Personal Finance Essentials
Smart Credit Card Habits
Credit Cards Are a Useful Tool
Until They Become a $1.2 Trillion National Disaster
Credit cards are useful tools. When a car breaks down during a road trip, you can pay for repairs and overnight lodging. When a family emergency requires a flight across the country, you can book it immediately. The problem is not credit cards – it’s using them to spend money you don’t have and then carrying the balance indefinitely.
Credit Cards Are Not a Substitute for Cash Reserves
Credit cards should complement your emergency fund, not replace it. In a financial crisis, the first thing a bank will do is cancel outstanding lines of credit. If that credit line is what you were counting on, you have a serious problem.
The same applies to home equity lines of credit, which some people treat as a substitute for savings. The critical flaw in that plan is that home equity loans and lines of credit are based on your income, not on the equity in your home. Without current income, you do not qualify. Someone who loses their job and then goes to the bank seeking an increase in their home equity credit line will not only be denied the increase – the bank may cancel the existing line as well. In a crisis, there is no substitute for actual cash.
The True Cost of Credit Card Debt
Under older tax rules, interest paid on credit cards was tax-deductible. That is no longer the case. The elimination of that deduction makes credit card debt more expensive than it once was – and most people don’t feel the difference until they try to pay it off. If you must carry debt, carry significantly less of it than you might have in previous decades.
Mortgage debt is different. A mortgage is the cheapest money you will ever borrow and may still be tax-deductible. No matter what scenario you imagine – job loss, health problems, divorce, unexpected expenses or a struggling economy – you are always better off having cash on hand with a mortgage than having a paid-off home and no cash reserves.
Managing Holiday Spending
Holiday spending catches people off guard every year, even though the holidays arrive at the same time every year. Retailers sell 35% of their entire year’s products between Thanksgiving and New Year’s Day; toy stores rack up 60% of their annual sales in that same window. The commercial pressure is intense, and budgets suffer for it.
The way to manage it is to plan ahead and use cash. Before you shop, make a list of everyone you plan to buy for and write down how much you will spend on each person – not what you plan to buy. Total the list. If the number is more than you’re comfortable with, start cutting. Then go to the bank, withdraw exactly that amount in cash and leave your credit cards at home. When the cash is gone, you are done. If you spent $1,200 on the holidays last year, start saving $100 a month in January. Stop treating the holidays as a surprise.
Wedding Expenses and Financial Reality
Weddings present a similar pattern: people spend far more than they can afford, often borrowing against retirement accounts, taking out home equity loans or charging the entire event to credit cards. Going into debt to pay for a wedding is a difficult way to begin a marriage. Money is consistently cited as one of the leading causes of conflict between couples. The practical solution is to spend what you have and scale down wherever necessary. A meaningful celebration does not have to mean years of repayment.