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Buy More to Save More? You’re Doing it Wrong

September 2, 2009 · Filed Under Random · 6 Comments 

I received a nice email from my credit card company today about a special “opportunity” for me:

Buy More, Save More!!

Sounds great, right?  Here are some more details:

Take $25 off when you spend $150 to $249.99

(Wait, it gets better…)

Take $50 off when you spend $250 or more!

Woohoo – so are you ready to go shopping and “save some money?”

Well, I guess technically (in the strictest sense of the word), you are “saving” more money but on earth (where I currently reside) it seems like you’re actually just spending more.  Here’s a fun quiz for you:

Q: If I buy something for $175, how much money will I save using this offer?

A: NOTHING – I will have spent $150!

I know that you see this kind of advertising all over the place but let’s get real here – my credit card company is not trying to save me money.  Rather, they are trying to get me to spend more money (using their card, of course).  But we are bombarded with these and numerous other similar artifices day in and day out.  It is almost to the point where we are blind to the truth of the matter (or the math of the matter in this case).  So, keep you eyes open out there and, of course, beware of credit card companies bearing gifts…

The Credit Card Question – Employ or Eschew?

October 22, 2008 · Filed Under Random · 5 Comments 

If you’ve read many personal finance blogs (say, more than two), you’ve no doubt seen very different philosophies out there regarding the use of credit cards.  Some say that credit cards are no big deal – they are just a tool to be used.  Others might say that if you were smart, you would put everything on a card for the rewards.  On the other end of the spectrum, you have people like Dave Ramsey who say that you should not even have a credit card.  So, I’ve decided to weigh in on the situation.

Borrow From None, eh?  Aren’t you one of those "credit cards are evil" guys?

Well, no.  Remember that, as stated in my About page, "Borrow From None" does not refer to a rule that I live by.  Rather, it is a reference to the blessings that God bestows.  Blessings that make it unnecessary to have to borrow from anyone else.  It is not a mantra about how credit cards are evil or anything like that.  To be transparent, I do have some credit cards (ok, a lot of them – but mainly because I don’t know what closing them will do to my credit score) and use one regularly.

The pros and cons of credit cards

The cons are easy:

  • Interest rates can be very high
  • Card lenders can increase your rates seemingly at a whim
  • Credit cards are too easy to use and lose track of your spending which can lead to big trouble by the end of the billing cycle.

But to be fair, you could also argue that there are some pros to using credit cards for certain purchases:

  • Convenience (going into the gas station to pay is such a pain!)
  • Rewards
  • Buyer protection (buyer protection, rental car insurance, extended warranties, etc)

Now the reality…

Sure, convenience and rewards are good, but you have to take an honest look at the entire picture.  If you are carrying a balance, stop right there and forget about any rewards.  You are wasting more money in interest charges than you could hope to receive back.

But what if I don’t carry a balance?  Even then you have to be careful.  I’m sure we’ve all read the statistics that you pay more when you use a credit card compared to when you use cash.  I don’t have specific references but I’ve seen different sources that quote anywhere from 10% to 30% more.  So, even on the low end, if you really do spend an extra 10% on each shopping trip, that 2% you get back is not looking so hot anymore.  I honestly don’t know if I do this or not,  but you certainly have to be aware of it.  If you are falling into these traps and spending more money than you normal would, you are losing money each time you use the card instead of earning rewards.

How I use my credit cards

As I stated above, I do have a rewards card (well, 3 to be exact) (well, i actually have a bunch but I only ever use these three and use only one of them the vast majority of the time).

I do pay off my full balance every month but I can’t really tell if spend more because of using the card.  We use credit cards for the necessities like gas & groceries.  We recently starting using cash for "fun money" and discretionary purchases like going out to eat and other "extras."  Since I pay it off every month, I honestly do not even know the interest rates on the cards I use; I only care about the cash-back I receive.

Recommendation: be careful

I am obviously not as vigilant about credit cards as Dave Ramsey.  I would say that if you carry a balance, you need to stop doing that.  Pay it off ASAP and put nothing more on it that you don’t have the money to pay off.  And if you have ever gotten yourself into real trouble by running up credit card debt, then to you I would say do not even use a credit card (ever).

zero percent credit cards
Obviously, most people use cards (as do I) for convenience.  If you decide to use a credit card, you should get one that provides good rewards or has a low interest rate.  Don’t just sign up for whatever one was handed to you on your first day of college or the latest one to come in the mail.  Like anything else, you might as well be an informed consumer and search for the card that best fits your lifestyle and credit rating (whether you have excellent credit, poor credit, or Fair Credit ).

Credit card companies make lots of money

Keep in mind that you are not outsmarting the credit card companies by taking their 2% cash reward.  They have really big buildings and lots of employees and they are in the business of making money (and they seem to make lots and lots of it each year).  Keep that in mind if/when you decide to use a credit card.

Photo Credits: Urthstripe and SqueakyMarmot

A Look in the Mirror: Are You a Borrower, a Consumer, or a Keeper

September 3, 2008 · Filed Under Finances, PF Basics · 3 Comments 

I am (slowly) working through my Personal Finance Basics , going into more details on each step.  It is time for the discussion on #3: Spend less than you earn .  I’m going to focus over the next few days on some techniques for budgeting (I’ve tried a bunch over the years).  Today I want to step back and take a broad look at the topic.  I think the importance of this aspect of your financial plan is illustrated well in the excellent book, The Bogleheads’ Guide to Investing .  This book leads off with a story illustrating three common financial lifestyles lived by three fictitious couples: The Borrowers, The Consumers, and The Keepers.  I think this paints a great picture of the contrast among these common lifestyles.

The Borrowers

image by David Boyle in DC

The Borrowers are living the high life.  They have the best of everything – expensive cars, high-end clothing, a huge McMansion, and so on.  They have numerous credit cards and they are not afraid to use them.  When the balances on the cards become too high, its time for a cash-out refinance or home equity loan to clear the credit cards and start all over.  Leased cars, no money down interest-only adjustable rate mortgages, and minimum monthly payments typify the Borrowers as they lead their life of luxury.

The only problem is that they are nowhere near able to afford their lifestyle.  Forget about retirement, they will be working until the day they die.  They are a job loss or a prolonged illness away from losing everything to the bank and their numerous creditors.  In Texas, the term for this is "big hat, no cattle."  (I find it strange that I’ve read a few different personal finance books that use that term)

The Consumers

The Consumers, in contrast to the Borrowers, do not live life restricted only by the limit of their credit cards.  Instead, they live life restricted only by their take home pay.  The question they ask themselves when investigating a major purchase is, "Can we afford the monthly payments?"  Interest rates and the length of the loan do not matter, if they can wedge the affordable payments into their monthly budget, then what’s the big deal?

Photo by donandcarol

Again, this is an unsustainable lifestyle in the long-term.  If their take home pay drops for whatever reason, the low monthly payments quickly become huge.  Retirement will not be the dream of a huge RV, traveling the country, and golf courses.  Instead, it will be a very restricted one governed by the check received from the government each month (assuming that is still going on by the time they are no longer able to work).

The Keepers

The authors contrast the first two lifestyles with the Keepers.  The Keepers live according to a net worth mindset as opposed to the credit card mentality or paycheck mentality.  They are concerned more with their net worth than their net income.  The first thing they do with their money each month is to save some.  They avoid debt as much as possible (certainly no high credit card rates as they pay off the balance each month) and participate in  tax-advantaged retirement accounts.

While they make no more money than the Borrowers or the Consumers, they are much more likely to achieve their long-term financial goals (partly because they actually have long-term financial goals other than buying the latest and greatest stuff).  While this lifestyle may not sound as exciting as the first two, it certainly sounds a lot less stressful to me.  Plus, I like the idea of being able to stop working 40+ hours a week to devote my energies to other pursuits at some point before I die.

There are numerous other lifestyles

Of course, these are three very broad generalizations.  In real life, there would be more lifestyles too numerous to detail.  I think that we all know people that fall into these three categories though.  Obviously, the book portrays the Keepers as the best lifestyle (the chapter in which this is found is called "Choose a Sound Financial Lifestyle" after all) and I would guess most of us (at least those reading personal finance blogs) would tend to want to live as the Keepers do.

So which type are you?

I do think my lifestyle matches up most with the Keepers.  I track my net worth monthly (oh, time to do another update in a few days).  We do use credit cards but pay them off each month.  I don’t care anything about monthly payments – when I buy a car I negotiate on the price, not the payment.  I should take more advantage of tax deferred investing options, however, as neither my wife nor I max-out our 401ks.

Some people, however, would certainly say that we are not living life to the fullest.  They would claim that we should spend more of our money to enjoy today instead of worrying so much about saving for tomorrow.  That is probably a valid point to some extent, but for me, I think the stress of not feeling like I was being a good steward of my financial blessings would outweigh any short-term benefit.  Though I probably do lean too far towards the "hoarding" side of things and that is something I’m working on.

Well, what do you think?  Do you even agree that the Keepers are the lifestyle to emulate?  If you do, do you hit the mark?

photo credits: David Boyle in DC and donandcarol

Back to School Tips For Starting the School Year – College Edition

August 15, 2008 · Filed Under Random · 3 Comments 

It’s that time of the year again! Everyone is gearing up to go back to school. It’s a very exciting year for most people – kids starting kindergarten, high school, college (and especially parents of teenagers, I think).

In honor of this special time, I’ve tried to collect some tips – especially for you students going back to college. Let’s start it off with some of my personal tips: Click here to continue reading…

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