Credit Card Reasons Revisited

Anonymous Says No To $350

Or, How To Miss Out On $29.20 a Month By Not Using Credit Cards

I recently listed 8 reasons to use a Credit Card which caused someone under the bravery of 'Anonymous' to call my advice crappy.

I understand that Credit Cards can be trouble for some people and I have no problem with people disagreeing with me. I did however take issue with these two segments of his response:

Why not keep the money in a high interest account and transfer it online,free, to your checking account as needed. problem solved
...
Rewards,benefits. Virtually useless. For most people the rewards/benefits do not outweigh the risks with credit cards

Great idea! And if one wasn't using a Credit Card at all, I'd agree. However, I found the line 'Virtually useless' rather suspect. I decided to run an analysis and see for myself (and for you, dear reader) what exactly is the financial benefit of using a Credit Card in the manner I use it.

Remember, our financial plan says to use the Credit Card wherever possible (and to pay it off on time, every time).

My analysis involves the following three scenarios:

Scenarios Under Analysis

Checking Account Only

• One 0% interest, $0 fees checking account


• Salary goes in, checks come out

Checking Account and a 3% APY Savings Account

• Salary goes into Savings


• Money is transfer ed over as needed

3% APY Savings Account, 1% Cash Back Credit Card

• Salary goes into Savings


• All expenses go onto Credit Card


• Credit Card is paid off at the end of the month

The Results!

With a monthly salary of $3,013.26 and monthly expenses of $2,187.50 using a 1% cash back credit card and a 3% APY savings account I will make $29.20 more a month than if I were just using a checking account. I will make you $24.96 more a month than if you I were using a checking and savings account (but no Credit Card).

See the whole sheet for a more detailed look including assumptions I made to simplify the calculations.

Table: Monthly Difference Between the Three Scenarios

Blog Sized Excerpt	Checking Only	Checking and Savings	Savings and Credit Card
Vs. Checking Only	$0.00	$4.24	$29.20
Vs. Checking and Savings	-$4.24	$0.00	$24.96
Vs. Savings and Credit	-$29.20	-$24.96	$0.00

A Partial List of Flaws

• Not everything can be paid for with a Credit Card.


• Expenses aren't actually evenly distributed throughout the month


• It is possible to get an interest bearing checking account


• Using multiple savings accounts will give you finer grained control over transfers to the checking account


• Some people really really really hate credit cards, so this won't work for them


• Some limitations may apply to 1% cash back purchases


• Carrying a balance even once will wipe out months of returns

Conclusion

I stick with my recommendation to use a Credit Card. I realize that my numbers are rough estimates, but I believe that they are strong enough and close enough to show that there is a clear financial benefit to using a Credit Card.

Using a Credit Card isn't for everyone, and I respect that, but just because they don't work for you doesn't magically make them crappy for everyone.

Groceries Without the Games

What's the Grocery Game

If you've been to a couple of personal finance blogs you've probably heard of "The Grocery Store Game". If not, here's a story on it over at Get Rich Slowly. The idea is that you combine coupons in such a way that you get most of your groceries and toiletries for very little cost.

It's Hard Work

Frankly, it seems like a lot of work. You have to go through all the store fliers each week, find the best coupon deals, find the manufacturer's coupons that match with the fliers coupons, etc. Oh. Then you have to drive to each of the different grocery stores and get all those deals, figure out what meals you can make with whatever products you may have been able to get for cheap.

As noted in the comments of the story over at GRS, most of the goods are actually toiletries or unhealthy foods. For me, I don't think it's worth the work.

Saving 14.5% On Groceries With (almost) No Work

As you'll see below, I save 14.5% on groceries before coupons even enter in to the equation. The process I use depends on the store having the two programs I use in place, so my process may not work for you.

Of course, playing the grocery game depends on you having the right big-chain stores in your area anyways, so I think this is a viable alternative for many people who could play the grocery store game.

Full Sheet : http://spreadsheets.google.com/pub?key=pFOJsib3bG6Gbi-GWZVFXRA

Here are the factors that let us save 14.5% whenever we get groceries:

• Grocery Gift Cards
  • Our grocery store sells gift cards which give you a 10% bonus. Eg. Buy a $300 gift card, get a $330 gift card. We bought $1200 of cards five weeks ago.


• Buy the Gift Card on your cash-back Credit Card
  • We get 1% on our Credit Card purchases. That's $12 back on our $1200 purchase


• 5% Student Discount Card
  • The grocery store has a special student affiliate card which gives you 5% off your purchase beyond the normal affiliate card price. My wife is still a student, so I don't think this is dishonest in the least.

Affiliate Card Price Caveat

The grocery store we go to doesn't always have the best overall prices, however when using the affiliate card the prices are competitive with other stores in the area. For this reason, I do not include the "mark down" that the affiliate card gives us. That mark down is only present because they mark the prices up for anyone who doesn't have the card.

Downsides

1) Be sure that the grocery store you do this at is one that you like, otherwise you get stuck with $1200+ of gift cards locked up in the one store.

2) It's easier to be spendy if you're spending gift-card money than real money.

3) You have to put down a large chunk of money right at the start. If the 10% bonus is going to be an ongoing thing, we will buy the smallest denomination possible, and leave the rest of the money in our ING account to further stretch our grocery money.

Real Life

Between May 9th and June 16th we bought $306.94 worth of groceries for a cost of $265.08. Considering that we had agreed to increase our grocery spending (we did) and decrease our eating out (we did!) we are about where we expected to be for grocery spending for the month.

Other

I have no idea where the extra $41.86 I saved went. Probably into my ING account...

Warily Eyeing Credit Card Reward Programs

Are Credit Card Rewards Programs Worth The Trouble?

Currently we have two credit cards. One we've had since we got married, almost five years ago. The other we got when we switched to the credit union.

The old Visa card is through a large national bank, and is pretty crummy. 24% interest, no rewards. The only reason we haven't closed it is that it's the oldest piece of our credit history. We'll keep it around until our mortgage is secured, then we'll close our account with that bank.

The newer card gets 1% cash back at the end of the year. It's convenient that we can just transfer money from our savings or checking to the credit card account, all in one spot.

Our Spending Habits

Neither of us likes carrying cash. I hate having things in my pockets, and she loses stuff in her purse. As a result, we use our credit card everywhere we can, our debit card where that doesn't work, checks where debit cards aren't accepted and cash as a last resort.

We always pay of the entire balance each month.

Current Rewards Program

I guesstimate that this year we've been spending about $2,200 on our credit card each month. If 1% cash back works the way I'm assuming it does, that means we'll get $264 back at the end of the year (.01*$2200*12).

Other Reward Options

Thinking that I'll get $264 back and knowing my average monthly spending means that I can now start comparing other credit card offers and maximize my rewards. Some cards appear to offer really good deals with reasonable APRs and no annual fees.

Let's pretend for a minute that I really did get 5% back on all purchases (there are a couple of exceptions). Spending the same amount each month would then get me $1320 cash back. (0.05*2200*12).

Is this really how it works? If I use the card responsibly (paid off in full each month!) do I really stand to gain that much in cash back? Does anyone have experience with any of these types of cards?

Other Factors

Our credit union is local. We will be closing our accounts when we move in January. Since we don't like our other credit card or the bank it's through, we'll need to get a new credit card anyways.

The cards I listed all require having 'Excellent' credit. My credit score according to Credit Karma is 811. My wife's is similarly high. That along with a car loan in our name and regularly paid cell phone bills I think might put us in the 'Excellent' category.

I'm not fan of credit card hopping. I don't want to switch or open cards every year in response to good deals, so I don't care much about the introductory bonuses or APY; I want to find the card that will be best in the long run.

I've heard Dave Ramsey's and JD's calls to get rid of credit cards, but that's not how we live. We have both been pretty financially reasonable, even before we had a budget. We treat credit cards like we would guns: useful but dangerous tools that need to be treated with respect.


I'd love to hear other's advice and experience with these or similar cards.

Categorizing My Monthly Spending

When we used our accounts at Wells Fargo, we could see a categorical breakdown of our expenses, but only for the Credit Card. My current Credit Union doesn't offer this functionality, but I had a driving need to know where my money was going.

Initially I would download the .csv (comma separated values) files, and manually sort them out into categories on a spreadsheet.

Of course, that grew old quickly, and I was forced to search the internet for something better. Coming up empty handed, I wrote my own script to sort out my different expenses into categories.

You run it on the command line like so

./statementToCategories.pl list.csv of.csv account.csv statements.csv

It will ask you how to categorize different expenses, and when it sees them again, it will remember what you entered last time. When it's done, it will ask you what to save the file as, and will create a .csv file with the different categories, and how much was spent in each category. It will also tell you how much you spent in each category in an average month.

With that data you can make charts, make plans and moan about how much you wasted on eating out....

You can find the script here:

http://richerandbetter.blogspot.com/2000/01/statementtocategoriespl.html

The script is in Perl, since that's what I'm comfortable with, and it probably won't work as-is for you, unless your bank/credit union lets you download .csv files with the same format as mine does, and you're running Linux. You are free to edit the script however you want and redistribute it.

I have no idea if the .csv files I download are some banking standard, or if they're just the way my credit union decided to make them.

What Does a Pay Stub Look Like?

How Much Do You Really Get From Your Paycheck?

What does a real world pay stub look like? When I finally started getting real paychecks, I was initially let down. I had very naively divided my salary by 24 pay periods and imagined all the cool stuff I was going to buy.

Reality is a bit of a letdown sometimes. I actually only end up with a little over half of my salary coming to me.

So, without further ado, here's my current pay stub (with certain data blanked out!)


Green is income, red is expenses.

At the top left, Salary is the amount I supposedly get each pay period (every two weeks). It works out to be about $50,000 per year.

At the bottom left is the amount that gets deposited into my bank account every two weeks.

43% of my salary doesn't end up in my pocket!

It would be difficult to argue with the taxes portion of the paycheck, but let's take a closer look at the section titled "Deductions From Gross" and "Non-taxable Company Items".

Deductions from Gross

Deductions from Gross are voluntary amounts I choose to have taken out of my paycheck. As much as it stinks to get that much less cash, there are good reasons to get those amounts removed.

Less Taxes:
These deductions are taken out before taxes are calculated. It appears that the taxes are about 15% of the taxable amount. If this is correct, then I pay about $100 less in taxes each pay period by deducting these amounts from my gross paycheck.

What are these accounts though?

Health Insurance - Employee:
This is a medical 'flex spend' or 'cafeteria plan' expense. We estimated how much we were going to spend on medical costs this year, and are having that amount removed from my pay over the course of the year. This account can be used for dental work, eye doctor visits and glasses, birth and related expenses etc. Since we knew we'd be having a c-section baby this year, we knew at least how much we'd be spending.

FSA:
This Flex Spend Account is for child care. Since I'm at work and my wife is at school, we needed someone to watch our kids for part of the day most days of the week. With this account we can pay for child care from our pre-tax money.

401(k):
We are currently putting in 15% of my gross salary into our 401(k). We'd like to retire well, so we've got to make sacrifices now.

Even though these deductions don't come home with me, two of the three are or will be used by me during this year.

Non-taxable Company Items

This is the section which shows non-salary benefits that the company is providing. It appears that they company is paying $306.07 per pay period for insurance for my family.

They match 100% of my 401(k) contributions, up to 3% of my salary. It's true then that I am not being matched completely with my 401(k) donations, but at least it's something.

Take Home Per Year

In all my excited imagining about how to spend my money, it turns out that I should have been thinking about taking home just less than $30,000 per year instead of the $50,000 gross salary figure.

So, if you just barely landed that dream job with the huge salary, don't make too many plans till you carefully review what you're actually bringing home each month.

Losing weight and making money

What do losing weight and managing money have to do with each other?

1. Well, for starters, unless you're a freegan or a self-sustaining farmer, you're paying for your food.
   

   We recently (March) noticed that we were spending about $500 per month on food. For a family of 4 in a reasonably priced part of the country, this is way more than what is needed.

2. Both require making and sticking with plans
   

   I have been aware of my increasing weight for several years. Between 2003 and 2008 my pants size increased from a 34 to a 36, and even that was starting to be a bit snug.
   

   Over Christmas holiday (2007) I stepped onto a scale and realized that I was up to 240 pounds. I committed to eat more healthily for the upcoming year, and the first several months of this year that was as firm as my commitment got. I ate less, and ate smaller portions but it wasn't until I also created a spreadsheet to track my progress that I was able to actually control myself and start losing significant weight.

3. Both are exercises in self discipline
   

   People, or at least me, are lazy. On our own, we will take the path of least resistance for most things. Controlling appetites is difficult weather you're trying to reign in a budget or a waist.

So now I'm down to 215 lbs from 240, and I am on track to reach my goal of 200 well before new years. I think these last 15 pounds are going to be harder than the first 25 though. I'm going to need to find some sort of regular exercise regimen to follow to burn off the fat.

For what it's worth, my weight loss plan thus far was mainly dietary. I now rarely snack late at night (when I'm programming), I try to drink more water, eat less meat and fatty stuff. I did play racquetball occasionally last semester, but 25 pounds worth of it.

Weight loss isn't fun. I hate passing up delicious food in order to become more healthy, but that's the way it is. I am already enjoying more mobility, more endurance and more fulfilling play time with the kids.

Our financial strategy

Goals
Before figuring out a financial strategy, we had to figure out our goals. Our goals are:

1. Live within our means
2. Pay off debts before they cost us interest
3. Save for a house, and for emergencies

Summary
Here's a high level summary of our specific strategy, based on those goals:

1. Pay off debts first
2. Keep money where it will earn as much interest as possible while remaining as accessible as needed
3. Use a budget to maximize the amount of money we can save

Implementation
And here is our specific implementation, as of May 15, 2008:

When we get a paycheck:

1. Put tithing and offerings (10% of paycheck + offerings) into checking (we pay with a check)
   
2. Pay off the balance on the credit card (also use funds from the Money Market account, if needed)
3. If it is the start of the month, put $600 for rent into the checking account
4. If there are any other bills, pay those
5. Put $100 "we don't accept credit cards" money into checking account
6. Put remaining money into the Money Market Account

Spending:

1. Pay with the credit card when possible
2. Remember that there is only $100 spendable in the checking account
3. For non-standard expenses (medical, tuition, etc.) which can't be paid with credit card, transfer needed funds from Money Market to checking.

Money Market Surplus:
When more than $500 accumulates in the Money Market account after paying all expenses, transfer that money to a higher yielding (but harder to access) account. We are currently putting our money into CDs, but we have been looking at high yield online accounts, such as ING's.


Results

1. We earn 1% back on Credit Card purchases
2. We earn 1.144% on the money sitting in our money market account
1. 1 & 2 together effectively create a 0% loan from the credit card which is paid off each pay period (bi-monthly).
3. We keep enough money liquid to pay expenses for each two week period. This reproduces the paycheck-to-paycheck feeling we've lived with for so long
4. Money we don't need immediately goes to higher earning accounts while being protected from our merciless spending

We have been operating with this strategy for the past two months (April, May) and have found it fairly efficient so far. We know how much we have to spend because we can compare our credit card balance to the amount in our money market account.

We will likely modify some of the details going forward, for example we are looking at options to maximize our 'extra' money. CDs aren't giving a very great interest rate right now. We will also consider getting a credit card with better rewards once we determine which one will be the best for us.