Don't be an idiot when it comes to credit cards

Credit Cards as a Tool

Credit cards are incredibly useful tools in today’s market. No longer is it about being able to finance a purchase or buy something now that you can’t afford until tomorrow, its about rewards. There are many cards out there today that provide holders with some sort of rewards incentives. Whether it be frequent flier miles, a points system usable for purchasing items in a catalog, or cash rewards, if you are a card holder it is worth your time and effort to research these. Over time, and through proper use you can make serious gains.

If you can’t afford it, don’t buy it!

That is the golden rule for credit card use. I’m guilty of doing it and I’m assuming you are too. By carrying over purchases from one payment period to the next you lose your ability to cash in on your rewards program. Take my Invest First card for instance. Through this card I am able to have 2% of all of my purchases deposited into an investment account through my bank. If you put all of your every day spending on that card, it would add up over time. If you spent $16,000 on that card for the year, you’d be pocketing an additional $320. For me, that’s the equivalent of one month’s deposit into my savings accounts. But how do you stay ahead?

Utilizing your card to its fullest

The single most important thing to remember about using a credit card in order to reap the benefits of your rewards program is that you have to pay the balance in full every month. That means having the cash on hand. That means that if you couldn’t afford it with your debit card or cash on hand, you can’t buy it. For me, that means having two cards. One for emergencies that I can put longer term purchases on, and my invest first card that I keep at a $0 balance by paying it off immediately every month. At only a 2% return on your purchases, even one month of interest could destroy any total benefits for the year, especially if you have a pretty high interest rate. It adds up quickly. You have to look at it as another means of using the money in your checking account, not as something in addition to the funds in your checking account.

Staying ahead of the game

As I mentioned, automated banking is by far the easiest way to stay ahead of the curve. It insures that you never miss a payment. You just have to make sure you’ve got the money in your account. If you can not pay your balance in full each month, then you should not be using that card for this purpose. I’ve made the mistake of letting my credit totals add up. I’m at least 6 months away from being free of my credit card debt at my current rate of repayment. I would much rather be saving all that I’m currently paying towards that card. Credit cards are great tools if you use them right. I don’t know anyone that wants to turn away free money, and properly utilizing a rewards card can get you pretty close to pocketing some extra cash.

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J.D. over at Get Rich Slowly has a great post with several personal finance ebooks worth reading.

Lazy Man takes a look at his net worth for the first time in awhile.

Nora Dunn posting on Wisebread writes about balancing spend and savings while not becoming miserly. Worth a read.

Baker over at Man vs Debt tells us how to not suck at blogging. I really enjoyed the video he embedded. It’ll motivate you.

Also at Wisebread this week is a great post by Vincent Scordo about money lessons he learned from his immigrant parents.

Trent at The Simple Dollar goes through his book shelf to pick out some of the best financial books he’s found.

Matt writing for Five Cent Nickel lays out 5 of the top ways we waste time and how that costs us.

Some great stuff out there this week. Looking forward to another week of good reading.

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My Mint.com comparison of Sept. and Aug. spending on restaurants/bars/groceries

September has been a pretty good month for my budgeting. When I moved to Washington, DC is July I knew that I would be spending a lot on getting myself set up down here. I pretty much blew through all of my savings. I spent $6,000 in July. That is… absurd. Granted, I had to buy furniture, pay for an apartment and a deposit, and splurged and bought a TV, but still, this was pretty outrageous. My jaw hit the floor when I looked back at July once August had rolled around.

Time to get it together

I knew going into August that most of my big expenditures were out of the way. I was ready to settle in. August turned out to be one weekend out on the town after another. DC makes it very easy to blow through your money in short order. As a result I spent over $600 on take out for lunch, going out to dinner, and binge drinking on expensive (and delicious) beer. I could probably count on one hand the number of times I actually cooked for myself that month. Part of the reason for this is because I live in a food desert. There isn’t a good supermarket anywhere nearby. There’s a decent corner market, but they charge $5 or more for a box of cereal and rarely have fresh fruit or vegetables worth getting ripped off for. To get around this I went to delis or salad places for lunch every day, and would order a pizza at the beginning of the week and work my way through that for dinner each night. Classy, right? Well, this was not only expensive but totally unhealthy. So for September I set out to change this entirely. I needed to spend less, eat better, and start getting in better shape. Basically, I needed to change my lifestyle.

Where to start

I decided to start with the obviously easy to fix issue: what I was doing for dinner. Cutting out the pizza was an easy fix. I replaced the weekly pizza and take out with a box of Grapenuts. For one thing, I fucking love Grapenuts. Talk about getting some bang for your buck, a box of that will last awhile, even if it does cost $5 from the corner store, I’m still eating better in the long run and saving a ton of money. Is it an ideal dinner? Hell no. But it’s a start until I can figure out the grocery situation. I also ordered 6 canisters of sugar free Carnation Instant Breakfast. In general, I skip breakfast because I refuse to wake up earlier and make something to eat. Because of that, I’m starving by the time lunch rolls around, and I haven’t jump started my metabolism. This is a great way to get your day going, and it keeps me from eating my hand and/or a foot long sub from Subway. This greatly cut back on what I’m buying for lunch, saving me more money and further improving my diet.

The hardest but most effective part

I’m never that good at saying no to people. So when an opportunity to go out with friends comes up after a long weekend, I always want to say yes. But looking at my past expenses I know this isn’t always realistically possible. In order to save I need to cut back in this area. I’ve turned down several gatherings that I know I’d spend money at in favor of just a few nights here and there. Saying no and staying home still sucks, but I’ve taken that time and put it to use being productive by setting up this blog, which has turned out to be fun and a worthy endeavor, I think.

The bottom line

At the end of the day, I’ve still managed to save over $400 in this one spending category over last month. Across the spectrum I’ve spent over $1,000 less than last month. This has allowed me to put $300 into my savings account, pay off an additional $500 on my credit card, and still have some left over to roll into next month. At this rate, I’ll have my credit card paid off in 8 months, and over $1500 by the start of the new year between my savings and emergency fund. It may take some time, but I’m on my way to actually making some money.

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Researching savings accounts will pay off in the long term

Banking and cash flow

So far in this series we’ve looked at how we get an idea of how our money is moving. We’ve looked at our income, our expenses, where we can cut back. We’ve looked at how to organize this to figure out fixed expenses and see how much we actually have to spend every month. Budgeting basics. For the last part of this “Straightening out your finances” series I want to take a look at where funds are being stored. What kind of bank, what kind of account, and why that matters to you in the long run. The short of it is that it can make a big difference over time.

Savings accounts

All savings accounts pay interest to the account holder, and that interest is going to grow over time. The key is to make sure that your bank offers a high percentage of interest as compared to your typical neighborhood or national bank. High yield savings accounts from online banks such as INGDirect, Emigrant Direct, and HBSC all offer higher than average interest rates.  Disclosure: I use ING for my savings accounts. I should note though that over the past few months there’s been a decent dip in the interest offered by each. The rates certainly fluctuate and you should look into how steady each bank has kept their rates so that you can project your earnings for each account.

In case you haven’t yet noticed, I love internet banking. I have no need for brick and mortar stores so long as I have an ATM near by. Neither do you really. In fact, online banks have led the way on high yield savings accounts. Their overhead costs are so low that they’re able to blow competitors out of the water in most cases. They also frequently have few if any fees compared to traditional banks that charge you fees for just about everything.

This same logic holds for checking accounts. You should look for a good online bank that offers a high interest checking account, no fees, and offers free ATMs nationwide or reimburses you completely for the use of competitor ATMs. I personally use and love Schwab, which comes with a free investment account that I plan on using once I have my credit card debt paid off and my emergency fund fully funded.

The emergency fund

In today’s job market, having a 4-6 month emergency fund is essential to your survival. An emergency fund should have enough money in it to cover all of your living expenses for about 4 months or longer. 6 months is a good target, and I was unemployed for 7 months before I found a job again in the political realm. This is also where your fixed expense tracking comes in: you can quickly figure out what you need to save to fund this account. Based on my current rent, student loan payments, credit card minimum, utilities, and grocery bills, I need to fund an emergency fund of about $10,000 for a 6 month back up. That’s going to take awhile to fund while I try to pay off my credit card and continue paying my loans. Every little bit helps, and that’s why keeping your emergency fund in a high yield savings account is the best route to go. One reason I chose ING Direct was because I could easily get secondary accounts to use for specific things, such as an emergency fund, without having it mingled with my regular savings account.

Routing your money

An easy way to make sure that you save before you can spend is to have your income directly deposited to your savings account. From there you can have the amount you spend on fixed expenses transferred to your checking account along with a little spending money to get you through the week or two. I have all my fixed expenses set for automatic payment each month so I never have to push a button to make sure my bills get paid. Everything happens automatically. This also means I don’t have to worry about missing a payment or forgetting. The only exception to this is my rent and utilities, which get included in a check to my roommate and have to be individually calculated each month.

Next Steps

Take the time to do the research. Shop around and see which banks offer the features you’re looking for, and offer highly competitive rates. Look into customer service reviews for them too. Because most won’t be brick and mortar, you want to make sure you can get someone helpful on the phone if necessary. Once you’ve got your banking straightened out you will have laid a solid foundation for your financial future.

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Sample fixed expenses

Yesterday, we looked at getting an overview of your income and spending habits. Hopefully you signed up for one of the online finance utilities that I mentioned yesterday. In my experience these have become an invaluable tool for my own financial awareness. They have helped me become a conscious spender, much more mindful of where my money is going. Ultimately, I can thank Mint.com for saving me money. I always know what is in my bank account. I always know what the last thing I bought was. More importantly, I always know what I have left to spend thanks to my budgeting and awareness.

Budgeting is not all that hard

I have yet to meet anyone that actually enjoys creating a budget and abiding by it. Budgeting is really not all that hard. It may not be fun, but it doesn’t have to be a struggle. The most important thing you do is that you pay your fixed expenses every month before you look at discretionary spending. This will keep a roof over your head and your car on the road. If you look at the graphic at the top of the screen you’ll see an imaginary budget that I created. Lets look at how one month breaks out for fixed expenses:

• Student loans have a minimum of about $400
• Let’s say the real minimum is $100 but I want to pay a minimum of $500 of my credit card debt for that month to try and bring that total down.
• Rent and utilities are combined and cost roughly $1100 (no one can really predict utility costs, always build in extra to your budget
• That is a total of about $2,000.

Now lets suppose your income is about $3,000 for the month. After removing the fixed expenses this leaves us with $1042 to save, spend, and live off of for the month. That’s not a huge amount, but its not terrible either. Things could be worse. Remember: your goal is to grow your money over time. In that light, let’s set aside 10% of our monthly income to put into a high yield savings account to start saving money for an emergency fund.  This leaves us with a total of $728.23 based on this break out for the month. Depending on your current financial situation paying $400 dollars more/month may not be totally reasonable. For a single 24 year old guy, living in a city with decent public transportation, this isn’t that bad.  Everyone has a unique situation. The point of the fixed expenses chart is that you should lay out everything you feel you need to be paying every month to see what is left.

The next step

From here you can go back to the software you’re using to get your financial overview and look at how your spending money fits in with your current habits. Look at the percentages, and start to segment your remaining money. What can you cut back on? Where can you find cheaper alternatives to your current vendors? Don’t try to apportion all your money, remember you can still save more here to add to your savings, or pay off more debt.

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Image Credit: http://www.cs.miami.edu/

Everyone needs a starting point

If you’re just starting to try and get a handle on your finances it can, at first, seem overwhelming. The best first step you can take is to step back and examine your finances. Get an overview. If you don’t already use online banking, this is the perfect time to switch over. With online banking you’ll better be able to track your spending rather than writing down every expense in a register (do people even still do that?!), or just waiting for a monthly report to be mailed to you. An added benefit of online banking is that you can transfer funds between accounts at the click of a button. Even better though is the capability of interfacing with some of the best financial programs out there, such as Mint, Wesabe, and Quicken Online. While I won’t be doing a full review of all of these services at this time (I can’t say I’ve used them all), but I will say that you should look at them and the reviews that are out there and see what works best for you. Sign up, add your accounts, they’re all safe so don’t be nervous, and start to get a feel for your actual spending. I guarantee you’ll be surprised at where your money goes. Of course this only works if you regularly pay by credit or with your debit card.

What to look for

There are a few specific things you should be looking out for:

• Total income
• Total expenses
• Spending habits/categories
• Net worth

Hopefully, you should already know what your total income is each month. If not this is a great way to see everything going into and out of your accounts. I want to highlight spending habits. This is the most important category you’re going to be looking at as you start to examine your funds. Are you eating take out for lunch at work every day? I’m guilty of that one, currently. Are you an impulse buyer who ends up spending several hundred dollars a month on stuff you don’t need, or aren’t planning on buying? What you’re ultimately looking for are the areas that you’ll be cutting down on in the future. Take some time and go in depth. Look at which merchants are getting a large portion of your money. Is this something you need? Can you cut back at that store now without budgeting?

Next you should look at your net worth. Are you spending more than you make each month? Are you dipping into your savings to uphold your current spending habits? Are you saving money each month? If so, what is happening with that? Is it sitting in a checking account? Is it going to a high yield savings account? 401? Roth IRA? Take the time to account for all of your money. It will make optimization much easier later.

Break down fixed and semi-fixed spending

It’s now time to play with the budgeting options in Mint or which ever soft where you are using if it has these tools available. Otherwise, use excel for this task. I use both. Take a few minutes and list each utility, credit minimum, loan payment, rent or mortgage payment, and recurring payment you currently have. This is going to show your base for expenses before all of your variable payments such as food and nights out on the town. Get a feel for what is roughly left over each month. Chances are you can’t cut back on these listed expenses, some you probably can, like Netflix. Regardless, from here you’ll be able to start creating a budget for yourself. But that is a battle for another time. But at least you know it, and that’s half of it right there…

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Back in February of this year, I made a stupid decision to close out my oldest credit card because it had a rate higher than the card I used more regularly. Why did I do this? Because I felt the account was cluttering my online banking screen with something I was never going to be using. So, I called up Bank of America and closed out my account. This was perhaps one of the dumbest financial moves I’ve ever made.

Why this was a bad move

Now, it may seem reasonable to cancel something you never use, especially when it’s an avenue for accruing debt. Perhaps, more than anything else, the problem was my mindset when it came to credit cards. I viewed them as the path to debt or as emergency funding, not as a utility to be used in special ways to get the most out of my money and spending habits. Had I known then what I do now, I would’ve kept that card and actually used it more regularly. Closing out that account had some serious consequences

• I lost my oldest credit card that held serious weight on my credit score
• I lost 2,000 in available credit
• My credit score when from a fairly good 720 to 680 practically overnight
• My new lowered credit score gave Bank of America a reason to double my rate on my other card

While I may have had a zero balance on this card, my other card was at around $4,000. The doubling of the rate on that card meant that as I kept paying minimums on that card (hey, I was unemployed, OK?) I was more or less spinning my wheels, not moving, not lowering my debt. Clearly, I now needed to figure out what the heck I was doing with my money. This event led me to begin researching the realm of personal finance.

What I should have done

A better way to use that card would have been to build both credit and payment history. By putting my regular purchases on that card and paying the entire bill monthly you do both. Unused credit doesn’t reflect well either. Long credit history and on time payments makes you an appealing customer. Besides, if you have a credit card with some sort of rewards program (which you should, but I’ll save that for another time) its a great way to generate miles, points, or whatever you may have. Instead, I ended up costing myself money in the long run, when I thought I would instead be decluttering my life. Lesson learned.

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