Step #4 of 6: Eliminate your unsecured debt

By ROBERT K. CUNNINGHAM, Personal Finance Coach

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

For many people, the prospect of paying off all of their unsecured debts – and for most, this refers to their credit cards and department store cards – are remote in the short term, and daunting regardless of the circumstances.

But truthfully, it doesn’t have to be a difficult task… provided you’re fully committed to the process.

Today’s post will lay out the steps for the quickest, most painless strategies pertaining to paying off debt.  To be clear, we’re not referring to a mortgage if you’re buying your home rather than renting, and we’re also not including automobile financing… although the reality is that if your credit card and other unsecured balances are manageable, you could choose to include your car loan in the system and get it paid off as well.

For our purposes, however, we are focusing on high-interest debt.  Credit cards typically charge 20% or more annually.  Nothing short-circuits your ability to get ahead financially… and BuildWealthEarly… than high-interest debt compounding monthly.

So let’s get to what you specifically need to do:

1) List all your debts in chronological order by minimum payment due date. The order in which you list your debts is your choice, of course, but I have found this particular method to be the easiest.  What is most important is to be sure the following information is included:  Creditor, account number, phone number and/or website address ( have your user name and password available), balance, APR ( annual percentage rate), minimum payment due, and due date for monthly payments.

Be sure this information is accurate, to the hundredth of a percent with regards to the APR.  I am about to explain why this is important.

2) For any creditors charging more than 12% interest, call and ask for a reduction. Yep… if you want this system to work at peak efficiency and effectiveness, you should be willing to call and talk to a human. The purpose of your call is simple, and should start with something along the lines of: “Hi, I am re-dedicating myself to getting my debts paid off, in full and in the shortest amount of time possible, and I’d like to request that you reduce my interest rate, which is currently at ____ (tell them specifically what it is).”

You want to be ultra-specific on the rate because it will assert that you’re serious about this endeavor.  Informing the company’s representative that your interest rate “is around 20% or so,” makes you come off as hap-hazard about the whole thing.  Furthermore, be prepared to ask for a specific figure if requested to do so.  “If you could see your way clear to suspend my interest entirely for the next six months, that would be greatly appreciated and will really assist me in getting my debt paid down.”

If that doesn’t fly, don’t be deterred:  “I understand that you can’t eliminate my interest entirely.  How about cutting it in half, then?”

NOTE:  You can attempt this communication via online chat, rather than by phone, but chat representatives often seem to have the least amount of authority.  In my opinion, you’re better off calling.

If you successfully achieve a reduction — and your chances at doing so are actually very good depending on the current rate — don’t push your luck by asking for more of a discount unless the awarded reduction is truly meager.  Anything that, say, represents a reduction of 25% or more (for instance, if your current rate of 20% is reduced to 15% or less) should be accepted on its face with gratitude expressed.

If you run into a rep who refuses any accommodation (reminds me of the film ‘The Godfather,’ when Vito Corleone asks the other Dons, “when have I ever refused an accommodation?”), ask to speak to a supervisor, and go through the same steps until success is achieved, or until they hang up on you (kidding).

3) Update your list’s APRs, and note the debt with the highest rate. This will be your first priority debt.  NOTE:  If you have two debts with the same APR, and one balance is significantly lower than the other, go with the lower balance debt first… but ONLY if the rates are identical, or virtually the same.

As many financial “gurus” have explained by calling this the “snowball” method, the trick is to dedicate all extra funds that you are setting aside for debt elimination to the designated priority debt, until it is paid in full.  You should have arrived at this amount of available extra funds by going through the first three steps of the “Six-Steps-to-Six-Figures” that have been laid out in this blog over the past month.

4) After determining your first priority debt, dedicate all that you can to it.  Here’s what you do:  Note the minimum payment due on your designated priority date, and add your total of extra available funds for debt elimination to this amount.  Don’t pay the extra funds total in lieu of the minimum, but instead pay it in addition to the minimum.  And pay it right now… even if the minimum payment isn’t due for another three weeks, or if you just sent the minimum payment in last week.

For all of the rest of your creditors on your list, pay the minimum payment.  Although it’s preferable to simply pay them all simultaneously right after sending money to the creditor for the primary debt, it isn’t crucial as long as you make each payment at least 3-5 days before it is due. DON’T BE TEMPTED TO IGNORE ANY OF THE OTHER CREDITORS, THINKING YOU WILL EVENTUALLY BE ACCELERATING THEIR PAY-OFF. There’s no reason to muck up your credit… just pay the minimums on time and let the system as it’s laid out here do its thing.

Regularly monitor the updated balance of your priority debt and when it falls below the amount you’ve been sending in on that debt, it’s time for an adjustment.  First, pay the full balance due on the primary debt but obviously not more than that.  Assuming this final payment is less than what you’ve been sending to this creditor, be sure to add the difference to the payment for your next priority debt.

To determine that next debt to attack, go back to your list and select the account with the second-highest APR.

Now this next step is important… send the following amount to the second creditor as soon as possible, but most certainly before the next payment is due:  Amount of total payment that was being sent to the first primary debt (plus the reduced difference in the last payment, as noted above), PLUS the minimum payment due on the second (new) primary debt.

The idea is to continue sending out the same amount of money every month while your debt slowly dwindles.  As it decreases, the amount you’re sending becomes more and more effective, and accelerates the pay-off process.  Thus, the term “snowball.”

5) Follow the same routine, in order of highest to lowest APRs, until your last remaining account is paid in full.  As each account is paid in full, just keep adding the previous total payment to the minimum payment of the new target debt.  If you stick with this system to its conclusion, it is impossible to fail.

NOTE:  An alternative to the above method which uses the APR to determine the order of accounts being paid off is to instead pay the smallest balance first, then next smallest, etc., regardless of APR.  The theory is that doing it this way will give you tangible results (i.e. zero balances) more quickly, and ultimately better encourage you to stick it out to the end.  The problem is that this approach will result in you paying more interest over the length of your debt-elimination trek.  For my money, I want to save every dollar available.  The math means more to me than the mental tomfoolery.

Ultimately, you will have earned a hearty congrats for paying off all your unsecured debt.  Just one last reminder:  Do NOT be a schmuck and run up more debt.  There’s a smart way to use credit cards, to gain access to some sweet rewards without going into more debt, and for that information please furnish your email address for a free report with the details.

In the meantime, thanks again for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know that you were referred to that site via www.buildwealthearly.com. 

DISCLOSURE:  If you opt to purchase a product(s) from www.spwealthadvisors.com, I will qualify for an affiliate commission.

Step #1 of 6: Summarize all your monthly income and expenses in detail

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

In the previous installment of the new-and-improved BuildWealthEarly.com, I laid out the six primary steps to accelerating the process toward reaching six figures of net worth in the shortest time that’s reasonable.

So now it’s time to begin dissecting the specifics of each step, starting with No. 1 – SUMMARIZE YOUR INCOME AND EXPENSES.

Although this appears to be a pretty straight-forward task, there’s more to it than just adding up your pay and out-go.  We want to be detailed when we do this, because we will refer back to it over the course of other steps, primarily in the area of attempting to cut wasteful spending.

First, let’s determine our income.  For most millennials, income is limited to a job.  How much are you paid? For our purposes, we want monthly numbers rather than weekly or semi-monthly.  Why?  Because the vast majority of expenses are paid out monthly, and when we put these figures side by side, it’s easiest and most effective if we’re comparing grapefruit to grapefruit.

I will assume that at least some of you may be asking, “but what if I’m paid weekly?”  It’s not important to get your income total right on the nose, as long as it’s close.  If you are paid weekly, for example, you will receive a paycheck four times in eight different months, and five in the other four months per year.  So for the sake of consistency, you can take your weekly numbers and multiply by 4.3.  This will give you an average monthly number over the entire course of a year, and that’s sufficiently accurate for our purposes.

An alternative to dealing with the weekly-pay dilemma is to simply assume just four paychecks per month for budgetary purposes, and in those four months during which you receive a fifth check, you can choose to ratchet up your savings or debt elimination. Treat those like mini-windfalls.

The same principles hold true to being paid every other week – you will occasionally receive a third check, but for the purposes of accurate info, simply multiplying by two will give you the monthly income total needed.

In compiling these numbers, you will need gross pay and net pay, as well as ANY other steady income sources.  If you rent a room in your home to a friend, for example, and he/she pays $300 per month, that is absolutely income that you count towards your monthly total even if you tend to immediately turn around and hand it to your landlord or mortgage company.

We note the gross pay because we want to have a starting point in reviewing the deductions from our pay each check.  You should verify these and understand not only what the deductions are for (taxes, medical, social security, etc.), but be prepared to assure they are correct.  If necessary, get a sit-down with a representative of Human Resources.  It’s also good to know what’s being taken out in taxes, and how your most current W-4 form is filled out so that you can adjust if necessary depending on if you’re receiving too much of a tax refund annually, or worse, you’re paying additional taxes come every April 15.  The latter scenario is uncommon, but certainly possible and avoidable.

Net pay, also commonly referred to  as take-home pay, is the magic number that determines how much spendable income you have available monthly.

With expenses, there are two broad categories — fixed, and discretionary. Fixed expenses are those which are the same, or virtually the same, every month.  Rent or mortgage payments, car payments, cellphone bills, and gym membership fees are examples.  Discretionary expenses are those that change significantly every month, such as food (it’s wise to separate groceries from eating out when compiling these costs), gasoline, utilities, clothing, and entertainment.

You need to separate any and all expenditures into one of these two categories, and by all expenditures I’m referring to everything from rent and car payments to gourmet coffee to your breath mints.  You don’t need a separate line in your summary for LifeSavers, but the mints are part of your grocery bill and should be included in the monthly total you dedicate to Ralphs, Vons, and Stater Bros., etc.

We separate fixed from discretionary because the former are expenses that you cannot easily change or eliminate.  Discretionary spending, on the other hand, is simpler to manipulate for your fiduciary benefit.  It’s pretty difficult to reduce your rent (good luck with that!), but quite doable to choose to walk or bicycle more and, thus, reduce your monthly fuel expense.

To ensure reasonable accuracy for listing your expenses, I suggest using the last three months’ of records – whether an on-line banking summary, credit card transactions summaries, hard-copy bank statements, or a combination of all.  If Christmas season falls during the prior three months (as it does at this particular writing), skip December (or November if you’re a proactive Christmas shopper), and utilize the surrounding three months.  Mark down all your expenses in both categories over this time frame, by month, and then average the three totals for each category to arrive at a fairly reliable monthly average.

Once your totals for income and expenses are laid out, simply compare.  If you are earning more money than you’re spending, it means you have some left-over funds that you should be dedicating toward saving, or debt elimination, or perhaps both.  And, as previously alluded to, you can attempt to decrease discretionary spending to give you even more money to work with each month.

If you’re spending more than you make, knock it off already!  In order to make this entire process beneficial, you have to be willing to cease bad habits… and spending more than you make tops the list. Get rid of all the credit cards in your wallet, at least temporarily, and use only your debit card for purchases, which will prevent you from spending money you don’t have (literally, but not in terms of budgeting – that onus is on you).

Now that you know where you stand in the most basic sense, we can figure out how to begin “paying ourselves first,” and otherwise create wealth-building money habits.  We’ll go into that line of thinking in next week’s post.

Once again, I thank you for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know by any communication you choose that you were referred to that site via www.BuildWealthEarly.com. 

DISCLOSURE:  If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.

Over the next several weeks, let’s talk about 6 steps to 6 figures, with 6 advantages

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

Last week, I introduced to you the revised focus of this website… which consists of a personal financial gameplan centered on Dividend-Paying Whole Life Insurance (DPWLI).

Now it’s time to lay out how I will detail this information, which will be formatted as six posts, explaining in specifics how to go about each of the six steps to achieve six figures of net worth.  I’d love to be able to announce that you can accomplish this six times faster than with traditional strategies, but there are two reasons that would be a false claim.

For one, the notion of six times faster than about 42 years — the timeframe from age 23 to 65 that many adults spend as income-earning professionals — would mean that I can get you to $100,000 in seven years.  Some might achieve that milestone in such short order, of course, but there’s no way I would propose to assist the masses in doing so.  Sorry, but this is about keeping it real.

Secondly, it would imply that “normal” or accepted methods of saving and investing typically buoy people to six figures.  I’m not sure that’s so, thus any claim related to that, including a comparison, would be moot.

Are ya with me so far?

I mentioned six advantages in the headline of this post.  In fact, there are more than six, but in the interest of being consistent the half-dozen are:  safety, liquidity, rate of return, tax-advantaged, living benefits, and a death benefit.

OK, without further adieu (and that’s as French as I get), here are the six steps with a brief explanation of each:

1) Summarize all your income and expenses.  Yeah, I know… this sounds painful, and boring as hell.  But it’s a must if you’re going to do this correctly.  Whether you do it on a computer, or you sit down with a pen and a legal-sized yellow pad, you need to be willing to account for all your net income (take-home pay, income from rent or other sources) and your monthly payments to others.

The idea behind doing this is two-fold:  A) Determining how much income, if any, that you have monthly to dedicate to saving/investing, and B) Form strategies on effectively cutting your current spending in order to increase A.

2) Establish a budget. The dreaded ‘B’ word.  Let me make something clear from the get-go.  There are certain financial authors (should I cite any specific examples, David Bach?), who will claim you can engage in savvy personal finance without a budget.  I’m not entirely sure what is meant by that — and I’ve read The Automatic Millionaire twice (it’s mostly a very good read) — but any strategy that doesn’t decipher income vs. expenses is either ill-advised or is wasteful of available resources, or both.

The need to be overly specific can be debated, but you have to not only know where your money is going and coming from, but also be willing to adjust based on those numbers for your own long-term benefit.

3) Begin ‘Paying Yourself First.’ This simply means that you dedicate x amount of money per month to saving/investing BEFORE you start paying bills and everyday expenses.  It’s the one piece of personal finance advice that, I believe, is universal.

In other words, EVERY so-called guru, expert, author, blogger, and wanna-be seems to agree on this principle. So should you.

4) Eliminate all unsecured debt. You can never truly start the journey toward six figures of net worth until you eradicate your debt.  Home mortgage debt and, in some instances, a car loan and school debt are acceptable, depending on the terms and circumstances.

Credit card debt, however, is only OK if you pay your balances in full each month, and so that is managed under expenses.  If you carry a balance, even just a few hundred dollars, a top priority for you is to pay it off as fast as possible. Because if you don’t, you’re wasting money on the astronomically high interest rates.  And even if you’re taking advantage of a low (0%?) promotional APR, it’s temporary and still interferes with saving and investing. It limits your ability to EARN interest rather than pay it.

5) Open a DPWLI policy.  A plethora of benefits, living as well as the other kind, and advantages over conventional strategies await you.

6) Borrow against your accrued cash value to buy a home.  Personal finance, like a typical college’s curriculum, has several stages… from introductory to intermediate to advanced.  Buying your first home often represents the culmination of a successful completion of fundamental financial principles.

And soon, you might be able to tap your resources for a car purchase… eventually, it will make sense for you to do so as you learn to take full advantage of the features of your DPWLI policy.  But we’ll get into that soon enough.

Meanwhile, in next week’s post we will break down Step 1 — exactly how to go about determining your income and expenses, and begin the process for using that information.

Until then, as always, thank you for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know by any communication you choose to commence that you were referred to that site via www.buildwealthearly.com. 

DISCLOSURE:  If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.

Ultimately, it’s all about retirement

By BOB CUNNINGHAM

On this website, and hundreds of others like it that I read and monitor, we talk about practically anything that has to do with money/personal finance.  And we should… there’s a helluva lot to cover about the subject.

But what it all boils down to, whether you’re in your 50s or half of that, is preparing for the “Big R.”  What proactive steps are you taking, now and in the near future, to properly prepare for retirement?

So let me ask you, is that what we should really focus on ad nauseum?

While planning for the long-term future is certainly important, I contend that excelling in the short-term, including the ‘now,’ is at least equally vital.  In fact, one often facilitates the other.

Maximizing your efficiency in saving and investing now, logically, will result in you having more money to work with later.

Let’s take a quick look at why planning for retirement has become such big business, cliff notes version.  You ready?  It’s because virtually all private companies have deserted the traditional pension system in favor of a 401K/IRA-led way of saving for one’s own career conclusion.  And, many public and government agencies appear headed in the same direction.

Sure… just save some money with your company in its 401K, or do it on your own with an Individual Retirement Account, combine those with the scraps that are our social security payouts – assuming those rates stay where they are now – and you’ll be set.  Who needs a big, fat monthly pension check when the S&P 500 historically averages a 10% annual return?

I’m tellin’ ya, it’s bananas.  And yet our society has fully accepted this monumental shift in monetary focus.  But what people fail to properly gauge is that, while $500,000 in a retirement account may sound like a butt-load of money, it is in fact barely enough to keep a retired couple above the poverty line.

Undoubtedly, you’ve heard that experts traditionally recommend drawing down your nest-egg at about 4% per year, so that you can live while retaining the full balance of your primary account.  In other words, if you start with $500,000, and want to leave a legacy, you should take annual withdrawals from that account of no more than 4%.

Really?  Hmmm… let’s see how that might play out.

Let’s say you’re an average wage-earner in the U.S., about to retire.  Your household income, says Betterment.com, is about $68,000 a year gross.  That’s roughly $50,000 net spendable money after taxes.

If you expect to maintain the same standard of living you’ve become accustomed to, you would have to have about $1.25 million saved.  And that’s not even considering the erosion caused by inflation.  At a 3 percent inflation rate, $50,000 of net spending power becomes just $25,000 in about 24 years, which is roughly the average length of retirement nowadays.

Of course, you can always sacrifice your kids’ inheritance and spend down your money – in fact, I think you should because it’s your money.  But try making $500,000 last 24 years when you’re taking $68,000 withdrawals on a taxable account.  According to calculators on the BankRate.com website, do that and you will be out of money in less than 15 years.

Your retirement account is a Roth IRA?  Cool.  No taxation on the withdrawals.  But with $50,000 annual withdrawals and inflation, your investments had better return more than 14% each and every year if you expect to continue paying the bills 24 years later.

Also, we didn’t enter increased medical expenses or anything else into the equation.  Scared yet?  Ya should be at least nervous.

So what do we do?  If we’re smart, we utilize specific strategies that take the guesswork out of money, and we start doing them now… to benefit us now, a little later, AND into retirement.  We do things that allow us to live a better, smarter life RIGHT NOW and over the ensuing years, and not just obsess about what we’re going to do when we actually get old.

And I have a strategy that makes all of this relatively simple and definitively painless.  Beginning in 2018, this website will be dedicated to detailing this approach and its various advantages on a regular basis.  Yep… I’m going to make you wait for it.

But, if you’ve been reading this blog for any length of time, you already know what I’m talking about.  DPWLI… to know what this acronym stands for, refer to earlier posts, and let me know your reaction to the suspense.

Yes, admittedly, I’m messing with my audience a little here.  But teasers are good, and it won’t be long now before the info will be at your fingertips.

In the meantime…  thanks, as always, for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

It may seem as if buying with cash is best, but don’t forget about opportunity cost

By BOB CUNNINGHAM

It is a common misconception that you should always pay cash on purchases.  Old-school thought on this is simple and straight-forward:  If you don’t have enough money on hand to pay the price, you can’t afford it and should save until you do.

Well, I’m here to tell ya that cash isn’t always king.  In fact, many times it is detrimental to your personal finances to pay cash for purchases.  And few people are as old-school as I am… or at least, as I like to think I am.

When you pay cash, there is this frequently overlooked factor called “opportunity cost.”  On small purchases, like a combo meal at Wendy’s, the opportunity cost is pretty doggone small.  But there is still an opportunity cost.

How does that work? Well, what if you use a cash-back credit card to buy your burger and fries? If the card pays 1% cash back, doling out a five and two ones instead of using the card just cost you about seven cents.

That’s $.07.  Not much, of course.  But if you buy lunch using the cash-back card five days a week, in a month you would have earned yourself $1.40, assuming you pay the credit card balance in full before the grace period of roughly three weeks expires.  That adds up over a year to nearly $17 – enough for two free lunches, super-sized.

It should be obvious by now that I’m not calling your attention to this for such small fried potatoes.  Instead, I’d like you to consider your next car purchase.  Let’s say the ride you want costs $25,000.  And for the sake of this discussion, let’s suppose you happen to have $25,000 saved and available.  It’s invested in a stock market index fund inside at an online brokerage account and has earned about 7% since you’ve had it.

Very smart of you to put that money to work, by the way.

Meanwhile, the car dealership is offering 2.9% financing on that sweet-looking sedan.  You have enough money to just pay cash for the car.   Your parents have always told you to pay cash.

Listen to your folks?  Or go into debt?

In my opinion, it’s a no-brainer… with all due respect to Mom and Dad.

If you opt to pay cash, you will have no car payments.  And that is, of course, a good thing.  It merits consideration, to be sure.  But that $25,000 is now tied up, and thus can’t be used for anything else unless you immediately turn around and sell the car (which if you did, you’d be lucky to get $20,000 because new cars depreciate as much as 30% the minute you drive them off the lot according to KBB.com).  So you’ve not only tied up the cash, but done so in a depreciating asset.

On the other hand, if you qualify for and accept the financing, and keep the $25K in the investment account, it would earn about $1,750 if it maintains a 7% rare of return (ROR) annually.  The spread of a 7% return over a 2.9% interest debt is a net positive 4.1%.  Mathematically, when the new car is paid off in five years, you will have netted a positive 20.5% (4.1% multiplied by 5 years).

Plus, you will still have the $25,000-plus if you need it for something else. It won’t be tied up in the formerly new wheels.

But hold on, you say.  What if we need to make the $449 per month car payment from that same $25,000 account?  OK… $449 times 12 = $5,388 in payments each year, with $388 of that being interest (we arrive at that by knowing the $25,000 cost of the car divided by five years equals $5,000 to principal per year, with the remainder being interest).  So in the first year, and the subsequent four years, you pay $388 in interest every 12 months.

But how much did the index fund money earn you?  The answer,  considering the dwindling balance as we make those monthly car payments, ends up at about $1,400.  That’s better than $1,000 more (the first year) to keep the cash and use it to make the payments as we go.  We aren’t considering income taxes in our figures, because you’d have to pay taxes on the gains of the $25K at withdrawal, whether all at once or a little at a time.

The major key to the comparison is the 4.1% separation between the interest rate being paid on the car loan and the ROR on the investment account.  Whether it’s the first year or the fifth, or anywhere in between, that spread is going to average out the same.*

*I’m not saying you can count on your cash to make a 7% return precisely, each and every year.  Of course that isn’t the case.  It might lose one year, but it also might make 30 percent gains the next.  Determining which strategy is the best requires us to use constants (averages) where they don’t typically exist.  If the investments in the account lose money in every one of the five years, then paying cash would have been better because we’ve lost that aforementioned spread.  But five straight losing years is extremely unlikely. Historically, four of the five will be gains with two of those being at least 10 percent. (source – Morningstar.com)

Finishing with our example utilizing a 7% annual return on the investment account, in five years using the auto financing to pay off the car in full, we would still have about $1,900 remaining in the account (according to BankRate.com calculators) to go with a paid-off car that is now worth roughly 10-12 grand.  Paying cash, you would still have a $10,000-$12,000 car… but the investment account would be fully depleted – immediately.

Look, nineteen hundred bucks versus zilch is a huge difference.   So remember – opportunity cost is a big factor to look at when considering whether or not to pay cash for a purchase.  For fast-food lunches, go ahead and use cash or your debit card.  But on the larger purchases, be sure to take advantage of credit IF the rate of return on your saved money exceeds what the creditor charges to loan you the funds.

As always, thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Small savings here and there can add up to surprisingly significant amounts

By BOB CUNNINGHAM

My family and friends often give me a hard time about being frugal.  When I first revealed to them that I had a personal finance blog, they asked if I had written a post yet on cheap eats or the wonderful world of coupon clipping.

It’s not that I don’t enjoy spending money, or that I’m not willing to splurge on occasion.  I am, and my wife and I do.  What I don’t like is feeling as if I have wasted money.  Spending $500 or more on the latest cellphone, for instance, just seems like a bad investment when I can go out and obtain a perfectly functional phone – for talking, texting, and taking basic photos – for less than $100.

My adult kids, ages 27 and 24, want the fancy phones.  Like the old fart in those Consumer Cellular ads, I’m happy with my basic phone.

Either way, there are numerous ways to save small amounts of money on a consistent basis… and when you do these consistently, I believe you will be genuinely surprised by how the little discounts, rebates, and cash back add up.

I do clip coupons, but I’m not obsessed.  Mainly, I look for discounts on grocery brands I buy, and restaurants we frequent.  I also constantly am asking for discounts.  When I recently had the oil changed in my car, I requested “the best deal you can give me. Been a customer here a long time,” and got a discount for a coupon I didn’t have and was afforded an additional  10% senior discount despite being ‘only’ age 53.  If I hadn’t asked, I’d have never received either courtesy,

Also, I’m a big believer in taking advantage of cash-back credit cards.  The process is really quite simple – apply for and (hopefully) get approved for a credit card that offers either a flat cash-back rate for all purchases, or quarterly “specials” with as high as 5% back on certain categories, or both.  The categories, usually featured for three months at a time, include restaurants, grocery stores, gas stations, or department stores among others.

The idea is to use the card each and every time you shop – for virtually all of your weekly purchases.  Concentrate solely on what you would spend anyway.  Don’t spend more just to utilize the card.  Defeats the purpose.

Then at the end of the month, you use your checking account funds to pay off the card.  You never want to carry a balance on the credit card, because you will then be wickedly guilty of stepping over dollars for dimes.  After all, how much sense does it make to get 5% back on groceries, but pay 20% or more interest monthly to carry a balance for those very same trips to the store.

None, of course.

Do this right, by using credit cards as the point-of-sale tool and your bank account to pay the credit card balance in full each and every month, and those 5% purchases here, and 1.5% there (and elsewhere) start to add up nicely.

Although it certainly isn’t recommended for younger adults who are trying to establish themselves as financially healthy long-term, my wife and I like to eat out.  We rarely do fancy dining, but we like Applebee’s, El Torito, Panera Bread, and the like several times a month.  Currently, our Chase credit card pays 3% cash back on all our restaurant purchases (including fast food, although we don’t do much of that).  Generally, in two months we have accrued enough cash that we get a dinner on Chase courtesy of a gift card to most any chain eatery we choose.

Over time, you can acquire a few cards, each of which might be dedicated to a different part of your overall budget – one for dining, one for groceries, one for gas, and one for miscellaneous.  The common denominator among all of them remains paying the balances in full each month, thereby NEVER paying interest on these purchases.

It’s like earning a rate of return on your expenditures, rather than just your investments.  Best of both worlds.

Thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

It’s time to review several things we’ve covered in past BWE posts – Part II

By BOB CUNNINGHAM

Continuing with the post from last week, in which we are examining some basic financial principles from a “fantasy and reality” perspective:

“Invest in your company’s 401K Plan.”  The most common workplace retirement savings vehicle is a 401K Plan, which is a qualified (i.e. government-sponsored) account in which the company holds your money and pays a brokerage to invest it for you into various securities.

FANTASY:   Max out your 401K Plan (the government places limits on how much you are allowed to contribute annually) as soon as you can.  The government is truly generous in allowing us an account that can grow tax-deferred.

REALITY:   Doing so means you’re trusting others to manage your money, in markets that are risky and volatile, and forfeiting access to your money until you’re age 59 1/2 (unless you want to pay a 10% penalty on top of standard taxation) and the account has been in existence at least five years.  It’s true that many companies offer a match up to a certain percentage of your income.  As a secondary retirement savings instrument, I’m fine with maximizing the company match (example – company matches 25% of the first 5% you have deducted from your paycheck to be put into your 401K).  Otherwise, there are better places to put your savings where you have safety and complete control. And once and for all:  Tax-deferred doesn’t mean tax-free, and it doesn’t result in more compiled money once you’ve paid income tax at the back-end.

“The most important aspect of investing is Rate of Return.” How much compound interest your money makes as it is invested in stocks, bonds, precious metals, real estate, or any other from among a host of investment choices IS something you’re going to want to track.  But there are other factors.

FANTASY:  You should be investing your money where you can earn the highest returns.  The stock market has risk, but it has gone up steadily over the long-term so if you leave your money in the markets, you’ll most certainly come out ahead.

REALITY:  I can’t quite recall where I first read the following, but the adage is oh-so accurate:  The most important part of savings and investing isn’t the return on your money.  It’s the return of your money.  I’ve never fully understood why otherwise sensible people have allowed themselves to become convinced that they should put their hard-earned life savings at significant risk.  In 2008-09, I personally knew folks who saw their nest-eggs drop by 40 percent.  They are just now fully recouping those losses, and that’s amidst the longest-lasting bull market in any of our lifetimes.  Remember, in a previous post we demonstrated how a 5% return every year can out-perform and average of 10 percent over the same period, in the same way that a 50% gain followed by a 50% loss results in a 25% net loss (Don’t believe me? Try it starting with $100 to make the math simple).  Slow and steady wins the race.  Just ask either the tortoise or the hare.  Better yet, ask them both.  Wouldn’t steady gains with no market risk – that’s zero risk, ladies and gentlemen – seem to be more intelligent when it comes to something as important as retirement savings? As opposed to hoping your funds return double-digits and avoid big declines along the way?  The answer is yes, because it is,

“Buy term and invest the difference.” This expression, of course, is referring to life insurance.  There two primary types – term and permanent.  Term insurance is solely a death benefit in exchange for a monthly (or annual) premium.  Permanent insurance includes products like whole life insurance, and can be set up to function in several capacities in addition to providing a death benefit.

FANTASY:  Because term is cheaper, it is advisable to buy term and then take the amount of money you’re saving on premiums versus permanent insurance and invest it in the stock market or other vehicle for long-term returns.

REALITY:  It sounds logical enough on its face, but two big problems here.  First, the vast majority of folks who intend to follow this strategy won’t “invest” the difference.  They will spend it… on stuff that depreciates.  And I simply don’t believe in unrealistic advice, even if the logic is sound (which it really isn’t here).  Secondly, there’s an obvious reason that permanent insurance tends to be more expensive than term.  IT DOES A LOT MORE FOR YOU!  Dividend-paying whole life, the product choice for permanent insurance suggested by this blog, offers a host of “living benefits” in addition to the fundamental death benefit.  The premiums are higher because the product is superior, on numerous levels. To recommend term strictly because it’s cheaper demonstrates a lack of reasonable research and comparison.

I hope you enjoyed this review and reaped some additional wisdom, or at least some reinforcement, from it.  Once again, thank you for taking time from your busy schedule to join us weekly on this site.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

 

It’s time to review several things we’ve covered in past BWE posts – Part I

By BOB CUNNINGHAM

(Note to my readers:  My apologies for being a day late with this post.  This marks a permanent change to Tuesday morning release of my new post each week.  The change is due primarily to professional convenience.  Thanks for your understanding.)

This website is, first and foremost, dedicated to coaching people how to best go about the various tasks related to savvy personal finance.  Achieving success can be accomplished through a mixture of some sound fundamental principles, combined with the reality that many strategies which are considered advisable by the masses are, instead, more beneficial to others.

What does that all mean?  Translated into one expression,

    “Unconventional wisdom, in many cases, is better than conventional.”

As you read, listen, watch, and research the world of personal finance, you will encounter some common themes preached by everyone from the most famous gurus to the tiniest out-of-the-mainstream blogs (I’d like to believe I’m somewhere in between, but closer to the latter than the former.)

This blog has been dedicated to assisting you in deciphering what to believe and trust, and what not to.  We’ve taken individual topics and broken them down into pieces small enough to digest in a way that allows us to effectively learn just how such habits can affect us, short- and long-term.

What I haven’t really done, until the paragraphs to follow today and next week, is put together a summary of the major points made through this blog’s seven months of existence.  So let’s get to it.  I’m calling this, “Personal Finance:  Fantasy and Reality.”  Part I is below, with Part II to run Oct 17.

“Pay Yourself First.”   This is arguably the most common adage in the world of money.  It simply means that you should set aside money for savings and/or investing before you earmark funds to pay your bills and for everyday expenses.  The theory, of course, is that if you get in the habit of doing this, you’re guaranteed to save more and anything is better than nothing.

FANTASY:  Saving even the smallest amount on a regular basis will eventually lead to significant holdings, from which you can build on additionally.

REALITY:  While it’s true that something is always better than nothing, there has to be a definitive goal for increasing savings regularly, and it should only be undertaken after expensive personal debt, such as credit cards that can have APRs well more than 20 percent, is eradicated.  One of the most common mistakes is to save slowly in an account earning less than 1% while simultaneously carrying a balance on a credit card charging 23.9% interest compounded.  Spend every extra dime paying off the card, stop charging stuff unless you pay it off entirely by the due date, and THEN ratchet up the savings to blow away what you would have accumulated – and wasted – otherwise.

“You need to save at least 3 to 6 months of living expenses in an emergency account.”  The idea is that if you have this kind of a reserve, loss of your job for an extended period won’t put you in the poorhouse – or worse, your parents’ basement.

FANTASY:  This is one of my favorite finance fables.  Some pretty well-known gurus claim it’s better to have a year’s worth saved.  Sure, and it would be better if my retirement savings had one or two additional zeroes, too.  In truth, for 95% of the population on this planet it is a complete fantasy to have a liquid cash reserve of $10,000 or more and be willing to leave it alone for a rainy day.  There’s a better HD television available.  It’s an emergency!!

REALITY:  A much savvier plan is a basic reserve fund of $1,000-$2,000 for things such as auto repairs.  But actually, I propose to use your credit cards as your emergency fund.  As long as you’re disciplined – and let’s face it, discipline is required when utilizing any type of advisable strategy – you can use a credit card to charge a true emergency and then formulate a plan to pay off the card with minimal damage.  Saving more than the aforementioned $1K-$2K means you’re not utilizing legitimate funds properly.  You should be investing those funds in debt elimination, or a dividend-paying whole life insurance policy, or if you must, low-cost index funds, or even in your work’s 401K plan (more on that next week).  All are preferable to letting inflation eat away at the buying power of a tidy sum dedicated to nothing… and earning next to nothing in a regular savings account.

“Avoid credit cards.”  Because they are debt instruments, many gurus advise to ignore them entirely, except perhaps for one card that can be used only in a “true emergency.”

FANTASY:  Just pay cash for everything, and you won’t need cards.  Credit cards only benefit the companies who issue them.  They victimize their customers unfairly.

REALITY:  Credit cards are great, but ONLY when used wisely and properly.  Running up a balance on an account charging such high interest rates is fiscal mutilation.  But if you are able to obtain 3-4 cards, each with cash-back allowances (preferably in rotating categories offering as high as 5%), and you use them for everyday regular expenses while ALWAYS paying off the entire balance prior to the next minimum payment being due, you not only avoid unnecessary costs, but also accrue small refunds, and at the same time build a favorable credit history.  Plus, your purchase of tangible goods are often insured by the card company, a service not provided by cash or a debit card.

“When strategically paying off credit card debt, pay off the smallest balance first.” As opposed to eliminating the account with the highest APR, many financial advisers propose the “snowball” strategy versus the “avalanche” approach.

As the AFLAC duck often exclaims, “Huh??”

FANTASY:  Paying off your smallest balances first, before working on the larger ones, yields quicker results and gives you a sense of accomplishment. This increases your chances of sticking with the program.

REALITY:  I won’t argue with psychology because I’m not educated in that area beyond my Psych I college course explaining the difference between Sigmund Freud’s id, ego, and superego.  But our goal is to save money on interest, so why would I pay off an account charging 16% before one jacking me for 24%?  The latter is going to require a larger minimum payment, so I want that one outta-here ASAP.  Look, if you have two accounts of very similar rates (like, within 1% of each other) and you choose the smaller one in order to get rid of it quicker, knock yourself out.  But don’t leap over dollars for psychological nickels.  Just dedicate yourself to the task with the knowledge that it is what is best for your long-term financial health, and save every dollar you can.

That’s it for Part I.  See ya next week for the conclusion of our review.

As always, thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

What you should know about car loans, when obtaining one is your only option

By BOB CUNNINGHAM

Most personal finance gurus agree that the one type of debt that is acceptable to have is a home mortgage.  As soon as you can reasonably afford such a hefty monthly output, and provided you have some money for a down payment and closing costs, it’s generally better to buy a residence than to rent.

I agree completely with the second part of the above statement, but not the first sentence.  Well… not exactly as it is written.

I have learned that a home loan is, indeed, okay as long as you’ve avoided going in over your head.  I also believe that under the right circumstances, obtaining auto financing is just fine in the big savvy-money-management scheme of things.

To be clear, not everyone who desires new wheels should be out applying for a car loan. If you’re already in a lot of debt (i.e. credit card debt), and/or don’t have steady employment or another reliable source of income, locking up $300 or so per month for the next five or six years is foolish.  You likely wouldn’t qualify anyway.

However, the old-school thinking that you should pay cash for everything except your house, under all circumstances, is unrealistic and sometimes downright ill-advised.  Under certain reasonable but necessary parameters, you should feel fine about going into some debt for your car.  Why?  Because the risks of buying only what you can afford by paying cash often outweighs the temporary negative associated with using credit, even on a depreciating asset.

In a perfect world, you WOULD avoid traditional financing.  A dividend-paying whole life insurance policy, such as what this website has been detailing periodically since its inception, with sufficient funds in its cash value is a far superior method for buying a car because it is “self-financing,” and allows the policy owner to continue growing his/her money even while tying up funds in the new ride.  Set up properly, you wouldn’t lose the growth that money would earn had you not went car shopping.

It’s a really cool and wise way to go about it, but this particular post isn’t dedicated to that, because I realize many of my readers are younger and either don’t yet have the insurance policy or don’t have enough saved in cash value to collateralize a loan sufficient to buy the desired automobile.

So that means your choices are, 1) walk/ride the bus/ride a bike, 2) buy something so cheap for cash that it could break down at any moment, as mentioned above, or 3) qualify for a loan in order to buy a car that will likely last for several years.

It’s fairly obvious, I would think, that a huge majority in such circumstances will opt for Choice #3.  So here are some tips for making a smart purchase, and getting yourself financially to a point that this doesn’t hurt your ultimate bottom line much, if at all:

1. Buy pre-owned, not brand new.  The beauty of buying a car that is two or three years old is that you can save a higher percentage off the new model’s sticker price than has been spent in terms of the pre-owned car’s expected lifespan. Yes of course, I will explain.

For example, say you’re after a Toyota Corolla.  Not sexy, true, but usually super reliable. A brand new one typically goes for about $23,000, as per my research, but an average of the half-dozen or so appropriate pre-owned Corollas I found was about $14,000. The latter refers to a 2015 model or newer, less than 40,000 miles, and an average of no more than 15,000 miles per 12 months of the car’s life since it was originally bought new (I recommend 12,000 miles).  Most auto-buying websites list not only the year of the car, but info such as when the car was originally bought, month and year.  If you don’t have that information, a CarFax report – free for the asking from dealers – will show it.

OK, so $14,000 is about 61% of the car’s new price today (another way of stating this is the pre-owned car is discounted 39% from new), but 40K miles is only about 20% of the very reasonable expected lifespan (if maintained properly) of 200,000 miles.  That difference (19% in this example) is value for you.  Let the person who originally bought the car absorb that excessive depreciation.  KBB.com indicates a new car loses an estimated 20%-25% of its value as soon the buyers leaves the lot with it.

2. Get pre-qualified for a loan BEFORE you go see and drive cars. You have a lot more leverage knowing what you can pay ahead of time. But don’t qualify for the maximum your credit and other circumstances allow.  Be content to buy a little under your means, so that you have a comfort level with the payment and also have the option to pad the minimum required payments if you wish in order to reduce the principal balance faster and pay off the loan sooner.

Speaking of paying it off, do not apply or sign for a loan of more than five years (60 months).  It’s silly to pay for six or seven years on a car that, in great likelihood, you won’t have or want to retain before the end of the term. Plus, of course, you will pay more interest over the longer the term if you make just the minimum payments.  (Take note, however, that if the interest rate is identical on a six-year term vs. five years, which it frequently is, and you KNOW you have the discipline and willingness to pay at least 10% extra every month, it makes sense to go ahead and get the 72 months.  But ONLY if the above is accurate for you and your circumstances)

With the above said, it is generally best to go with the shortest loan term you can afford considering the aforementioned “padding” and comfort level for the required minimum payment.

3. Know the Kelley Blue Book (or comparable) values of your target car before you head to the lot.  It is important that you make your buying decision based on the total price of the car, and NOT based on the monthly payment.  Auto sales reps make a good living showing prospective customers how they can actually afford the car of their dreams (translation:  a car they really have no business buying) with the loan stretched out far enough.

With that in mind, know what your target car is worth and should sell for, allowing for a modest profit for the dealership – a good rule of thumb is no more than 10% above private party value.  Don’t be concerned with dealer retail or average price of similar cars sold in the area.  You can do better if you’re willing to work at it a little (see No. 4).

Lastly, it’s obvious that you must test drive your car of choice.  But when you do, really put it through its paces.  Ask the salesperson to direct you to a quiet side street and try an abrupt stop to test brakes, complete a sharp u-turn to test radius, and do a three-point turn to assure the transmission’s smooth functionality going from drive to reverse and vice-versa.  Ask for a certificate from the dealership guaranteeing all buttons, switches, lights, etc. are in good working order.  If that isn’t available, personally inspect and test everything.

4.  No-haggle pricing is NOT to your benefit.  Have your info, and stick to your guns while being reasonable.  Many car dealers are advertising no-haggle pricing in an attempt to cater to those who find the car-buying process stressful or even distasteful.  This is nonsense.  Haggling is to your benefit.  Arrive at what you’re willing to pay for the car based on the above parameters… and don’t buckle when the salesperson tells you their price is, “the best we’re going to be able to do I’m afraid.”  I can practically guarantee you that if you’re reasonable in what you’re willing to pay, and you’re willing to leave the lot if you don’t get close to what you’re requesting, the deal will get done to your satisfaction. The dealership wants and needs your business a lot more than the few hundred extra dollars they appear to be unwilling to discount for you.

5.  Make your car payments automatic through your bank’s online bill-pay. Set it to make the payment each month 3-5 days before it is due, and forget it.  And preferably, add at least $25 or 10% – whichever is greater – to the minimum payment when you set up the automatic payments.  You’re unlikely to feel the extra out-go in your monthly budget, and yet you could knock six months, a year, or more off the loan term.

There’s a lot to consider when buying a car, especially if you’re willing (and qualified) to make a long-term commitment by borrowing funds. Use the above as a basic guide, and you will undoubtedly come away pleased, while having not fallen into the trap of over-paying.

Once again, thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Seven steps for successfully beating the credit card companies at their own game

By BOB CUNNINGHAM

There are many folks out there who believe the credit card companies (more specifically, banks and other institutions which offer credit cards) are evil entities, with no other earthly purpose than to suck as much money from unsuspecting card holders as is inhumanly possible.

Yeah, that’s pretty much it. Who else would have you pay more than $17,000 for a $5,000 loan by essentially tricking you into paying a smaller monthly (minimum) payment when you could easily afford more in order to pay less interest?

But I’m not really down on these financial firms.  The folks at Bank of America, Capital One, Chase, and Wells Fargo… at Visa, Mastercard, and Discover are like virtually all businesses out there.  They want to make a profit in order to grow their business to, in turn, make more profit.  It’s an American mindset that has worked well for a lot of folks, and allowed a lot of other folks to obtain gainful employment.

Still, trying to learn the subtleties of how credit cards work – what you can be charged for, how much interest you pay if you run a balance, and how best to take advantage of the myriad of offers for new accounts – is a daunting task, especially for younger adults and families trying to navigate their way out of too much month at the end of the money.

So with that in mind, here are seven steps for the personal finance newbie to consider that will allow for befriending the credit card companies and coming out ahead of them in their own arena.

1) Start off by obtaining one new card with a small line of credit in order to begin establishing a credit history.  Even if you’re fresh out of high school and have never had your own credit card of any kind, it’s fairly easy to obtain one if you have a job. And if you do encounter difficulties getting a traditional card, contact a company like Premier Bank that will allow you to pay into a card account in advance, then charge off your established balance.

2) With your new card, go ahead and make one or more SMALL purchases, adding up to no more than $200, and start paying it off with monthly payments.  The purchase doesn’t have to be something separate, and certainly doesn’t need to be anything you wouldn’t otherwise buy.  Use your card for gas and groceries a few times, for instance.  When you have roughly $200 charged, plan to make four monthly payments of about $50.

By doing this, you are establishing a credit history.  In four months, the account will be paid off (do NOT charge anything else during the period you’re making the monthly payments).  And you will start receiving offers for more credit, from other companies with higher credit limits, including perhaps an offer or two of 0% APR promotional rates.

The cost for this exercise in credit-building?  About $14, based on the average newbie interest rate of 21% (according to BankRate.com).  So if you pay off your $200 in four months – or, one third of a year – the full-year interest you would pay would be $42, divided by three = $14.  Fourteen bucks is a small price to pay when you consider all the benefits you will ultimately reap from a quickly-established positive credit history.

I should point out that stretching the $200 purchase into four payments is a much better and more effective way to establish credit than paying off the whole $200 during the first month.  Why is this?  Because the credit card companies want you to carry a balance.  They make a lot more money if you have a monthly balance owed, and they prefer you pay the minimum payment – a practice we will never, ever do during our life of savvy money and credit management.

3) If you’re offered a 0% APR promotional rate card, it’s okay to accept it but be 100% sure you understand all the terms.  Some cards simply want to acquire you as a long-term customer in the hopes you will buy stuff after the 0% intro period expires and end up owing interest.  This is fine, because you will learn the discipline and strategies to avoid that scenario.

There are other companies, however, that will try to small-print you past an annual fee of as much as $69… just to be an account holder.  Note this here and now:  NEVER PAY AN ANNUAL FEE ON A CREDIT CARD ACCOUNT.  If a company says it will charge you, tell them you’ll cancel the account and go elsewhere.  Simple as that.

4) Determine the length of the promo period on your new 0% card, decide a comfortable amount you’re willing to dedicate per month to pay off a purchase before that period expires, and pull the trigger.  Any time you can use OPM (Other People’s Money) to buy or invest without paying a fee or interest to do so, the only decision you need to make is whether you should make the purchase at all, because the method of payment has been intelligently determined.

For instance, let’s say the promo period is six months, there is no annual fee, and you are comfortable spending $50 per month for this purchase.  That means you can spend $250 – not $300, because we generally prefer to pay off the purchase a month or so before the expiration of the promo period.  This is simply a buffer to allow for unforeseen circumstances that might interfere with this payment.  Make the buy, pay $50 a month on it (always pay the monthly payment a few days before the minimum payment is due, and use online banking to establish the payment in advance so it becomes automatic), and have it paid by the end of Month 5 of the six-month promo period.

The idea behind this is two-fold.  First, you’re continuing to establish a better credit history.  Secondly, you’re learning the basics for OPM use that, down the road, can be done on a much larger scale with the purchase of asset-bolstering investments rather than a new gizmo or blouse and matching skirt.

5) Request credit limit increases on both of the first two cards you have obtained and used.  This can be done on-line at the card issuer’s website, or by phone to a toll-free customer service numbers.  You’re not interested in buying more stuff or more expensive stuff – that’s wrong-headed.  Instead, what you want is to maximize the available credit in your name but not utilize it.  That’s a key factor in establishing a great credit history that will allow you to qualify for the best-available financing on your first home, and/or maybe a car (although there are better ways to buy a car).

6) Seek out one or two more credit cards, focusing on those that offer cash-back rewards, but don’t get carried away.  Applying for credit means credit history inquiries, which are a temporary hit to your credit score, so they should be kept to a minimum.  That said, the small score deduction you will endure in the short run will be more than offset – fairly quickly – by having more available credit in your name, and the pay-off can add up fast if you’re able to acquire a card or two with meaningful cash-back rewards.

There are cards on the market currently offering quarterly cash-back of as much as 5% on certain types of purchases.  For instance, as I write this in August of 2017, the Chase Freedom card is offering 5% back at restaurants and movie theaters.  Others offer a flat rate of cash back on all purchases.

7) Use the cash-back card(s) smartly to maximize your benefit. This is very important, so please note:  Do NOT start buying things you don’t need, can’t afford, or wouldn’t buy were it not for the card and its associated perks.  If you typically go out to dinner once a week, for example, don’t start going six times a week.  But for that typical date-night dining, use the card with the 5% back on restaurants, and be sure to pay the entire balance off before the next minimum payment is due.

Look, we are no longer trying to establish credit.  You’ve achieved that already.  Now our focus is to take advantage of the available rewards without paying for the privilege in the form of interest.  DO NOT carry a balance!

Follow these steps, in order, and you will be a happy carrier of multiple cards, boaster of an impressive credit history, and will have paid a grand total of about $14 in the first four months for the accomplishments.  Pretty shrewd, dude!

Thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.