Don’t Unlock Your Paycheck – Ignore It

Let’s say you’re out doing some yard work this weekend, when all of a sudden some guy rear-ends your car that was parked in the street as he came around the corner.  He panics and drives off, and you can’t get a good look at his license plate fast enough.  All your neighbors are inside, and no one else saw what happened.  As you go over and look at the damage, you find that you now have a smashed taillight and a banged up bumper.  The body shop says it’ll take about $400 to fix the damage, which is super convenient because your deductible is $500.

So what do you do?  Can you cover a $400 emergency without putting it on a credit card (that you still have to pay with actual money)?  Or are you one of the 47% of Americans who would have to sell something immediately, borrow the money, or simply do without until payday?  This is the very definition of living paycheck to paycheck: one runs out before the next one comes in, and Rachel and I have both been there.  Not knowing how you’re going to make it until Friday is a feeling that far too many people are familiar with, given that we live in one of the wealthiest countries in the world.

Loan Sharks

Thankfully, we’ve never been in a situation so bad that we had to go to a payday lender, but many people have.  With over 300% interest rates, payday loans are quick fixes that lead to big problems.  A 2013 study by the Consumer Finance Protection Bureau found that the average borrower from a payday lender earns less than $22,500 a year, and $458 of that goes to fees on the payday loans.  That’s underneath the 2013 poverty level for a family of four, and they’re the ones these sharks are preying on most.  Ever see a payday loan office in the rich part of town?  Didn’t think so.  They sell their victims on the idea that if they just take out a payday loan, they can make ends meet and catch up the slack with their next check, except that doesn’t happen.  When payday rolls around, a chunk of it is already gone, leaving them with even less for the next two weeks.  Rinse and repeat, and you’ve got a disappearing middle class that’s drowning in debt while the loan sharks wait for a meal.

Same Wolf, Higher-Tech Clothing

If you’ve poked around on the App Store on iOS (or, I presume, the Google Play store on Android) recently, you may have seen some new apps being featured that sound awfully familiar.  I’ve noticed two so far, Dave and Activehours, that have killer marketing departments shouting happy-sounding stuff like, “You worked today, get paid today!” and “Unlock your paycheck!”  It sounds intriguing, and they tout backing from some large employers like Sears and Target.  So how does it work?  You sign up, give some verification about where you work and what your paycheck normally is, and that’s it.  From then on, you can take 0% loans against what you earned each day, and pay them back through an automatic withdrawal as soon as they see your check clear your account.  Don’t have enough on that check to pay back what you borrowed for whatever reason?  No worries, they’re patient people that will gladly wait until you have the money in your account.  But rest assured, they’ll get their money back.  Because you wouldn’t want to be that person, would you?

Dave
Look at Dave, with his smug little bear grin, just waiting to help you pull off a heist against Future You’s bank account.  He is right, though: a coffee shouldn’t cost $38.  Which is why you shouldn’t buy it until you can afford it.

These kinds of apps open the door to a whole new kind of payday lending crisis.  No, the interest fees aren’t going to eat up your poverty-level salary, but there’s an entirely different animal lying in wait: anonymous, instant gratification.  To get a payday loan, you have to walk inside the office, pass at least some kind of credit check (even if it is just the office cat deciding whether you’re creditworthy), and actually talk to a person.  Now, you can download an app and get an advance with no one ever knowing, which makes it sooo much easier.

So, if there’s no interest rate, what’s the harm?  First off, you’re still robbing Future You.  When payday comes around, your check isn’t going to be as big as it would have if you’d stayed away from these apps.  And guess what?  You’ve still gotta make it to the next payday, but now you’re behind the 8-ball because you’ve got less money to use.  Secondly, you’re treating the symptom, not the disease.  I get it.  Sometimes, stuff comes up and you need to find a solution fast.  But when that solution is painless, like tapping in some numbers on a phone app, you don’t force yourself to learn and prepare better for next time.  And when you don’t learn, you don’t grow.

 

Active Hours
You know what else people shouldn’t do?  Spend money they don’t have yet.

I hope these two apps are a flash in the pan like so many other financial tech apps on the market.  But something tells me I’m wrong.  I feel like this sort of appeal to our intolerance for delayed anything is going to catch on, and will ultimately drive a deeper chasm between “the wealthy” and the rest of us.  Don’t believe me?  Check out this post from Liz at Chief Mom Officer, where she writes about three apps that were covered in the Wall Street Journal, of all places.  If they’re pushing these things, people are going to use them.  After all, scammers and swindlers have always been around, and the most successful ones are the ones that convince their victims that they’re helping make life easier.  Encouraging you to use the future to pay for today’s purchases is not helping you.  It’s keeping you trapped in your job, and prevents you from ever reaching beyond your current financial situation.

Live Boring, Live Better

Isn’t it exciting when it’s Tuesday, and your bank account is at $7.43?  Don’t you just get a rush not being able to remember what your gas tank is at, or if you’ll be able to make it to work the rest of the week?  It’s great, right?  Nah.  I want you to live a more boring life.  I want you to not even know when payday is, because you’ve got your bills planned out for at least a month in advance.  The people behind You Need A Budget call this “aging your money,”  and it’s the key to never needing to set foot in a payday loan office or finger on a payday advance app again.  The idea is to use last month’s (or paycheck’s if you’re just starting out) money for this month’s obligations.

Yeah, it’s going to take some work to get the ball rolling, but once it starts, it can make life so… boring.  You never get the thrill of overdraft fees or the intrigue of strange people calling you from collections agencies.  To do it, you have to cut lifestyle expenses way down.  No cable, no eating out, no new shoes for a while.  You have to live below your means instead of bumping up against or exceeding your means like these apps try to encourage you to do.  Your friends might not like you very much for a couple weeks, but they’ll come around once you’re able to cover your part of the restaurant tab again!  Turn it into a game, where the more you save, the more you can treat yourself the next paycheck.  Made it to payday with $100 in the bank?  Spend $10 on something you wouldn’t normally be able to do.  And make it your goal to do the same behaviors again and get to the next payday with $200 left over.  Build up a cushion, and then start to pay your bills out of that cushion, not out of the current pay cycle.  Eventually, you’ll only be using money you made a month ago or more, and you’ll forget when payday is.  How boring!  The point is, once you become more in control of your money, you won’t need to “unlock” your paycheck.  You’ll be able to forget about it altogether.

What about you?  Have you ever used a payday loan?  What was your experience like?  What advice do you have for someone struggling to break the payday loan cycle?

 

 

17 thoughts on “Don’t Unlock Your Paycheck – Ignore It

  1. I strongly agree boring is better. I could live a more lavish lifestyle, have a trendier apartment, or try to keep up with the Jones-es. However i like to save, I live somewhere that is well below my income level (my neighbors are also fantastic, and I don’t need more clutter. In short I’m boring, but I’ll also be the millionaire next door :). Life is better with less stuff.

  2. Borrowing money is almost always bad idea. IDC how it looks. Any business willing to lend money is just looking for an excuse to make it put the lotion on its skin. You are the it.

    1. Yep. If it wasn’t profitable, the business wouldn’t be able to stay open. Even charities and nonprofits need income to stay afloat. I don’t see the option for 0% interest staying around long, and then we’re right back in the exact same spot as with traditional payday loans.

  3. I hadn’t heard of these apps before but from the statistics I have seen there is a large percent of the population that would be interested in their services.

    The funny thing is that I could imagine some personal finance number crunchers doing the math on investing the money they earned today. Because of the 0% interest on it, they could make a case for participating in the program.

    Not me though, my money is ‘aged’ a few months before I even spend it. It’s good to have a secure buffer and not worry about the next payday.

    1. If you look at the marketing for these apps, they’re pitched as something that is almost a no-brained to do with your money. And I think that’s what they’re banking on: people not using their brains. If we become a generation of people that are not only carrying the highest amounts of student loan and credit card debt in history, but are also shifting from paycheck-to-paycheck to day-to-day, we’re in deep trouble. Hopefully some voices with a little more pull than mine will start speaking out against these things before too much damage is done.

  4. I hadn’t heard of these apps and thankfully have never even been tempted to use a payday loan. I can’t help but to wonder how many using these payday loan apps, access them with high end devices with an equally high monthly bill attached to it. A bit ironic when you think about it.

    1. I hadn’t even thought of that, but you’re right! Kind of shows just how ingrained the keeping-up-with-the-Joneses mentality is; it’s a given that if you’re an adult in America, you have a $600+ smartphone and pay $100+ every month to keep it running. All those little “givens” like that add up, don’t they?

  5. I agree with Duncan’s Dividends – Boring and sensible is good. I’ve been lucky, I’ve never been out of work, except when I wanted to be and never had debt except a mortgage. However, when there was no money,and there was plenty of times that happened in our early days together – we didn’t spend. Beans on toast for tea, water to drink – so what! Mind you we didn’t have the temptations of cable, smartphones etc, and Starbucks hadn’t been invented!

    1. Haha, today’s temptations do definitely play a role in our spending! And while I hope no one would ever take out a payday loan to pay for Starbucks, I’m sure many have in order to keep their cable on. I think learning to do without some of life’s “deserved” luxuries could be a great teacher in the difference between a want and a need.

  6. We have never used payday loans or applied for anything similar, but we did live in a vicious debt circle for a couple of years.

    We both had debt to pay off and setting all payments on autopilot helped a lot! However… problem was, once the bank took their monthly chunk of money back + interest, we found ourselves borrowing money from friends or from our employers. Which, of course, led to even less money next month and so on.

    It took a while for us to realize ‘what the heck are we doing?’ 😀 We’ve been living a “boring life” ever since and couldn’t be happier!

      1. Progress came slooow 😀

        We were aware of how bad we were handling money, but since frugal living wasn’t something we were used to, it took a while to realize we could cut unnecessary costs or even learn to live without so much “stuff”!

        Good money habits examples are everywhere, it’s just difficult to shift from one mentality to another and start putting finances in order.

  7. “Encouraging you to use the future to pay for today’s purchases is not helping you. It’s keeping you trapped in your job, and prevents you from ever reaching beyond your current financial situation.”

    These are strong words. Really summarizes my whole concern with this developing technology, even if there could never be interest or a fee charged for the service in any way. It encourages – almost forces – impulsivity in finance, which is a universally horrible idea.

    1. I agree. Two sides to the technology coin: it makes life easier, even when it maybe shouldn’t be so easy. If you grow up being pampered and having immediate access to everything you think you “need,” you don’t learn personal responsibility and how to develop so many characteristics that we used to find admirable in people. Patience, self-control, and sacrifice become unnecessary and undesirable. As a result, people become impatient, selfish, and impulsive.

    1. I agree…. Our culture is becoming more and more accepting of whatever’s placed in front of them, and there are a select few who are very intelligent and very shrewd that are taking advantage of that in ways that haven’t been possible before.

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