Welcome back to the second of the most anticipated series of all time, HANDY ANDY’S LESSONS! In the first episode of Handy Andy’s Lessons we talked about starting a dividend portfolio but now we’re here with a personal finance subject – how to save money WITH credit cards!
I know it might seem completely backwards that I am saying that you can make money with credit cards, but it’s not. Obviously, credit cards are a very dangerous thing just in general if you don’t have your mind right and focused on personal finance.
I personally struggled with if I even wanted to write this, because the last thing that I want to do is have someone that isn’t disciplined to go out and get a credit card, but I think that the lessons are too great for me to not share. So please, just make sure that you’re very responsible with your money and you’re not going to just open up a card and get yourself in debt.
Just because you put a charge on a little piece of plastic doesn’t mean that it’s free. You still owe that money and you absolutely have to account for it in your budget.
If you’re going, “budget? I don’t have a budget” then you need to stop right now and get the Doctor Budget tool. It will pay for itself a hundred times over, guaranteed.
I can tell you for a fact that you can use credit cards to your advantage in two major ways to save money, so why delay anymore?
You might’ve heard about these before but never really understood exactly how they work, so let’s break it down. Essentially a balance transfer is when a credit card company goes, “Hey Andy, you still have some room on this credit card – do you want us to loan you some money while you go buy those awesome things that you’ve been wanting?”
And then I go, “Sure, credit card company, I’ll take your loan, but instead of buying new things, I am going to pay off my debt!”
So why does this actually work?
Well, I have found that the best time to do this is when your credit card company is running a promotion for 0% APR on balance transfers. I know that they do this because I did it in my own personal finance journey.
When my wife and I were getting married, we had some wedding debt on a credit card and we were offered a chance to transfer it all over for 0% interest for 12 months. Of course, the credit card company wanted to make some money so we were required to pay a 3% fee off the top but that was it for twelve months, compared to the current situation where we were paying 22%.
Now, I don’t exactly remember the details, but I am going to use some round numbers to show the math and how this can really workout in your favor:
- Current Situation
- You have $10,000 on a credit card
- Interest Rate is 22%
- You can afford payments of $500/month
In this current situation, you can see from the screenshot below that it would take you just over 25 months to pay off this debt:
Before I get into the situation of the balance transfer, I just want to say that Excel is such an awesome tool and if you don’t know how to use it very well, checkout some YouTube videos on excel to try to learn. The types of things that you can do are endless and that absolutely will make your life easier – guaranteed.
Ok, sorry, I just geek out about Excel.
So, in the balance transfer scenario, there are really two different periods of time. The first period is where you’re going to pay for the 3% transfer fee, which is $300 on a $10,000 balance, and then have no interest for a year. This time period is shown below, also in Excel ?
As you can see, your balance will spike, but then it will drastically decrease at a very rapid rate because you’re not paying interest that entire year, so 100% of your $500 monthly payment is going to the principal – that’s pretty dang good.
The second time period is where you’re going to pay interest again (assuming 22%) until the balance is paid off, shown below:
So, you can likely do the math pretty simply now…the first example took 25.14 months and the second example only took 21.44 months…that’s a big savings! But how big?
In the current example, you would’ve paid well over $1500 more than the proposed example!
And before you ask, yes, I did include the $300 transfer fee in the Balance Transfer option and it was still that much better than the alternative.
As with investing, we always talk about the importance of doing the research yourself and making sure that you really understand exactly what is going on. You see, personal finance is just that – personal. If you don’t know the numbers then it’s on you, and only you, and maybe your unlucky family.
It’s imperative to know what you’re getting yourself into and also know your limitations. As I started this article, this isn’t very complex by any means, but if you’re not super focused and dedicated to get out of debt then this might simply just open up one more way for you to max out another credit card and make things way worse than they were initially.
But if you are focused and motivated, then you can do this really as often as the credit card company will keep giving you promotions to do so. Earlier this week I went and looked to see if I had a promotion to do this and I didn’t – I guess I taught them a lesson that I’m actually a responsible credit card user. SORRY!
But like I said, if you don’t know how to do the math yourself, then you’re never going to really be able to take control of your finances and grab the bull by the horns.
So, before we go too much farther, I want to teach you how to do this formula to calculate this yourself. Normally I would just provide a calculator, but I want to teach a man to fish today!
All that you need to know are 4 pieces of information – the outstanding balance, the interest rate, your monthly payment and then the frequency of compounding (it’s almost always once/month, so this would mean 12). Then you simply use the NPER function, or Number of Periods, and look at my formula below:
I simply take the function and then do this: (Interest Rate/Compounding Periods per Year, Monthly Payment, – Loan Amount).
You need to do the negative loan amount because it’s a debt! Then, the rest will calculate on its own. If you want to take it one step further, simply take the Months to Pay Off and multiply it by the Monthly Payment to see what you will have to pay:
By adding that very simple step, and then taking the difference of that Amount I Will Pay and the Balance of $10,000, I can see that I will pay $2,570.89 in interest. Then I can play around with the Monthly Payment to see how things change!
Dropping by $50 to $450/month is going to cost me nearly $3K in interest, or about $400 more! Ouch!
On the contrary, if I were to increase my payments by $100 up to $600/month, then I would pay the loan off nearly 5 months faster!
Not only do I save the $400 or so in interest, but now I can take that extra 5 months of no credit card payment and apply it to something else…like maybe finding some Dividend Aristocrats of the Future.
This is simply the mindset that I hope you have, or challenge yourself to have, to really get ahead on your personal finance journey. These are the types of thought processes that will set you up for amazing success.
Ok, we’re finally off to #2 believe it or not!
Credit Card Rewards
I know, I know – this likely seems obvious. Of course, we get rewards on our credit card, and of course we should use a card that gives us the best rewards possible, but this is more than that.
What do you do when you get your rewards? Do you just blow them on something stupid or do you actually put them to use?
I have three strategies that I like to use with my credit card rewards, in reverse order:
3 – Don’t touch them and hold onto them as a savings account for Vacation
I know that cash is king, so keeping money out here isn’t the best use of funds, but I also get this weird feeling about having this little safety net. It’s not really my money, so seeing it stack up and then using it feels really, really good. It’s like a reward for paying off my card in time.
Of course, one or two missed payments can wipe out a year of rewards, so never open a credit card just for the rewards unless you’re very responsible with your money.
But if there’s a household where both family members make $50K/year after taxes, and they have an awesome savings rate (just keep it out of a savings account!) of 50%, meaning that they spend $50K/year, and let’s assume that half of that is fixed and the other half is a variable expense meaning it changes month to month. That means they have $25K on annual expenses that might go on a credit card.
I know some cards will offer up to 2% cash back, meaning $500 in free money on rewards! Yeah, that won’t get you a vacation, but that might be a plane ticket, or an excursion on your trip at a resort, or maybe an extra night or two, or that extra fancy dinner and show you wanted to. It’s free money that can take your trip over the top!
2 – Use it for Christmas Presents
I always did this when I was in college because this was just the only way that I could afford them honestly. By saving this money until the end of the year, I would then by my Christmas presents like normal and then use the cash back, therefore making me net back to normal after Christmas.
Honestly, since I usually got cash and gift cards for Christmas, it was almost like a double win because I didn’t have any extra expenses since I was banking on these rewards as well.
All it was is a little bit of planning and then focus to not touch that money. I knew that if I touched that money, it was going to mean that come December, I likely would be struggling a lot and would have to pick between going out and doing fun things with my friends when I was back home and then buying my family Christmas gifts, and that wasn’t a choice that I wanted to make, so instead I planned for it.
Simple concept, really.
3 – Look for promos!
Find something that you are going to spend normally and then look for a promo. For instance, Chase frequently offers discounted gift cards on their website.
Last year, I was going to need to buy a lawn mower because we just moved from an apartment in Chicago to a house in Ohio, and I was going to get it at Lowe’s. I waited until it was on sale, then used a 10% off coupon that I bought from Amazon, and then used these gift cards that I earned with my rewards.
So, a $400 mower turned into this:
- On sale for $350
- 10% off coupon from Amazon that cost me $2 or so
- Used $300 of Cash Back Rewards that I got for 10% off, so it only cost me $270 in rewards
So, again, by planning I saved $50 on the sale, $35 with my coupon and then I saved another $30 by using the on-sale gift cards, and even those are debatably free money! It was quite the win.
The points with Chase are 100 points = $1, so you can see the on-sale items below:
They’re all basically 10% off or so, but simply by me looking at these first, I can take even more advantage than I might be able to normally, and these are just very few amounts of the sales!
Have you noticed that planning is really the key takeaway here? That’s all it is. Personal finance is nothing more than planning and if you fail to plan, you plan to fail.
Don’t be that person.