We covered baby step #1, save $1000 for a starter emergency fund awhile ago. We did not forget the rest of the baby steps! You need to have some money saved because an emergency is waiting around the corner at all times. That is just for true emergencies, not the “emergencies” we think are, but really are not. When we don’t have money saved or money in the budget, what do we end up doing? Put it on credit! 90 days same as cash! Spend this much money and get this many rewards/points/money/prizes/winnings/award/honor/bonuses you name it! It is easy to believe in credit cards and debt because companies make them easy and attractive to use besides it also getting you want you want. Let’s look at some reasons why debt can lead you down a difficult path.
It is harder to track and adds stress- When you have multiple credit cards, it can be hard to track where you are spending your money and what cards need to be paid off and when. Even if you have reminders and auto payments set up, it still is adding more things and more reminders in your life. If you are not the most organized person, then keeping track of it will lead to more stress on making sure you are staying on top of everything. Also, when you go to pay for something, instead of just paying, it can turn into “wait, what card gets me the best rewards?” or “which one still has money on it and is not maxed out?” If you pay cash or use a debit card the decision is easy. When you go to pay, you just pay.
The rewards aren’t as good as you think they are- It is amazing how math can work for and against you at the same time especially with statistics. Interest rates on most credit cards are in the high teens to anywhere in the 20% range. Some stores advertise spend this much money get $5 or 5% back. Let us do some math.
Spent $100 + 5% back= $5
Spent $100+ missed one payment at 20% interest – $20 fee= -$15
Does this seem like a good deal to you? You could be doing a great job paying your bills on time and then you forgot one month, or you lose your job, whatever the case might be, and in a blink of an eye, you are behind. If you were ahead $50 in rewards (that also means you needed to spend $1,000 which you may or may not needed to spend) all it takes is 1 month of missing a payment and using the 20% example, that is $200 in interest you just paid. Even if you argued you just had a $1,000 balance and not all of was due, if you cut that $200 in half that still is $100 and puts you in the hole $50 if we are still counting the $50 reward. You have to be flawless in your execution to make rewards work. People also like to use credit cards to get free hotels and free airline miles. Well, if you are too tapped out financially or time wise to travel, what was the point of accumulating all of those rewards? You can “win” in the credit card reward game, but you have to have a purpose and be extremely disciplined. Or you could just go about your life normally and when you are ready to buy something or ready to go on vacation, you just do it without even thinking.
If you don’t have the money you don’t have the money- Credit cards allow you to justify purchases were debit cards/cash is a yes or no question. Yes I can afford this or no I can not because I will overdraft my account. When we really want something (anything really) bad enough, we start justifying the something. Here are some examples of justifying a purchase, “it’s on sale, it’s a once in a lifetime opportunity, I really “need” it, I am getting my bonus/raise/promotion soon, it is only x amount of dollars per month, it is the last one, etc.”
Interest Payments and “I always pay my credit card bills on time”- You may be this person. If you are, nice job being above average. However just like how people think they are above average drivers, the same fallocy happens with personal fianances. Everyone claims they pay their credit card bills on time, yet rountinely credit card companies keep getting more interest fees because we fail to pay the bills each month. Be honest with yourself if you do not pay your bills every month. Even missing one month if you have a reasonable balance on your card will cost you a lot.
Help out the people who continually use credit cards- Credit cards can be akin to bad habits like gambling, smoking, overeating, and really any bad habit that you might be looking to change. If you want to have an altruistic view, even if you can handle paying your credit card bill off each month, many people cant. Let’s not keep handing banks over free money and letting people who may not know much about personal finance continue to be stuck in a never ending cycle. Your actions set the precedance for others and as much as this statement might be controversial, we don’t need credit cards.
We are obviously a little biased against using credit cards here at Cents of Time. We aren’t so extreme where we will judge you and say you need to stop now. We just hope to make you think about how you view credit cards. In our opinion they are not worth it and just add more stress/confusion to the mix.
Instead of focusing on small rewards, we think your focus should be on growing your income, your skills that will get you higher paying jobs, your savings, and what you actually want to do with your time and money. Don’t think small, think big.
Stay tuned for part 2 where we will focus on how to pay off your debts, what your focus should be, and how to make sure you stay debt free. There is so much to this step and it is normally the hardest and longest to do. Our goal for this article was to show that if you are behind, the best thing to do is not dig yourself more into a hole and be aware of the things that got you here.