And they often do thank customers in the form of interest. In return for your generous deposit, the bank offers an interest rate. With the Federal Reserve still looking to influence the economy, banks can borrow from the central banking system and pay less than if they had to pay interest to depositors. As a result, customers face lower interest rates.

Combine this with the fact that banks have not been lending as openly as they have in the past, their profits are down. In the end, these banks, especially the largest national banks, replace the lost loan income with fees for their depositors, with the rationalization that they are providing a service that customers should pay for.

3. Convenience fees for online payments.

Put yourself in the position as the individual in charge of collecting vehicle registration fees, insurance premiums, or business taxes. Would you rather pay the salaries of a team of employees to go through payments sent through the mail or pay to establish an online presence and payment capability? The latter in many cases is going to be much more affordable. In reality, it’s rarely a choice of extremes, but a combination. Nevertheless, the more you can encourage people to pay online, the less manual labor is necessary.

This is surely a convenience and money-saving endeavor for businesses and the government in the long run. Yet when citizens attempt to pay for these services online, they are often faced with an online convenience fee. Merchant services enabling businesses to accept credit cards can be expensive, and some entities did not accept credit cards at all until they began accepting payments online.

That, plus the IT costs of building an online system, is the rationalization for these fees. When businesses can’t increase the cost of your services to compensate, they try to recover these costs through fees, conveniently ignoring the long-term savings benefits of accepting online payments. And when you’re a government entity and have a monopoly on vehicle registrations, for example, you don’t have to worry about competition driving your costs down.

4. Fees for using coins.

When is a dollar not worth a dollar? When one of those dollars is in coin form. The tried-and-true method of daily saving, the coin jar, has taken a hit. There was a time you could take the jar to the teller in your local bank and they would deposit the money dollar for dollar into your account. You probably still can, but not without nasty looks from the tellers who don’t want to count your change.

In the United States, coins are considered inconvenient. People would rather walk around with bills neatly folded in wallets than with change jingling in their pockets. When faced with a collection of change, people are interested in exchanging their coins for dollar bills. Bank tellers don’t want to deal with this, so in many circumstances, they’ll take a fee out of the exchange, usually only if you don’t have an account at that particular bank. Coin exchange machines in stores, like CoinStar, take a cut from the exchange as well.

If I give someone $30 in change, I expect to receive $30 back. Coins are not worth less than bills.

5. Account inactivity fees.

Investment banks are going to earn money off you in whatever method they can. Brokers love active traders; for the most part, the brokers earn money with every transaction. Transaction fees are expected and even tolerated. Many discount brokerages offer plans that offer a monthly fee in exchange for leniency with transaction fees, but for the most part, profits are derived from those who buy and sell often. It’s no surprise that most investment advice agrees that investors should not trade often, as fees and bad timing hurt your long-term investment returns more than anything else.

You have to be careful when you buy and hold in certain investment accounts, however, due to inactivity fees. If you aren’t adding to your balance or making any number of other changes to your account, some brokers will charge you an inactivity fee. This fee could appear on a monthly, quarterly, or annual basis.

When investment accounts are able to change their account terms on a whim, an account you’ve had for years, just sitting and growing in value over time, could begin to leak its value. This is the primary reason it’s worthwhile to read every notice you receive from your banking institutions, regardless of how unimportant the envelopes might appear. It’s also a good reminder to keep your address current with all of your accounts, reducing the chance you’d inadvertently miss a notification.

What banking and investment fees do you find the most annoying? How do you avoid fees?

Photo: CarbonNYC

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Earlier this week, I appeared on HuffPost Live, an online television channel, to talk about saying no to spending. Social situations make it difficult for people to admit among friends that they can’t afford whatever the social activity might be, such as dining out or going to a club. The discussion was couched in fashion. Working in the fashion industry, there seems to be quite a bit of social pressure to have the right clothes and accessories to fit in with colleagues. I don’t know anything about the fashion industry, but I do know how important it is to look the part when your goal is to move forward in any social or business environment.

I participated in a panel hosted by Nancy Redd that included Christina Anderson, the Fashion and Style editor for Huffington Post, Dr. Nancy Berk, a psychologist and author, Nathan Morris, a financial planner, and Veronica Dagher, a reporter for the Wall Street Journal whose article It’s Really OK to Say, ‘I Can’t Afford That’ inspired the topic for the show.

American consumers face pressure every day, whether from friends, the media, or societal expectations, to fit in. The human drive for the feeling of comfort in an environment or some kind of community drives us to make choices that move in that direction, even if those decisions can be harmful in the long run. It’s not a case of ignorance. We knowingly do things that harm our health every day, but we continue. The same is true about financial harm.

In order to feel accepted in a group, we want to act like a group. The problem is we can’t really see the true financial condition of those we emulate. If everyone on the block owns a Mercedes, it’s understandable that the one remaining household on the street feels inadequate for not being able to afford the same car. Many of the families, despite the outward display of wealth in the form of a car brand that has put a lot of marketing effort into making sure its vehicles are perceived as high-class, may be struggling financially. The car may be leased, and they might not be able to afford the payments. The families outwardly displaying their wealth might have no retirement plans, and their children might require loans to attend college. The pressure to appear the same as everyone else is strong enough that the financial priorities that aren’t outwardly facing often assume a lower priority.

This type of pressure manifests itself in early adolescence. Children at this age are often judgmental and cruel, and the pressure to be like others in a particular social group manifests in a big way. Kids who either refuse to conform to others’ expectations or can’t fit in due to their families’ financial constraints can become social outcasts. This doesn’t need to be damaging in the long run, but it can make life difficult for middle-schoolers. For some, this feeling — the need to fit in by adjusting outward appearances to be like others — never goes away.

If social groups weren’t enough, businesses whose primary goal is to make money have learned how to take advantage of the need to fit in. Marketing to children is so powerful because most parents are willing to do whatever it takes to keep their children happy. If the latest toy is perceived as being this year’s must-have at Christmas, it can be difficult to say, “No, we can’t afford it,” to a sweet child who has behaved all year. Parents have the responsibility to curb expectations and lead their children in such a way that they don’t need to care as much about outward appearances, fitting in, and resisting the highly-targeted and performance-tested marketing messages from a ever-widening array of media.

The Wall Street Journal articles offers some concrete advice for adults looking for new ways to feel comfortable saying no. Not wanting to be embarrassed is only one reason people don’t say no to spending in social situations, however. The article doesn’t address another important factor — not wanting to disappoint friends. Keeping up social relationships is an important part of having a fulfilling and happy life for most people, but it’s impossible if you turn down every request to get together for dinner because your budget doesn’t allow it.

Rather than feeling you need to say no all the time, change the conversation. Take initiative and suggest other ways of getting together and socializing that don’t require expensive restaurants or $15 drinks at the fanciest clubs. Organize a pot-luck dinner or a picnic in the park. Get together to play games. Attend a gallery opening. Find event in your community that don’t require an outlay of cash but still provides for a social experience. Rather than being the person saying no, you’re now the one with great ideas for activities, and you’re saving everyone money, and you’re not disappointing anyone.

The article suggests blaming your financial adviser when you need to say no to your friends. Punting responsibility is a quick way to get out of a sticky situation when you feel you need to give some kind of an explanation beyond “no.” Depending on how much you’re willing to share with your friends, you might want to say something along the lines of, “I’m saving money for x, so I can’t fit this into my budget this month. How about next month?” This shows that you, not your financial adviser, are responsible and in command of your money, and describes a healthy attitude towards savings. Plus, the word “no” triggers such negative responses in the brain, it’s better to avoid it and turn the conversation around in certain social situations.

And who knows — if you’re genuine and non-judgmental with your friends, your approach to saving money might have a good effect on your friends’ attitudes. They may think more about savings when they hear you are taking a positive approach to your money.

How do you say no to spending in social situations or to your children? Continue reading to watch the half-hour HuffPost Live segment, “You Can’t Afford That.” Read the full article →

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The frugal approach to growing wealth focuses on what you spend. The Millionaire Next Door, one of the most popular wealth motivation books, shows how spending wisely is the most important factor in increasing net worth. The book contains anecdote after anecdote about millionaires who live below their means and keep their wealth by maintaining modest spending patterns even when they have the financial capacity to spend more.

This philosophy is a necessity, particularly in the early stages of growing wealth. It’s limited. Whether you’re supporting a family of four or are living on your own, you can only reduce your expenses so far. Expense reduction can be taken very far — you can live off the land if you are willing to forgo the conveniences the modern middle class has come to accept as basic living conditions. If you’re not willing to go that far, you can feed your family a steady diet of ramen noodles.

There’s always further you can take frugality, but everyone has a limit. That limit might be flexible once a family concludes that frugality is the path to long-term wealth.

A frugal-only perspective to building wealth is not going to take anyone very far. Saving money is limited — whether by a soft limit in which a family has living standards below which it would not like to have an enduring experience or the hard limit of zero. You cannot reduce your spending by an amount larger than your total expenses.

If your total expenses consist of only the basics, food and shelter, and they amount to $1,000 a month, you can only reduce your spending or increase your savings by $1,000 a month, and to do that you would need to live rent-free with a kind soul and find free sustenance. And even then, you’ve saved only $1,000 a month and there’s nothing more you can do. This is an extreme example — most people have more they can save without resorting to mooching off others who understand your desires, but mathematics is not as forgiving.

The other side of the equation is just as important, and I would argue that it’s significantly more important. In these ten tips for saving money, half are about earning more money because increasing savings depends on having a healthy income more than it depends on cutting costs. The amount you can save by cutting spending is limited by nature, nurture, or logic.

In contrast to the limited approach of cutting expenses, earning more money is virtually limitless. While there comes a point at which saving more money is not possible or even desirable, there are always opportunities to earn more.

In the short time I was a non-exempt employee in the financial industry — eligible for overtime payments — I took advantage of this as much as possible. Working long hours in this job was expected and there was more than enough to do to keep me busy, so the situation was perfect. When I moved into a different department and received a promotion to exempt status, my first concern was that my new salary would be more than my previous salary plus overtime payments. Without the opportunity to earn more for working overtime, I had less control over my income from that job.

At this time I had already reduced my expenses significantly, and had little more possible without sacrificing some of my basic requirements for quality of living. I was on the quest to build wealth, however, and that included quickly eliminating my remaining student loan debt, so I focused on earning more money. I consulted for several clients who were interested in building their web presences, as this was a skill I had been developing for a long time. I put more focus into my business outside of the workday, and that help me use a variety of skills to increase my income. A few years later, this website began gaining in popularity among readers and high-quality advertisers, and it provided a surprisingly stable source of income above and beyond my salary from a day job.

The point I’m making is that there are always opportunities to grow income if you have the time to spend building something of value. While not everyone is suited to being an entrepreneur, those who build something that other people are interested in can ease the pressure on their expense rollbacks by generating a revenue stream. This is the key to building wealth in a manner that you just can’t imitate by cutting spending.

Getting rich slowly through smart spending and good choices is an important part of the wealth-building picture, but there’s not much use to wealth if it takes a lifetime to accumulate. Putting significant effort into creating something of value — a product customers will buy, something that fills a need previously unfilled or poorly filled, a business with the potential of being sold, or a service other people or businesses require — your day of financial freedom can arrive much sooner.

Photo: fireflythegreat

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