The Amateur Financier

(Given the upcoming holiday shopping season (which is getting started even earlier than usual this year), there are going to be more than a few people who find themselves in trouble with their credit cards.  If you don’t want to be one of those people, it’s important to use your credit cards wisely.  One important thing to do is keep from overspending, not an easy task when there are dozens of friends and family members for whom you want to get gifts.  Enjoy the advice, and here’s to some frugal shopping this season!)

In today’s economy, it can be difficult to stay out of debt. The cost of living seems to get higher every day, and prices on the things we need can put us under very quickly. This can be the starting point of overspending, and once you start, it can be hard to quit. If you are currently an over-spender, there is no better time than now to help yourself get out of debt and start spending your money wisely.

Not having control over your finances can cause stress, anger, and even depression. The feeling of regret you get after making a large purchase will only add to these other feelings and make you feel worse than before. Stores can be tricky, and they have come up with many ways to try to get you to spend more and buy things you don’t need. However, there are changes you can make to your lifestyle and ways to recognize and avoid impulse items so that you can be sure to never make poor purchase decisions with your credit card again.

Store Tricks

The first tip you should be aware of when shopping is to be aware of the check-out counter. There are lots of items here that look really great for right now, but they are usually extremely overpriced and not necessary. If you do need something that is found by the check-out counter, you can usually find the same product somewhere else in the store for much less than they are asking at checkout. Ask yourself if you really need that item before you throw it in with the rest of your purchases.

Stores also lay out the entire store very strategically to try to get you to buy more. Thin aisles only allow two people to walk through at once, so you are forced to stop and look at the items around you. The more you stop, the more you are probably going to pick up and buy. Stores also put the most expensive or most appealing brands at eye level. You are more likely to buy the first item you see, but it may not be the best or the most cost effective. When you find the item you are looking for, search every shelf to make sure you are getting exactly the brand you need at a great price.

Don’t shop when you’re in a hurry or when you are hungry. This tip has been said many times, but it is so true that when you are hungry and are shopping for groceries, you will end up spending more on unnecessary items that you wouldn’t have bought if you had just eaten. Sticking to a list of items can help you stay on task if you do shop when you are hungry. Also, when you are in a hurry, you don’t have time to consider all of your options and find the best product at the lowest price.

Limit Credit Card Use

Limiting the use of your credit card can be very helpful with overspending. When you spend with cash, you will probably find it harder to part with your money. Use your credit card only when there is no risk of overspending, like with bills, automotive repairs, and other expenses where you can trust yourself. When you know you may have the impulse to pick up unnecessary items, use cash instead. Budget a specific amount of cash each week, and make a solid effort to spend only that amount.

Budgeting

Budgeting is such an easy solution to credit card problems, and yet it is so easily overlooked. Most people end up going into debt with overspending because they were not able to stick to a budget. That is exactly the reason why they fail. They don’t maintain the motivation to follow their budget. You need to know exactly how much you must spend each month, and follow it to the T for many months until it becomes a habit. If you slip, even just once, you will most likely fall back into your old pattern of overspending. Following a budget takes a daily commitment, and you need to decide each day that you are going to stick to it.

Jenna White is an author who writes guest posts on the topics of business, marketing, credit cards, and personal finance. Additionally, she works for a website that focuses on educating readers about getting secured credit card offers.

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(Time for another guest post, this one that attempts to answer some of the most common credit card myths.  Given the number of mistaken conceptions there are about credit cards floating around out there, in spite of the best efforts of personal finance writers like myself, any attempt to debunk a few more myths is well appreciated.  So, thanks to Odysseas Papadimitriou for contributing this informative post.)

While they might not be quite juicy enough to make it onto Snopes.com—the Web’s foremost authority on urban legends—these personal finance myths certainly shouldn’t be taken lightly. Both your money and your credit standing are at stake, and with the abundance of information available about how to handle each, it can be difficult to determine what is and isn’t factual. It’s therefore no wonder why 41% of Americans give their personal finance acumen a grade of C or worse, according to the National Foundation for Credit Counseling’s 2011 Financial Literacy Survey, and 76% say they “could benefit from a financial professional’s advice and answers to everyday financial questions.” I don’t know about you, but my parents certainly wouldn’t have been pleased with those grades or that lack of confidence in something as important as financial management. So why don’t we shed some light onto a few of the biggest credit card myths out there and help set the record straight?

1. Myth: You can change the amount of time negative information stays on your credit report

Explanation: Negative information about credit accounts, including charge-offs and late payments, remains on your major credit reports for seven years. There is nothing you can do to change or influence these time frames unless the information is inaccurate. Services claiming the ability to do so are scams.

2. Myth: Some credit cards allow unlimited spending

Explanation: There is a limit to the amount you can spend on any credit card. Many of us are led to believe otherwise, however, out of a combination of wishful thinking and credit card company encouragement. Some charge cards and credit cards for excellent credit have a feature called No Preset Spending Limit (NPSL), which many take to mean “no spending limit.” Issuers perpetuate this myth by not informing customers of their credit limits and by reporting proxy limits to the major credit bureaus.

3. Myth: You can’t be sued for time-barred credit card debt

Explanation: You might know that you’re legally bound to pay back debts younger than your state’s statute of limitations for written contracts, like credit card and loan agreements. What you might not know, however, is that a lawsuit for money you owe can be brought against you even if the statute of limitations has expired and your debt becomes what’s known as “time-barred.” It’s up to you to bring this fact to the court’s attention. If you do and your debt is time-barred, the suit will be thrown out. If you don’t or your debt isn’t actually time-barred, you could very well lose a court decision.

4. Myth: Leaving a small monthly balance will help your credit score

Explanation: It’s quite common for people to think that by leaving a small balance each month and allowing their creditors to collect interest revenue, they’ll garner some sort of preferred customer status. This, they believe, will result in access to additional credit and being reported favorably to the major credit bureaus, both of which benefit your credit score. Unfortunately, this is untrue, and all a revolving monthly balance will get you is unecessary interest costs.

5. Myth: All credit cards are protected by the new credit card law (CARD Act)

Explanation: Technically, the CARD Act only applies to consumer credit cards, and even though a Card Hub study revealed that so-called business credit cards are actually more closely tied to individual consumers than to individual businesses, they are not included within the scope of the law. Some issuers, most notably Bank of America, have taken it upon themselves to apply major CARD Act provisions to their “business credit cards” though. If you want a business credit card that you can revolve debt on without worrying that your interest rate will rise unexpectedly and for no reason, get one of the best credit cards for small businesses.

By Odysseas Papadimitriou, founder of Card Hub, the leading online destination for the best credit card deals on the market.

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I’ve been noticing lately that my spending is starting to get away from me.  There’s a number of reasons I could cite, from the fact that my job as a graduate student pays only about one quarter of the pay I had gotten used to in my previous jobs (and given the research, grading, and other outside work required of grad students, there’s little opportunity for me to get another job, or even keep up on this blog at times) to the fact that I’ve had to make some major repairs to my automobile these past few months (some of which I’ve discussed in detail already), all of which has taken its toll on my financial standing.  It’s been a rough first quarter.

But that’s not the only reason, I’m afraid.  I’ve gotten into the habit of using my credit cards for all of my spending.  This wouldn’t be bad if I was still able to completely pay off my credit card bills each month, as I did while working in my last jobs, but with my spending running at nearly twice my monthly income, that’s become a mathematical impossibility.  The simple fact is that I need to cut down my spending, and find a way to do it soon.

Considering Going Cash-Only

In this environment, I’m starting to consider adopting a cash only lifestyle.  It’s not a new idea, by any means; Dave Ramsey, among others, has built a sizable media presence by stressing the importance of not going into debt to make purchases or do other spending.  On just about every get out of debt tips list there is a suggestion, if not an order, to cut down credit card use and rely on cash.

So, the goal should be to use more of this. Although, I had this much cash lying around, I wouldn't have so many problems...

There are a number of advantages to someone who would be debt-free (someone like me) in relying on cash, and only cash, to make purchases.  Some possibilities include:

1) Keeping your spending under a set limit: By far the most important advantage of using cash (at least, for the goal of keeping your spending low) is that you need to have the money on hand in order to spend it.  Unlike with credit cards, there’s no ability to spend what you don’t have.  (Alright, I suppose you could open a ‘tab’ somewhere, but that tends to be limited to things like bars, and if you try to leave without paying it off at the end of the night, good luck getting any service the next night.)

2) It creates a stronger bond between the spending and the actual cost: It’s one of those odd aspects of human psychology, one that numerous money writers have discussed already, but we just can’t seem to get a handle on the idea that credit card spending IS real spending.  Even those of us who understand the math involved and the concept behind credit cards can’t quite seem to grasp that spending a dollar via credit card is AT LEAST as expensive as spending a dollar from a wallet (usually more so, when you factor in interest).  For credit card companies, this is probably a good thing; people who spend a great deal and don’t pay it off each month (such as, I’m increasingly afraid, myself) are amongst their biggest income sources.  For individuals, though, this disconnect can ensure that by the time the minimum payments due on their credit cards start to get hard to make, their total tab is so high that it’s simply impossible to pay it off.

3) Using cash can save you money: Behind the scenes, using a credit card costs the businesses you visit a fee each time you use them.  Yup, every time you swipe, part of your purchase price pays a fee to the credit card company.  (Fun Fact: Part of the reason why some businesses only accept certain credit cards is due to the different levels of fees charged by each credit card company; consider that the next time your American Express card isn’t accepted at a store.)

With these fees hanging over their heads, some merchants attempt to offset their costs by passing them onto you, charging credit card users higher fees.  You can see this frequently at gas stations, which will charge credit card users several cents more per gallon of fuel than cash users.  (This is sometimes limited to diesel fuels, but I’ve been charged a few cent premium for the privilege of using my card even when filling up my poor little station wagon.)  In the same token, you can also find that some companies, particularly small, independently owned businesses, may give you a discount if you provide money up front.  (There are numerous websites that note some advantages of using cash, and list companies that will cut you a break; Discount With Cash is one of those, although it is still in its early stages.)

My Plan to Go (Temporarily) Cash-Only

With all of that in mind, I’ve decided to go on a little experiment, to see how much I can improve my finances by locking away my credit cards.  For the rest of the month, I’ve decided to go only cash with the rest of my spending.  (Well, I’ll be writing checks to cover my bills, but that’s a form of cash.)  I admit, it’s perhaps not the most ambitious goal; there’s only a little more than a week left in the month, and if all goes according to plan, I should spend nearly all of it at school, where my spending is much lower than when I go to visit my fiancee or my family.

Still, I think it would be good to prove to myself that I don’t need to spend a great deal of money to live my life, and live it well.  Plus, if I get in the habit of keeping my spending limited to my cash on hand for a week, I can probably stretch it to, say, two weeks, then perhaps a month, and then maybe several months, and from there… Well, as way of reworking how I think about my spending, it should be a pretty good experiment.

Any advice on keeping my spending to a minimum?  Anyone care to share their own thoughts on a cash-only spending lifestyle?

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In the course of your life, you’re going to have to many different things you want to accomplish with your money.  That’s just the nature of life; we all have more than one goal we want to accomplish at a time, and given the reality of a capitalist system, most of those goals are going to involve earning, saving, and investing our money in order to reach them.  The question we have to face, then, is how do we prioritize our goals in order to accomplish everything we want to accomplish, given our financial and other limits?

Let’s use my finances as an example (only fitting, since it is my blog).  After I take care of my general monthly expenses (rent, utilities, etc.), I have some money left over, which I apply to one of my larger, unable to be fulfilled in a single month goals.  Currently, I have four them: Paying off my Mastercard debt, paying off my American Express debt, paying off my student loans, and investing for the future (both in retirement accounts until I’ve maxed out my contributions, and then in non-retirement accounts).

No sailboats on my priority list (yet)

How do I decide which goal to put my money towards first?  Well, my first consideration is

Interest Rates

As I’ve discussed before, one of your first considerations when deciding which financial goal to pursue is the associated interest rate (because compound interest can be both a friend, and an enemy).  High interest rates will either cost you a great deal of money (for your debts) or earn you a great deal of money (for your investments).  In either case, finding the financial goal with the highest associated interest rate will enable you to maximize the effectiveness of the money you put towards the goal.

In my case, the choice for highest interest goal is pretty easy; my Mastercard has an associated interest rate of 29.99% (plus the prime rate, I believe, which is currently zero).  (In case you’re wondering why my interest rate is so high, it’s because (a) it’s a department store credit card, (b) I got it back when I was in high school, and (c) I’ve never tried to have the interest rate lowered, although that’s something I’m adding to my To-Do list.)  None of my other financial priorities has an interest rate anywhere near that amount.  For every hundred dollars I put towards paying down this debt, I can save more than $30 over the next year, to say nothing of years down the line.

On the other side of the equation, my lowest priority goal is also pretty easy to determine.  My student loans have a fixed interest rate of 2.85%; that’s less than half of the rate for any of my other goals.  Because of that, I only pay the minimum amount I have to towards paying off my student loans; by putting my money into goals with higher interest rates, I’ll have more money to pay off my student loans when I finally get around to it years from now.

The last two goals are a bit harder.  My American Express has an interest rate of 7.99%, while my investments, assuming they perform as they have in the past (a big assumption, particularly given the way the economy has performed these past few years) should average around 10%, give or take a few percentage points.  Just on the basis of percentages, the ideal solution would seem to be to max out my investments, while paying the minimum (or a bit more) on the Amex.  But that plan ignores the difference between

Fixed and Variable Returns

Again, I’ve discussed this before, but it bears repeating: it’s usually better to put your money towards slightly lower fixed returns than somewhat higher variable ones, particularly in the short term.  In one, three, or even five years from now, the volatility of investments in something like the stock market will likely make fixed returns look more attractive.  For this reason, I’m planning to put more of my money towards paying down my Amex, and only investing a fairly small portion of my ‘extra’ money until all my credit card debt is gone.

But What About An Emergency Fund?

I’ll be the first to admit, I don’t have much of an emergency fund at the moment.  When you have debt with nearly 30% interest, or even 8% interest, it doesn’t make much logical sense to save money at 2% interest (and given the current interest rate climate, that’s if you’re lucky).  On the other hand, having some money available that can be quickly accessed in case of an emergency is usually a plus.  In my case, it’s especially important; one of the realities of being a graduate student is that when summer comes, my major source of income, my stipends from grad school, will decrease significantly, while my free time to get another job will be largely nonexistent (thanks to the research I need to do in order to graduate).  Having enough savings to cover a month or two of expenses will be necessary.

In my attempt to play Solomon, the best course of action seems to be putting money towards an emergency fund at the same time I’m working to pay off the Amex.  I’ll have at least one credit card paid off, and if my financial calculations are complete, that should allow me to build up a pretty solid emergency fund by the start of the summer.

Overall then, my plan looks like this:

-Start by paying down my Mastercard tab as quickly as possible (I’m still in the grace period for my most recent expenses, but that won’t last)
-When the Mastercard tab is gone, begin splitting money between American Express and saving for an emergency fund (with perhaps one hundred or so a month being put towards investing)
-Once the emergency fund is sufficient, get even more aggressive on paying down the American Express (and bump up the investment amount)
-After the American Express tab is paid off, start going whole hog into investing (assuming I haven’t exhausted the emergency fund and need to refill it, then split the money between emergency fund and investing), and
-Pay only the minimum necessary on the student loan for as long as possible; at less than three percent interest, it’s cheap money.

So, how does my plan sound?  Are there goals or other factors that I’m missing?  How much do you rely on interest rates to determine the order of your financial goals?

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