Why a Zero Credit Card Balance Can Be Misleading

Yes, you read that correctly, zero credit card balances can be very misleading.

I’m not saying that carrying a credit card balance is a good thing. What I am saying is the convenience of whipping out plastic to pay for things is a MAJOR impediment to your financial success!

If you are one of the vast majority of people with an inadequate amount of personal saving you can probably blame credit and debit cards for allowing you to make thousands of impulsive purchases that have robbed you of serious potential wealth.

We are where we are today because of the decisions we have made in our life. Some of those decisions are large and life altering (marriage, home, job, etc.) while most are very small (what we spend money on every day), but have a cumulative effect.  For example, paying for everyday items with a credit card may be a sneaky impediment to you accomplishing your financial goals. Most of my clients pay off their credit card balance every month and feel quite proud about it.  I hear it all the time: “Sure, we charge things all the time, but, we pay the bill off every month”.

Does this sound like you?

How could this be a bad thing?

The reason is quite simple: People (you?) that use credit or debit cards tend to buy more “stuff” then they would otherwise if they actually spent cash.  These are not usually large expenses, but many little ones that add up to hundreds or even thousands of dollars per month.  For almost everyone under the age of 60 (most 60+ year old’s are more frugal and this does not apply), if they looked closely at their monthly credit card bills from last year,  would hard pressed to remember what they bought with a lot of that money.  How many times did you buy something because you saw it was “on sale” when you had no intention of buying that when you walked into the store? One reason you buy it, is because you know you card use your plastic card and afford to pay off the bill at then end of the month.

Imagine if your credit card limit was only $500 per month.

Would you think twice before you whipped out the card? Of course you would.

What if instead of using plastic you spent cash on everything and could only use a fixed monthly allowance?

My point is that many of the items we purchase with a credit card provide little marginal value in our lives and we would not purchase them if we had to fork over cash to buy them.  With my typical client, I find that if they generally have a $2,000 monthly credit card bill, at least $500 of that bill was used for marginal purchases.  As a financial planner, I want to help people recapture those marginal credit card purchases and reallocate that money toward high priority goals.

Take a look at your credit card bill. Now imagine you had lost you job last month and income was super tight or that you were trying to make your saving pay for your expenses until you found a new job. If money was that tight, how many of the credit or debit card charges would you have made last month?  Men are as guilty of overspending as women and I’m guilty too. I just bought a new $99 fishing reeling for my upcoming Canada fishing trip. Hard to say “I needed it” as I already have 4 reels, but I justified it because I needed a dedicated reel to go with the unique fishing line I had put on it. I never would have bought this if I was tight on income. What if I took that $100 and the money I spent on most marginal purposes and invested it instead?

I’m considering most of those unnecessary purchases. Now add them all up and do that from the last few months to get an average.  Imagine if you were able to cut that number in half and save or invest the other half.  Like I said earlier, I’m guessing that for many people that amount is from $200- $2,000 per month!

For those that can’t be convinced to use cash, but would rather keep using credit cards here are a few ideas that might help:
1.    Stay out of stores – don’t shop as a way of using free time
2.    Shop with a list – I learned from watching my mother prepare her grocery list based on the family meal plan for the week.
3.    Minimize drink orders – Drinking water with dinner is healthy and saves a bundle over time. Try asking your kids to pay for their own drinks at a restaurant and watch how little real value they place on their drink order.
4.    Don’t buy online the first time you see something you like.  Make yourself wait a day or so to avoid impulsive buying.

WHY BOTHER DOING ANY OF THESE THINGS?

Most people do not have nearly enough money saved for retirement!
$1 million is not enough.

Low interest rates are killing retiree’s monthly income.  Ask any senior what happened to their lifestyle and many will say “I don’t make any money on my CD’s any more”.  One million dollars invested in a 1.5% CD generates $15,000 per year before tax and that equates to only $1,250 per month!  Not much to live on in today’s world. Maybe this knowledge will motivate you to spend less and save a little more.
How much are you on pace to have at retirement?  If it’s not a crooked number in front of six zeros you may be working a lot longer than you had planned.

Even if you are not worried about retirement savings, there are probably many things you would gain more satisfaction from then most of your impulse buys.

30 Day Challenge

Try leaving the credit and debit card behind for the next 30 days and see how it changes your spending. 

I guarantee the money you don’t spend will far exceed the value of any credit card bonus/miles points you may have earned over that time. Report back to me on your results if you don’t mind.

How to Grow Wealth With Your Spare Change! Acorns!

10 Seriously Easy Ways to Save Money Each Month

Good Luck & let me know if you would like some help with your spending/saving program.

Managing your monthly cash flow is the single most important determinant of your financial success or failure.

Fortune Financial Group Website