Say no to ATM fees and improve your finances forever

Suppose you need $100 to pay a tab at a cash-only bar and your friends are gone. Which of the following options would you choose to get cash?

(a) Withdraw money from the nearest ATM, which is not owned by your bank ($3 fee from your bank, $3 fee from ATM bank)

(b) Take a cash advance on your credit card at the store next door (4% credit card fee, $3 fee from ATM bank)

(c) Spend 30 minutes walking to the nearest ATM owned by your bank ($0)

You’re financially savvy, so you are not tricked by option (c) which is a pain in the ass and is costlier if you value your time at more than $12 an hour. You correctly pick option (a) since it costs $6 as opposed to option (b) which costs $7.

Great! You are happy to make the best financial decision given the alternatives. Let’s say you often do pick the best option in each one-time problem, which I’ll term a local personal finance decision. Does that mean your finances are in the best possible shape?

Absolutely not! I know tons of smart people who can make the right singular decision, but do not have satisfactory overall finances. What is going on?

The problem is that your total finances cannot be optimized by the best one-time decisions. If you find that you pay ATM surcharges frequently, then you are wastefully incurring an avoidable cost. A more appropriate solution is to plan ahead and get cash from your bank. This better solution requires a broader understanding of how your actions relate to each other. I call this more involved decision a global personal finance decision.

Global personal finance decisions are not difficult; they only require small amounts of research and discipline. For example, when I first opened a bank account, I read horror stories about how quickly ATM fees racked up. Even responsible people racked up $100 in fees in a year. I decided I would do my best to avoid ATM surcharges. Accordingly, I chose a nationwide bank with convenient ATM locations. I then followed through by planning my cash holdings during vacations and nights out. I’m not perfect: I have ended up needing extra cash on occasion, but luckily I’ve had understanding friends who have spotted me.

I may not have the best solution, but my results are great. My global decision has not been inconvenient and it has saved me tons of money. Since Americans spent $2.1 billion in ATM surcharges last year, and I’m guessing that’s spread over 100 million adults, that’s a whopping $210 a year! a mere $21 spread over my guess of 100 million adults (Thanks to Ben in the comments for catching my math mistake).

How can we spend billions on a typically avoidable cost? Or alternately, why do we fail at making good global decisions? I think it is because we are naturally impatient people who want quick fixes. And I agree it’s great to learn quick fixes, like figuring out the best credit card or best savings account. Check out most personal finance websites and you’ll have a bunch of people talking about these topics.

But these personal finance tricks cannot substantially improve your finances. I compare it to how dieters often lose weight but never really build a healthy lifestyle. Oh yeah, and after a few months, they regain the weight and are on another diet.

Or, using the language of computer science, optimizing local decisions is known as a “greedy algorithm” and it almost always fails at finding an optimum solution. If you want better finances, I assure you it is easy, but it requires a global approach.

I believe a global approach starts with knowing that personal finance is not about money. It depends primarily on understanding six decision factors: understanding your own preferences, figuring out the opportunity costs in a situation, judging the risk of your choices, realizing that there is a time value of money, accounting for the related taxes of your decisions, and making sure you don’t waste your time because there is value to your time.

For advice on techniques that can improve your local personal finance decisions, get started by paying yourself first and by getting what you want by making more credible threats.