Idea$ 2014 - August: Credit Cards

In the world of personal finance credit cards have a bad reputation.  They can give people a false sense of how much money they can spend and lead to high interest and finance charges.  But, if used with appropriate discipline, credit cards can be a powerful tool in your financial universe.  What follows is a look at different types of credit cards and some of the best ways they can be used.  

Disclaimer

Before we begin, I will offer the disclaimer that I have found there are two golden rules when it comes to credit cards.  First, never spend more on the card than you can pay off when the bill comes due.  Second, always pay the card off each month i.e. never carry a balance.  By following these rules you will never have to pay interest or finance charges on your card, which can be large sums and lead to ultimate financial ruin.  

Cashback cards

Credit cards with a cashback feature provide the cardholder with cash in conjunction with certain purchases they make with the card.  One of the most popular is Discover's 5% Cashback Bonus program.  This program gives the cardholder cash back of up to 5% on qualifying purchases, which vary during the year.  For example, right now users of this card get cash back on all of their gasoline purchases through the end of September.  If you spend $100 on gas this month, you will get $5 credited to your cashback account which can be used to pay your bill, buy merchandise, or transferred to your bank account.  Cashback cards are great tools for people that only use a credit card for certain purchases, like gas and groceries.  

Cards with points

Credit cards that offer a points structure come in many different forms.  You have American Express, which gives you points on each purchase that you make.  These points can be used to buy merchandise from American Express, used on their travel website, or even used at Amazon to buy merchandise.  Then you have travel cards with airlines which give you miles instead of points.  These miles can be cashed in for plane tickets once you have earned enough.  Finally, you have store credit cards which give you points to be used as discounts on future purchases.  These cards are good tools for people that use credit cards a lot, buy a ton of plane tickets, or are always buying new things at their favorite store.  Plus, many of these cards have bonuses where, once you have spent a certain amount of money on the card during the year, they will give you extra points!  These cards are also great for people that have a lot of work expenses that are reimbursed.  If you have to buy your own plane ticket for a work trip and submit your receipt for reimbursement, you get to keep the points.  I don't see anything wrong with using credit card points to get a new set of golf clubs because you were on 25 airplanes last year!

Store credit cards

Store credit cards is an area where you can get the most bang for your buck with the proper discipline.  Here's a common example.  You need to buy a new refrigerator that's going to cost $2,000, but you don't have that kind of cash right now.  You see on the TV that your local appliance store is running a zero payments / zero interest for 18 months special on their store credit card.  The rules of these promotions are pretty simple - the interest on the purchase accrues for 18 months and then hits as soon as that period expires.  The trick is, if you pay the card off before the 18 months, you pay zero interest.  Basically, the store has financed the purchase for you.  So you go down to the appliance store, buy the refrigerator with their credit card, and then take the balance and divide by 17.  You divide by 17 to make sure you pay the card off before the promotion ends.  Make that payment each month and - voila! - now you have a new refrigerator, and you paid no interest or finance charges.  This is the only situation where the golden rules discussed above do not apply.  

Conclusion

In conclusion, credit cards can be a useful financial tool if used correctly.  By never carrying a balance and always paying the card off at the end of the month, you can earn cashback or points and a little more interest on your checking account.  A helpful tool is to treat credit card transactions just like they are cash transactions on your budget.  Look at your statement each week and make sure you are not overspending.  

Idea$ 2014 - January: Budgeting

Starting this month, the Ruggnotes will be dedicated to one personal financial planning idea each month.  I am calling this Idea$ 2014, with the intention that the idea each month will help readers address a new part of their financial lives.  To begin, January 2014 is dedicated to Budgeting. Almost any financial goal can be achieved by using a budget. Unfortunately, the word "budget" has a negative connotation in our society today. People do not want to be limited or told what to do, especially on how they spend their money. A common response is "I work hard for my money, and I don't need anyone telling me what I can and can't spend it on!"  However, speaking from personal experience , once you buy into the budgeting process and see how rewarding it is to set and achieve financial goals, you will find that a budget is not nearly as limiting as you think.

If you already have a budget, January is a great time to update it for the new year.  If you don't have a budget, I am offering the following thoughts on how to analyze spending and create a budget.  To help, I could think of no better example to use than what I do in my own house, so these ideas are coming straight from my personal experience.

Big picture

The first step is to look at major expenditures throughout the previous year. These would include anything that are not monthly recurring amounts or are large enough dollar-wise to not absorb in a normal month. Some examples are car insurance, property/real estate taxes, or annual memberships. We own a home and cars, so we also consider any large maintenance expenses, such as new tires or tree trimming. Identifying these large expenses and when they will occur can help you develop your monthly budget and how much money you need to have in savings.

Once you have looked at the big picture, it's time to develop the monthly budget.  Here is a picture of the spreadsheet we use:

What is "the budget"?

Before budgeting for monthly expenses, it is important to determine your actual "budget".  In simple terms, your budget each month equals your net take home pay for one month.  You can spend less than that (which is encouraged), but you can't spend more.

Fixed expenses

The first part of your monthly budget should be the fixed expense section. Fixed expenses include anything that is paid on a regular basis, is not discretionary, and the amount is known or can be reasonably estimated. Some examples are mortgage/rent payment, utilities, daycare, etc. Knowing these amounts is vital because they will help you determine how much actual discretionary income you have, because you have to pay these items no matter what. We actually include our monthly savings amounts as fixed expenses to be consistent with the theory of paying ourselves first.

Semi-fixed expenses

The next part of a monthly budget can be called the semi-fixed expense section. This includes expenses that are kind of discretionary, but not completely optional, like groceries and gas for the cars. We know we will have to buy groceries and gas, but by setting a budget we are less likely to make impulse purchases at the grocery store.

Variable expenses

Variable expenses are just that - variable, optional, discretionary. This includes eating out, entertainment, gifts,and a column with the very descriptive title "Other". We budget these categories by taking our monthly take home pay and subtracting fixed expenses and semi-fixed expenses. Whatever is left over we allocate between these categories. One key to this is that both my wife and I have our own columns. Each month we both know we have $xx to spend on whatever we want. This is the money we use to go out to lunch, pay entry fees to run in races, play golf, get manicures or buy clothes.  Setting a reasonable budget for variable expenses, and sticking to that budget, is the key to making your budget work each month.

Net (over) under

At the end of each month, we look to see if we are over or under. This is to say that if our monthly expenses exceed our monthly take home pay, we are over.  If we are over, we try to figure out why and make it up next month. If we are under, we transfer that extra money to our savings or make an extra payment on the house.

Budgeting does not have to be an arduous, time consuming project. A simple spreadsheet works for us. There are also some great tools on the internet. My favorite is Mint, which I was introduced to by a friend of mine a few years ago. Mint pulls in your transactions over the internet and lets you categorize them, and will also guide you through creating a budget. Mint also has an app for smartphones and tablets, so you can see in real time where you stand.

January is a great time to create or update your budget. Using the tips above, you should be able to identify trouble areas in your spending, and set and achieve reasonable goals.