The financial industry was a different beast twelve months ago. This time has shed some light on the toxic relationship between three key parties: the government, financial institutions and consumers.

Thinking of the times before the economy fell, we were able to get a credit card easily and most people didn’t have too much trouble obtaining a mortgage for their home purchases. Lenders were lenient and credit was readily accessible. Such was the alleged reason for the credit crunch and subsequent recession.

While I believe big banks were at fault for bring down the global economy, the government’s attempt to stick up for consumers by reprimanding the financial industry will eventually come back around to bite us in the rear – which will trigger another government intervention, thus repeating the cycle.

The Death Spiral Begins Continues
The media and financial experts predicted this a long time ago – that banks will try to replace lost revenues by implementing or changing their financial products and services.

It’s a natural response that is exhibited by all life on Earth. When you destroy a garden of beautiful flowers that used to be the feeding ground for bees, they’ll move to another garden. If you lost your job, you’ll look to replace that lost income by searching for another source of income. If a “fat cat” banker can’t charge you for “this”, they’ll charge you for “that”.

With financial reform, these were some bank revenue sources that suffered:

• The group under the age of 21. This is a severe blow to the college student market for card companies.
• Penalty fees. Overdraft, late, and over-the-limit fees were reduced with restrictions. No more multiple penalties for a repeated violation.
• Interest charges. To reduce lending risk, banks cut credit lines and close accounts while new laws forced them to drop APRs if customers paid on time for 6 months straight. Also, potential borrowers weren’t able to meet their lending criteria.

Here are some of ways that banks have negatively influenced us since:

• Increased APRs. Around the end of last year, many cardholders saw their APRs jump for no apparent reason (even those who paid in full every month). This could be due to the new rules that card companies have to cut interest rates on good payment behavior.
• Reduced credit limits. Just like with APRs, credit limits were being slashed with no explanation and many took hits on their credit score. Banks were cutting their risk by reducing their extension of credit.
• Inactive accounts were closed. To them, inactive credit card users are the top echelon of deadbeats (those who are lose money to banks). Credit scores took a dive for those with large credit lines and long histories.
• Reduced rewards. There were some pretty amazing rewards and cashback credit cards out there before the economic downturn. Now, the rewards programs are abysmal. I curse the geniuses who came up with rotating categories.
• Card conversions. Some cardholders are seeing their accounts being converted to different cards with different perks and programs such a no pre-set spending limit card.
• Non-free checking. As of late, the sizzling news is that free checking may soon become extinct. We may see the days when we are nickel-and-dimed for simple things such as talking to a teller or receiving a paper statement.

So the game we are playing goes like this:

1. Banks want to make money and impose industry practices to bring about a profit.
2. Consumers suffer and grow increasingly unsatisfied by these practices.
3. The government steps in to defend the consumers by imposing new rules on banks.
4. Banks want to make money and create new industry practices to bring about a profit.
5. Consumers suffer some more and become more unhappy with banks.

Hurting Many to Help a Few
It feels as if financial reform has caused banks to cut the harm they do to the irresponsible customers and transfer their financial burden onto the entire customer base. It’s similar to one of those situations where one person arrives late to basketball practice but those who were on time had to run 5 laps while that one person watched.

Sure, we can’t blame those who had to undergo foreclosure and bankruptcy due to unfortunate events that were out of their control. But, I do think put quite a tight leash around the necks of banks. The majority of you (I hope) are handling your personal finances responsibly. Yet, you may find that your bank accounts and credit card accounts are becoming less and less attractive.

Are these effects sinking in for you yet? Do you feel financial reform has done good for the consumer population?

(Photo credit: Daniel Morris)

The world seems to be spinning at such a rapid pace that the many basics of money are neglected. It is these small lapses of financial common sense that foster a trend of bad habits.

Take out the numbers and look at the fundamentals. With a hint of logical reasoning, our personal finance management skills would become that much more powerful.

1. Buying stock is buying part of a business.

The mentality of investing in the stock market has drifted to a point where people are buying stocks and praying for the share price to go up.

Too often is there a voice saying that stocks are a way to make money while the fact is that it is actually a purchase of part ownership in a company or business. Sure, the desired result for everyone is a profitable return but stocks aren’t lottery tickets. In the end, the business has to do well for the investor to do well.

So, stop asking what is a good stock. Instead, start asking what is a good business that you don’t mind owning. Personal finance experts have recently been trying to drive this point home because many rookie investors omit this reasoning in their investment decisions.

2. Credit card purchases are loans.

We are oblivious to the fact that every time we swipe our credit cards, we are actually borrowing money with the agreement to repay the amount, plus interest. If someone is unable to pay the balance in full, the purchases are bound to cost more than the prices that appear on the receipts.

Credit cards are designed so that we can escape that reality. The form of seemingly simple plastic cards that, when swiped, allows us to buy things we cannot afford reminds me of the granted wishes with the rub of a genie lamp. Unfortunately, a credit card is the magical lamp containing the devil disguised as a genie.

The convenience and accessibility of credit cards exist to keep us spending without this fact ever crossing our minds. If we had to sign a bunch of forms for every time we made a credit card purchase, we’d all be much more reluctant to incur more credit card debt.

3. Banks are out to make money.

Banks are financial institutions that operate for a profit. For them to profit, there has to be a way for them to take money from their customers.

I find it funny for a bank to claim that they have your financial goals in mind. Make a late credit card payment or overdraw your account and see how much they care about helping you reach your goals. When you stop to think about it, the bank’s ultimate goal to draw a profit conflicts with the customers’ ultimate goal of saving money.

4. Founders of get-rich-quick programs aren’t rich, yet.

If you’ve ever been home on a Saturday afternoon, you’ve probably seen one of these paid advertisements on TV touting an ambiguous program on making thousands of dollars with little to no effort in a matter of weeks.

You’d expect the people, who teach you to get rich quick, to be rich as well. Right?

Now ask yourself: “why would someone, who knew the secret to achieve instant wealthy, contemplate sharing this knowledge with someone else?” Would you share these secrets if you were in this position? I sure wouldn’t. And, if I genuinely wanted to share the wealth, I wouldn’t charge you for it.

5. Spending isn’t saving.

An avid shopper may tell you that a sale is a once-in-a-lifetime event that mustn’t be missed. If such an awesome deal was never presented to us, would we have spent the money to buy something at a discount? If we didn’t have a super savings coupon, would we have even walked into the store?

Now, if we hadn’t bought anything, what wasn’t spent was saved. But, if we bought something and spent money, did we really save anything despite getting a discounted price?

We didn’t save – we just spent less, which is technically still considered spending.

I know I missed many other obvious financial concepts that must’ve influenced the way you handle money. Share the logical reasoning behind them so that other readers can benefit from the cold, hard truth!

(Photo credit: banjo d)

Written by author Jim Randel, The Skinny on Credit Cards was the straight-to-the-point type of book that I had expected. It acted very much like the CliffNotes guides that we used to skip out on reading the entire novel.

Throw in a short storyline and some stick figure illustrations with the bare bone facts on credit cards and Randel presents us with a nice one-hour read to set readers straight.

Here are some things that Randel does nicely:

• Unmasks the disguises of a credit card. He puts it in your face. When you use a credit card, you are making loans and you are borrowing money. It’s design was purposely created to make it easy and mindless.
• Adds a story to make a point. Situational examples provide something that readers can relate to. That helps drive home the point that is trying to be made. When it comes to credit card debt, it becomes an influential way to motivate change.
• Provides updates from the Credit CARD Act. With the new financial regulations in full motion, much of the information in books and on the Internet need to be updated as some information may no longer apply.

Overview
The Skinny on Credit Cards is a ideal for anyone in beginning stages of getting or having a credit card and it’s even better for those who are already in a struggle with consumer debt.

Randel tries hard to include strict facts and distinct points (which he does very well) but credit cards just encompass so much that the content may be overwhelming to anyone unfamiliar with the terms. As a personal finance blogger, I was already familiar with about 95% of the content but his story/stick figure format kept me flipping the pages.

Minimalism is an art that I’ve seem to have slowly adopted unconsciously. It may have contributed towards my carefree, lax attitude toward physical possessions. Some may call it being lazy or apathetic but I prefer the freedom from unnecessary worry and concern over material substance.

All too often do we place an excessive amount of sentimental value on items that are better off if they remained out of our lives. The typical outcome is clutter – the true enemy of a minimalist.

A Minimalist Lifestyle
The minimalistic life consists of days where physical belongings represent the bare minimum. A great way to think of it would be to pretend as if you were traveling around world for eternity. George Clooney’s character (Ryan Bingham) in the movie Up in the Air was always traveling and showed very little emotional attachment to physical things – maybe that’s why he excelled at his job of firing people.

A time when I, and many of you, experienced a minimalistic lifestyle is the time spent away from home in college. I lived on very little – rarely spending more than $50 a week on food and fun. Plus, there was only so much space in our tiny, overpriced dorm rooms. That’s why so many people suggest that we not dismiss the college lifestyle after graduation because we were able to live off very little then, so we can live off very little now.

Another terrifying way to look at it is to put myself in the situation where burglars breaks into my home and leave tremendously pissed off at the slim pickings this target happened to be. A minimalist would be able to withstand material loss calmly (though I’d lose my sense of security).

What Minimalism Offers
It is a zen approach to life. With it, money is secondary to meaningful experiences and peaceful lifestyles. To me the benefits are very enticing.

• Focus on what counts. Minimalism frees the mind of mental clutter and it frees my surroundings of physical clutter. That leads to more focus and concentration on the things with true relevance to my financial well-being. In the end, I am able to spend money and devote time and attention efficiently.
• Clutter prevention. It takes up space. We build a false sense of compassion for it. I sometimes look at a useless object and feel the need to keep it. Why? I don’t know. But, it will be the start to many deja vu’s next year, the year after that, and the many years to come. When I do toss it, I’ll wonder why I was silly enough to hold on to it for so long.
• For the need of less stuff, there comes a need for less spending. The obvious reason for cutting out what we consider to be “necessities” is to save money.
• Find out what real makes me happy. Buying new things does create the happy feeling but it lasts for just a moment. It requires repeated purchases to maintain happiness – a recipe for financial disaster. Instead, money is better off spent on new experiences and learning new things because they create long lasting memories of the happy times.
• Lessen the burden. Society has made many of us into rabid workhorses. The conventional wisdom to wealth accumulation is to boost income. Higher income is definitely an appealing option but minimalism goes against advice to earn more to buy more but it supports the idea that we should learn to live with less.

Small Steps
An immediate conversion into a minimalism would be overwhelming. As a matter of fact, there is no specific point where one person can say “I’m living with the bare essentials”. If I feel I’ve reached that point, then that is the life I’ll try to maintain.

Each person has their own beliefs on what is considered necessary. For me, tech gadgets have gotten me enslaved. In other areas, I can easily purge myself of “stuff”.

(Photo credit: Hoboken Condos)