Who Should Use A Credit Card?

Credit cards are not for everyone. Some people do not have the self discipline required to control their spending with a credit card. I recommend that these people only use debit cards. If you recognize that you have a problem with controlling your spending, then the last thing in the world that you need is a line of credit.

Step 1: Picking Your Card

Don’t bother filling out the credit card offers that come to your mailbox, go straight to the source- the bank. If you need help looking for a card, click here to read a SmartMoney article about the best rewards credit cards. Personally I like the Discover Card program because it gives me cash, but make sure you like the rewards program for the card you select.

Step 2: Using Your Card

Now that you got that fresh new card in your hand, go and run up a big balance at Best Buy. Just kidding, that’s the last thing you want to do. Credit cards are not free money, so get that idea out of your head. Credit cards are a tool to use when making purchases that you would make anyway. I personally use my credit card for every single purchase that I can get away with. I normally don’t use it when splitting a restaraunt bill with friends or for purchases that are less than one dollar. By using my credit card for every purchase it enables me to easily track all of my expenses online. This is important for easily establishing a budget and keeping track of your monthly expenses.

Step 3: Paying Your Bills

So now you have used your card for about one month and you just got your first statement. The first thing you should do is quickly check over all of the purchases and make sure they’re legit, because you want to catch someone illegally using your credit card as soon as possible. I check my account several times per week to stay on top of things, and I check more often when I’m expecting either large purchases or many smaller ones. Because I check so often, I don’t normally spend much time on the monthly bill, but I always check to make sure I haven’t been charged any interest or fees by the bank. The next step is the most important, and the one that makes the whole concept of credit cards a financial tool rather than financial suicide, and that is to pay off your balance in full. I do not care if your card has a low APR or a zero percent APR, you must pay off your statement balance at the end of every month. By paying in full at the end of each month you will avoid all interest and finance charges, and you should start building points in your rewards program.

Step 4: Be Smart And Be Careful

Now that you have a credit card, do not abuse it. Use it as a way to help you take control of your finances and to give yourself some fun rewards (I recommend turning points into a Nintendo Wii if you can), but be careful. There is at least one study out there that says using a credit card will increase your spending over using cash. I suspect this is true because most people are using a credit card to live beyond their means and they never intend to pay their bill off at the end of the month; however, there might be some truth to the fact that using a card instead of cash desensitizes you to the pain of giving someone your hard-earned money. Just use some common sense and only purchase things that you can afford to pay for with cash.

Here are 5 tips for saving money and living on less than you make.

1. Know How Much Money You Make.

I know it seems obvious, but you would be surprised how many people have no real concept of how much money they make annually, monthly, or per paycheck.You cannot start living on less than you make until you fully understand how much you make. You need to know what your gross income is (the total amount your company compensates you plus any other income) and how much your net income is (gross income after taxes). Once you have figured that out, and most of you should already have that part figured out, you can move on to step 2.

2. Start A Budget.

If you don’t have one already, then you need to start one today. To start a budget grab a sheet of paper.

• At the top write down how much you will make this month (see item 1) from all sources including salary, gifts, eBay sales, and interest. This is your income.
• Below that list out all of your fixed expenses. These are things like rent, phone bill, Netflix, car payment, student loan payment, etc…
• Below the fixed expenses, write out all of your monthly variable expenses. These include gas, electricity, gas for your car, groceries, metro fare, etc…
• Below variable expenses, write out all of your discretionary spending. This is the category where you can make the biggest impact in terms of cutting down on spending. These are things like clothes, movies, eating out, iPhone applications. Plan out ahead of time how much money you’re willing to spend in this category and then stick to it. If you use up all of your discretionary funds, then you cannot go to the baseball game with your friends, nor can you go out for drinks afterward. You cannot afford it.
• Lastly you need to plan for all of your one-time expenses. These are things like insurance premiums (if you pay them every six months, which you should), plane tickets to visit family, medical procedures, car repairs, etc… It’s okay to put money into this category even if you don’t have anything planned. Something will come up, and if it doesn’t you can roll the money into next month. This is not for concert tickets, trips to Vegas, or anything like that. It’s one step removed from emergency funds.

3. Stop Eating Out At Lunch.

Most people eat out with their coworkers, that’s normal. Most people are in debt, can’t pay their bills, or live paycheck to paycheck, that’s also normal. Stop being normal, start respecting your budget. I know it doesn’t seem like much, but eating out is much more expensive than packing a lunch and it isn’t necessarily better. If you become super dedicated and always pack a lunch (and you aren’t filling your lunches with oysters and caviar), you could save thousands of dollars a year. Be reasonable with this one. You should still go out to eat if you want to, but stop going out every day and try to limit it to once a week at most. As an added benefit, you might start losing weight because you stopped eating so much junk.

4. Dump Cable And Stop Buying DVDs. Get Netflix And Buy An [HD] Antenna.

Digital cable, Verizon FiOS, and DirectTV are all awesome. I admit it. It’s cool to have so many channels to choose from. However, the last time I looked into it getting cable, basic cable alone cost at least $20/month and that’s just the local channels- no ESPN, no Cartoon Network. If I want those channels I have to get the extended package. Do my options end there? No! There is digital cable or satellite to think of, and everyone wants you to buy the triple play (phone, Internet, TV) for over $100/month. No thank you. I have not had cable service in a couple of years and I hardly even notice that it is missing because almost all of my favorite programs are available for free over-the-air in beautiful High Definition. The cable companies will not tell you this, but over-the-air HD has the widest bandwidth and can be the best quality HD programming available. Heroes, Lost, 24, The Office, The Biggest Loser, American Idol, and most nationally televised NFL football games are available for free in High Definition on your television set. All you need is a $15 to $50 antenna. If you do not have an HDTV, don’t sweat, you can still enjoy all your favorite programming on your TV with an antenna, but make sure you go here to learn more about the February 2009 switchover to digital TV.

Netflix, as you must know, is one of the best inventions ever. Any movie you could possibly want, delivered straight to your door. I love it. Before I used Netflix and before I got my financial act together, I would buy at least one if not two or three DVDs every week. I was addicted, and my collection quickly grew to over 500. As a movie buff I couldn’t have been happier. A strange thing happened when I started using Netflix, I continued to watch the same number of new movies, but I was paying 10 times less to do it. I had a spending problem when it came to DVDs and Netflix was my cure. I really didn’t need to buy every movie that came out, but I did, and now I only buy movies that I will watch repeatedly or for some reason I want to collect them. For example, Star Wars, Indiana Jones, and Futurama are all DVDs that I feel like I must own because that’s just who I am and there is absolutely nothing wrong with buying a few DVDs that you really want. I really liked Cloverfield, but I was satisfied after watching it on Netflix once and I really don’t need to own the DVD. If I ever want to watch it again, all I have to do is add it back to the queue. If you don’t have Netflix and are looking to cut down on your entertainment budget, give it a shot. Instead of going to see every new film you like in the theater, add them to your Netflix Queue. Netflix will save the movies in your queue until they are released on DVD, so you won’t forget about them. For the price of two movie tickets and snacks at the theater, I could get almost 5 months of Netflix on my current plan. What a bargain!

5. Focus On The Small Things.

Cutting back on spending really starts with the small stuff. Turning lights out when you’re not using them, shutting the AC off when you leave the house, and wearing sweaters instead of cranking up the heat are all ways to save money at home. To save money at the store, you can buy store brand food instead of name brand food. Honestly, can you even really tell the difference? Really focus on small expenditures that you have on a regular basis. If you buy a cup of coffee or espresso every morning at Starbucks, then get a cheap coffee machine and brew your own at home for a fraction of the cost. If you buy a soda every day in the vending machine at the office, go to a CostCo/Sam’s Club/Walmart and buy a large supply of soda at a fraction of the cost and take one with you every day. Any one of these might not feel like much, but when all the small things are added up, they can really make a difference.

I know what you’re thinking. Who is this clown? Why should I listen to him?

Well, let me tell you why I think I am a personal finance maven, and why I think my method works. But first, let me tell you about my current situation.

My wife and I are pretty young (mid-twenties), but we are completely debt free. We own two cars that are paid for, we do not carry any credit card debt, we have well funded retirement funds, we max out our roth IRA accounts every year, and we are paying cash for my wife’s MBA from Georgetown University. On top of that, we have saved up a 20 percent down payment for a townhouse in the expensive Northern Virginia region, and we plan to purchase a house in the very near future (we submitted an offer today- wish us luck). I don’t tell you these things to brag or to be elitist, I just want to show you that our methods have worked for us and we consider ourselves to be pretty well off for someone our age.

I am not formally educated in corporate finances, investment banking, accounting, or economics, but fortunately I don’t plan to teach you anything about those subjects. I want to teach you about personal finance, which I consider myself to be very well educated in. It started with my parents, who were pretty good with their money. They weren’t perfect, but nobody is (not even me). From them I had a strong foundation in common sense based personal finance, but the rest I had to pick up on my own. I learned from books, personal experience, radio, tv, magazines, my friends, my family, and my wife. My personality combined with my interest in personal finance has always pushed me to talk about money with whoever I could get to listen. I found myself trying to help as many coworkers and friends as I could, and I feel a great sense of accomplishment over some of the advice I have been able to give. This sense of accomplishment has pushed me to try to reach a wider audience on the world wide web, where I could potentially affect the lives of many more people. By writing this blog, I am also stepping away from the intimacy of face-to-face communication, which should allow me to delve into much more personal subjects that might be too invasive to discuss with friends.

Personal finance can be intimidating to a great many people, and instead of trying to deal with it they might ignore it all together. Everywhere I go I see people making mistakes with their money, and it isn’t always because they don’t know any better. Sometimes it’s because they are following social norms, the crowd, or conventional wisdom. My method works because it breaks down personal finance into pretty simple ideas that require a little bit of discipline and the guts to reject social norms and conventional wisdom. In America, there is a negative saving rate, which means that the average American spends more money than he makes. If the average American is in debt and spends more money than he makes, then do you even want to follow the crowds? My method, which isn’t really a method at all, but more like a philosophy based around the idea of living on less than you earn.

The most basic tenets are:

1. Live on less than you make. Easy to say, difficult to do, and absolutely crucial to building wealth.
2. The only acceptable debt is house debt. Yes, that means car debt is no good, student loans should be avoided, and credit cards should never carry a balance from one month to the next. Home equity line of credit is also a terrible idea.
3. Don’t make stupid decisions. This one is harder to qualify, but this is where common sense really comes in. Example, don’t buy a $30,000 car when you make $30,000/year and have $5,000 in the bank. I don’t care how good the APR is, it’s still a stupid decision!
4. Compound interest is your friend. And so are online checking and savings accounts.

This blog will strive to help you identify the stupid decisions you make with money today, and help you avoid them in the future. Don’t be ashamed, everyone makes stupid decisions with money, but you don’t have to keep making them over and over again. Use your noggin’ and think about what you want to accomplish financially in your life. If you keep it simple and follow these four tenets, you will be blessed with more wealth than you can shake a stick at. Even a large multi-branched stick.

• Use a credit card to pay your bills online
• Use a free online bill pay service from your bank (never pay for this service)
• Use your checking account to send an e-check online
• Have access to more than one checkbook
  • One with him and one with his wife, or
  • One with his wife and a supply of checks at home, or
  • One with his wife, and a few blank checks in his wallet
• Pay your bills at least 1 week early, so that you can improvise when situations like this occur

I’ve established that the containers that hold your money are relatively unimportant, so that begs the question, “what IS important?” It’s pretty simple actually, from now on don’t think of your money in terms of “yours” and “mine,” don’t think of your bills in terms of “yours” and “mine,” and don’t think of your retirement as “yours” and “mine.” It is “ours.” The other important part of your financial lives is establishing a budget together. It has to be together, with each partner getting an equal voice, and you have to hold each other to the budget. If you break from the budget, you have to discuss it with your partner beforehand, and you have to figure out where the money is going to come from. I won’t tell you how to make your budget; maybe I will later if readers request it, but the most important thing is that you have one.

Do you agree with my take on combining finances? Discuss it in the comments and I would love to debate it.

This will mark the first post in what is hopefully a long standing and well read personal finance blog. Let me start by introducing myself. I am an engineering graduate from the University of Virginia, and something of a personal finance maven. I am recently married and in the process of purchasing my first home in Northern Virginia. I am very opinionated when it comes to personal finance and I think my opinions could help a lot of people increase their wealth, improve their relationships, and lower their stress levels during these uncertain financial times.

My mission statement for this blog is to cut through the complicated mess that is personal finance, and boil it down to plain old common sense.