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Money and credit lessons from the past

The ways people managed finances before credit cards can help us now

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Life before credit cards: How did it work?

Credit cards financed our electronic whims, vacation fantasies and fashion fetishes. Now, in an economic downturn, experts tell us to pay off debt and stop charging.

How -- after decades of relying on plastic -- is that done? A look back at how we used to pay for things may help.

Not long ago, credit cards were rare and granted only to those with long and stellar credit histories. According to the Federal Reserve, Americans' credit card debt in August 1978, when credit cards were just catching on, was about $42 billion. Fast forward 30 years. In August 2008, credit card debt hit $969 billion, more than 20 times higher.

"Jackie Kennedy didn't have a credit card while she was in the White House, and she did just fine," says Catherine Williams, who, as vice president of financial literacy for credit counseling agency Money Management International, has researched the history of credit card use in America.

"Credit has allowed us to make purchases of items we simply can't afford, and we pay for them over a long time and end up paying a lot more for them," Williams says. "Americans have garage sales to pay for stuff they put on their credit cards. We're really purchasing our futures away."

Many consumers don't know any other way, however, so taking a look at life before credit cards -- or at least, before every American had a wallet full of them -- can help provide some insight on how to reprogram our credit mentality. "Despite all the nifty equipment we've got today to help us plan and save, we were much better planners and savers back in the old days," Williams says.

Online tools make savings a snap

Online banks and savings tools can make socking away money much easier. While you can always open multiple savings accounts with your bank and transfer funds regularly, to keep funds even more separate, you may want to open an online account and link it to your checking account.

"It's not right in your neighborhood, so you're not going to run right down and take money out on impulse. It takes a day or two for it to appear in your local bank account, so it's not like you can't get to it," says Steve Rhode, president of Myvesta.org. "It acts like a savings club with no hassle."

Here's a quick sampling -- all are FDIC insured.

Dollar Savings Direct -- Link your current checking account to this no-fee, $1,000 account balance minimum, savings account. You can schedule automatic transfers. DollarSavingsDirect is an online banking division of Emigrant Bank.

E*Trade Financial -- E*Trade's savings accounts only require a $1 minimum deposit to start a new account. You can transfer money from your current checking account, but you can't schedule automatic transfers. There are withdrawal limits, however, of six a month (this does not apply to transfers).

First National Bank of Omaha (FNBO) -- The minimum initial investment to open a FNBO savings account is $1. You cannot access your funds for the first 10 days and there are limits to how much you can transfer: $2,000 in any one day and $10,000 in any one month.

SmartyPig -- An online piggybank that doubles as a social networking site and offers the option of getting your money out once your savings goal is reached in the form of a preloaded debit card, merchant gift cards or a transfer of the funds back to your bank account.

ING Direct -- Customers can link up to three checking accounts to their Orange savings account. A regular, scheduled transfer can be created, and if you create an Electric Orange account, funds can be accessed via debit or check. 

No matter which online savings tool you use, having a specific goal in mind makes for more successful saving. "Those who are saving for a goal save twice as much as those who aren't," says Nancy Register, national director of the America Saves campaign.

Here are some areas where old-time financial mores can reduce credit card dependence.

Groceries
Credit cards have become such a staple of daily life that some shoppers routinely use them to fill their grocery carts -- which makes budget-busting impulse buys more likely. 

Behavioral economist Richard Thaler, professor of economics at University of Chicago and co-author of the book "Nudge: Improving Decisions about Health, Wealth and Happiness," has a favorite YouTube clip of actor Gene Hackman recalling an incident from decades ago when a young Dustin Hoffman asked him for a loan. Hackman walked into Hoffman's kitchen and saw a row of labeled jars. All had cash in them, except the jar labeled "food." Hoffman insisted he couldn't take money out of the other jars to pay for food.

"It's a funny story that illustrates sort of an old-fashioned mental accounting strategy of literally keeping money in separate accounts -- people used to use envelopes or cookie jars or something like that," Thaler says.

Food-buying clubs, an old-time technique for saving money on groceries that became popular during the Great Depression, are making a comeback. Members typically place a monthly order for basics, such as cereal, beans and grains, then gather to sort and unload the shipment for a savings of 10 percent to 20 percent or more.

"By the power of bulk buying, you not only reduce costs but force yourself to cook more from scratch," says Ronnie Cummins, director of the Organic Consumers Association. "Buying clubs are coming back now because of the economic recession." Consumers can contact the association to see if there's a buying club in their area -- Cummins estimates there are as many as 5,000 clubs in the United States -- or they can start one with friends, relatives or co-workers.

When shopping at grocery stores, experts say consumers can take a clue from the past by going into the store with a list and a budget and sticking to it. (Some budget-conscious consumers swear by online grocery shopping as a way to avoid overspending since it's not embarrassing to delete an item from the virtual cart.) Like dieters, consumers on a budget should stick to the outer ring of the store where staples such as produce, meat and dairy usually are stocked. That way, it's easier to avoid the temptation of spending on unnecessary items.

Vacations
Before easy credit put tropical cruises and European vacations within reach of average Americans, a typical family vacation was more modest, and often closer to home. "It was Uncle Bob's motel where your dad drove up and you parked in front of the door," says Money Management's Williams, who grew up in the 1950s.

In addition to traveling to less-than-glamorous locales, the typical family planned vacations a year or more in advance, and saved up for the trip. "Dad would make a list: 'I'm going to need three tanks of gas, and that will cost this much, and the cabin costs that much,' " Williams says. "Mom would make a grocery list and always be saying, ‘You kids be saving up -- we're going to the Poconos next year.'"

The whole idea of a rainy day account is another thing that's become obsolete. The fourth credit card has become the rainy day account.

-- Richard Thaler    
Economist, author, University of Chicago    

There are tools available now that make it a little easier to take a vacation without going into debt. Online savings accounts make it simple to save for a specific goal. Jon Gaskell, co-founder of online savings site SmartyPig.com, has been using his online piggy bank to save for almost a year for a family vacation to Arizona this winter. "Afterward, all I'm going to have are memories of that vacation," Gaskell says. "I'm not going to get a shocking credit card bill in January."

Another choice, available through the American Automobile Association, is the Visa TravelMoney card. It's a prepaid debit card that works like a credit card and offers emergency card and cash replacement. The card can serve as a vacation savings tool because money can be loaded onto the card little by little before a trip.

"It's a convenient way to travel with cash, and it allows you not to overspend your budget of the amount that you put on the card," says Brett Henry, manager of partnership programs for AAA. One other relatively new option is to use a trip layaway website, which offers inclusive vacations that can be purchased with monthly payments.

Clothes and back to school
In the past, families budgeted and saved for school clothes and school supplies. Each child got a few items and, of course, hand-me-downs. But now, parents feel pressure to buy laptops and name-brand wardrobes. That's why, along with Christmas and summer, back-to-school season is now one of the times each year when a family's budget is likely to get overextended, according to Steve Rhode, president of Myvesta.org, formerly Debt Counselors of America. The solution is to go back to saving and budgeting. "Planning in advance is boring, regimented and predictable -- but it works," Rhode says.

Fortunately, layaway -- another throwback to the 1930s -- is making a small comeback. Layaway allows retail store customers to pay a small fee of $5 or so and usually a 10 percent down payment to put an item on hold for about 30-60 days. Customers agree to make regular payments on the item. Once all the payments are made, the product can be brought home. Kmart launched an ad campaign in October 2008 to tout its layaway program, and Burlington Coat Factory, TJMaxx and Marshall's offer layaway, too.

An online twist on the concept, eLayaway.com, offers the service through participating online merchants where monthly payments are automatically deducted from consumers' checking accounts. "Just five years ago, everyone was announcing the elimination of layaway programs, and now they're back," Rhode says.

I still remember growing up that when something broke, we fixed it and we kind of made do with what we had.

-- Steve Rhode    
Myvesta.org   

Vehicles
Before car loans stretched out to five, six and even eight years, buying a car was much less of an impulse purchase. "People went down and got a loan -- usually at the bank," says Money Management's Williams. "You talked it over with your banker and actually worked out a payment to fit your budget. Then you went and started shopping for a car, and there were a limited number of choices, and the transaction was pretty straightforward."

Lured by the temptation of that shiny vehicle sitting on the lot and easy credit, however, consumers have been buying Hummers on Honda budgets. "In the 1970s, the average American drove a Vega or a Pinto," Williams says. "Now you can drive almost any car you want, and your payments could stretch out eight years. Probably 60 percent of our clients are upside down on their cars where they owe more than that the car is worth."

In addition to considering the possibility of being a one-car family and relying on public transportation, bicycling and carpooling, consumers need to save as much as they can for a down payment and select the shortest financing term available "You also have to look at your budget -- not just the price of the car, but gas costs, insurance and upkeep too," Williams says.

Holidays
The first Christmas clubs started in the early 1900s to help bank customers save money for the holidays. Each week, participants would put aside a little money, which they couldn't withdraw until December. "Christmas clubs had billions of dollars in them through the 1970s," says University of Chicago economist Thaler. "Credit cards put Christmas clubs pretty much out of business. You can still find them, but they're pretty rare now."

Credit unions are the exception; at these depositor-owned institutions, Christmas clubs never went completely out of style. According to a survey by the Credit Union National Association, 78 percent of credit unions offered Christmas clubs to their members in 2007. "They're increasing little by little," CUNA spokeswoman Katye Long says.

"It always surprises me that people seem to be caught off guard that Christmas comes every year," Rhode says. To prepare for the arrival of the holiday season, look at how much you spent during the last holiday season, divide it by 52 and set up a weekly automatic transfer into a savings account, Rhode recommends. "The best time to start saving for the next holiday season is at the end of this one."

Appliances and furniture
In the past, the purchase of an appliance or a piece of furniture also required planning and saving. And once purchased, an appliance or piece of furniture wasn't tossed to the curb as soon as it went out of style. "I still remember growing up that when something broke, we fixed it, and we kind of made do with what we had," says Rhode.

He recommends saving big on furniture by using online classified-ad websites, such as Craigslist, or consignment shops. "If you can just get past the mental notion of that whole thrift thing, you can save a boatload of money," says Rhode. "There are more upscale consignment shops for furniture around, and you can go buy entertainment centers and living room sets for 70 percent off retail prices."

Another option is to buy or keep an old piece and give it a facelift. "It might be cheaper to have a well-built sofa reupholstered than it is to buy new," Rhode says.

Emergencies
Before credit cards, almost everyone stashed away some cash for emergencies. "There was this mentality that, 'Oh my goodness, something might happen,' and there wasn't this instant piece of plastic that got you through the emergency," Williams says. "In some cases, the emergency fund probably wasn't even at the bank --  Mom kept it in a drawer or Dad kept it in his pipe box."

That concept has all but disappeared. "The whole idea of a rainy day account is another thing that's become obsolete. The fourth credit card has become the rainy day account," Thaler says.

An emergency fund is essential to avoid debt, though. The first step is to realize that so-called emergencies --  new tires, a busted hot-water heater, an unexpected trip to the vet for the dog  --  are inevitable. "We'd like to see everyone have a savings account to allow them to pay for the $2,000 a year that we know arises in unexpected expenses," says Nancy Register, national director of America Saves, a campaign to encourage Americans to reduce debt, save and build wealth.

America Saves works with financial institutions to make free savings accounts with a low initial deposit available  --  in many cases as little as $25. After opening an account, it's a good idea to set up an automatic transfer every payday through the employer or bank. Register says: "Saving automatically is really the key to saving." 

See related: Layaway enjoying small revival

 

Published: October 30, 2008


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