Thursday, June 19, 2008

Checkbook oops

When I left home for college, my parents set me up with a checking account and an American Express charge card. The understanding was that, even though they might send me money on occasion, I would be solely responsible for the two accounts.

Responsible. What a loaded word.

Many of my friends were on the same boat, but they seemed more savvy. Instead of keeping tally on their checkbook, they called their automated teller whenever they wanted to know their balance. I considered adopting this practice until I realized the balance reported was sometimes inaccurate; There was no way for the automated teller to know that a check had been written if it hadn't yet cleared.

While I was busy feeling proud of myself for avoiding this possible disaster, I walked right into another.

Expenses I paid for with my American Express card didn't seem real. Although I kept track of ATM withdrawals and checks written against my account, I didn't pay much attention to the American Express charges I incurred. According to the American Express website: "Unlike Debit and Credit Cards, with an American Express Charge Card you can enjoy no pre-set spending limit and you must repay your full balance at the end of each month giving you total control over your expenses."

No spending limit
+ full balance due at month end

college student without the funds to foot the bill

In my desperation, I found a loophole. My American Express for students card allowed me to defer travel expenses, interest free. That is, the card acted like a miniature loan for travel expenses and a charge card for everything else. Problem solved! The money my parents sent me for buying plane tickets home went directly to paying off my over-budget spending.

This was great! For the next couple of years I overspent, conveniently by about the same amount my parents were sending in plane ticket money. I didn't give much thought to this growing travel debt. So, by the time I accumulated enough curiosity to check the card balance, I was in for a shocker -- it was over $1500. What had I been thinking?

Reality set in around then. By upping my hours at my part-time job during the remainder of that school year, curbing my spending, and saving as much as I could during the following summer internship I was able to eliminate that debt.

Determined to not play the fool twice, I changed the way I balanced my check book. Instead of only keeping track of direct expenses, I began to also keep track of "virtual" expenses.

DescriptionReal BalanceVirtual Balance
Starting balance$1000.00$1000.00
ATM withdrawal-$40.00-$40.00
Remaining balance $960.00$960.00
LANES membership (Amex)$0-$55.00
Remaining balance $960.00$905.00

The virtual balance, depicted above, is what I learned to live by. It let me know how much of my "real balance" was available for spending. In other words, even though my "real balance" was $960, if I spent $55 on my card that I had to pay off at the end of the month, $55 of my "real balance" was off limits as it was reserved for that purpose.

Although my checkbook habits have evolved since then, I still live by a virtual balance and recommend it heartily. I believe it's played a major role in steering me clear from debt. Thank goodness for my first checkbook oops -- It led to one of the best lessons I learned in college.

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