Could You Live Without Your Credit Card?
An article posted by CBC entitled ‘Household debt loads inch higher: StatsCan’ poses the serious question – how many of us live beyond our financial means? The art of saving before spending has been lost upon previous generations, despite the ongoing success of financial writers such as Gail Vaz-Oxlade, Suze Orman, and Dave Ramsey who tell us that the only way not to stress yourself financially is to practice this art of saving.
It surprises me that, especially given the recession we experienced and especially watched in the US, people still don’t care if they can’t pay off their credit card (or cards, as it usually is) at the end of the month. I knew a girl who told me, ‘Why would I pay off the whole thing if all they tell me I need to pay is $15?’ I am still baffled at this lack of education in terms of finances. I admit completely that I am no innocent in this; budgeting was hardly passed on as a mandatory skill through my formative years at home & school. Honestly, it was only after marrying Andy that I really started to learn how to save. Living pay cheque to pay cheque, even if your income is more than your expenses, is completely and utterly contrary to good stewardship.
Too often our money, how much we have, and how much we give in to instant gratification is what gives shape to our lives. Instead of money helping us to live, we live for money. Instead of us ruling our money, our money rules us. I highly doubt that any of us do this intentionally. However, I would say most of us do this out of ignorance or negligence. I am happy to say both of which are curable (especially happy for me!).
Currently Andy and I are using Dave Ramsey’s audio cds to help us refine our budgeting skills, and they’ve been very good (the exception being the American-based references that are not applicable in Canada). Gail also highly recommends this action: first step, cut up your credit cards. You. Don’t. Need. Them. If you do, then you’re living outside of your budget. Cash in hand will always speak louder than O.A.C. (On Approved Credit). This is definitely one area we’ve struggles with. Questions always seem to arise: ‘How will I pay for groceries?’ ‘What about purchases I can only make online?’ ‘Do you realise how many air miles I’ll lose out on if I get rid of my cards?!’ Honestly, it really comes down to this: if it is making me sin, I must lose it. Groceries: we now use cash. Online purchases: find a local dealer. Question whether you truly need it. Last resort – pre-paid credit cards (though we’re still working through this step). Loyalty points: get. over. it. We’ve weighed it on a scale: debt or loyalty points? money ruling us or loyalty points? I do believe there is a time and a place for credit cards (they are not evil. they are not the devil), but we need to master the art of learning how to manage our finances before we place ourselves in disaster’s path. I speak from experience; while in the States the only way I could get a credit rating (so that I could get a phone, not have to pay extra fees on items, etc) was to get a credit card. Catch – I had to pay a $100 fee and my limit was $200. In order to manage things, I felt it wasn’t enough, so I got another credit card, approved limit of $300. After 6 or 9 months I applied for another one, this time I had an approved limit of $1000 (which was finally enough to get a flight home). However, I didn’t stop using the other two in favour of the one. Pretty soon the pay cheques were going almost directly to paying off the credit cards. I never felt like I had money. I never felt like I could work towards something. I did feel constricted. I did feel opportunities fly by when all I had to work with in terms of money was a credit card (or fake money, really).
Things can change. Things have changed. The art of saving, while always being refined, has helped to change our approach to life. It’s easier to say no. It’s easier to recognise when my desire for instant gratification (ie. shoes, purse, clothes…those are definitely my downfalls, along with home decorating items) is calling out of me. It is hard to say no. But it is an option. Andy and I are choosing the way we go about purchasing a house (basically how can we best be stewards of our money). We will not purchase a house with less than a 20% down payment. We will not have a mortgage longer than 15 or 20 years so that we can then put that money towards future education of our children. Currently that means our price range is $150,000 (read: out in the boonies or rent). Despite the fact that I am sick of renting and that I want a permanent, stable place to raise my family, the option that we are choosing is to rent and save over mortgaging long term and under 20% which would mean an unstable financial situation (which is much worse environment to raise my family).
Choices. We have the option to make ourselves better. We have resources to help us make better decisions (read: library). What strategies are you using to be stable financially? Where do you want to be in 20 years, and how will you get there?
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His make-shift pillow (what a cutie!)
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Our second-last outing with the Iversons (so sad!)
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Enjoying the breeze by the river!
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Elizabeth helping walk
9 Comments
Jenn
Excellent post Jane. Saving is one area I sure struggle with. Fair play to you for applying yourself and learning how to make better choices. I’ll be looking up your links and start working towards that myself. Thanks for inspiring!
Uncle Kevin
Glad you are getting some use out of those Dave Ramsey CDs. We swear by the program, but admittedly success will come down to exercising will power.
While credit cards are not evil, what situation they can bring you to IS. A challenge yes… but cutting up those cards is your first physical statement saying you can do without them, it is empowering to prove yourself in this regard. Debit cards, only use them if you must (very few places don’t take cash).
Spending cash is harder than with plastic, somehow we feel more attached to our cash than our deferred credit obligations, you will find yourself less willing to spend with cash.
I wish you and Andy all the best as you continue to work through family finances.
Adam
Very interesting points. I do agree that it is much harder to spend cash than plastic. I also agree that the “art of saving” has been lost, but I would only say in the 2 generations. Our parents generation seems to have a pretty good grip on it.
I do have a little issue with the mortgage section though. I don’t agree that rent is the better action over buying in most situations. The average person will start paying more in rent after 2-4 years in the same place (http://www.nytimes.com/interactive/business/buy-rent-calculator.html). Unless you can make 20% in 2-4 years, while paying rent, you’d be losing out big time. The biggest thing about buying a house is that you are essentially paying into your own pocket. Its a relatively safe, low risk, long term investment. You will probably pay what would be 20% down on a house in just rent way before you actually save up the 20% you want to have to buy a house. Even if interest rates do go up, your still paying a similar rate you would be paying rent, with the exception that you are actually paying a portion of that back into your own pocket as equity in your house.
For an example, I’ll use us. We only put 5% down. We pay less than you per month than what you pay in rent now. Because we are on the advanced payment option, we only have 20.8 years left on a 25 year mortgage, AFTER ONLY 1 YEAR!!!! We have also almost paid enough into our equity of our house in the 1 year we have lived here to cover the amount we put down on the house. So essentially, we are coming out even in upfront investment in about 1.5 year. I would highly recommend doing the math on what the cost of rent compared to the return on investment buying would give you. If you just look at what you have paid in rent approx. over the past 2.5 years you have been living in Ottawa, your looking at somewhere in the range equal to a 20% down payment on a $170,000 house, of which none of it you will see because you paid it into someone else’s pocket. Rent is good for the short term. Or as I have said before, rent until you can find something to buy, but look quickly.
Darryl
I use my credit card all the time, but my own personal rule is to pay it off every month. For me, it’s cheaper than using Interac (no transaction fees), and I get Avion points for things like flights to Ottawa. 🙂
So it’s more of a convenience thing for me. I couldn’t imagine carrying a balance and paying the crazy-high interest on it.
Sherry
We bought our house with only 5% down payment, because our mortgage payment is cheaper than what we were paying for rent and our landlord wanted to raise our rent ALOT! (read 75%)
I can’t live without my credit card because I am on the road everyday, and there are still places that don’t take debit. I won’t carry much cash because of the risks already inherent in my job. ( Transporting bank material, etc). And if I ever misplace a receipt for tax purposes, I still have my credit card statement as proof of purchase. However, we pay it off every month. We also got a card that gives us points towards free food, so it is a useful loyalty system. You always need food!!
Uncle Kevin
Housing is a cost of living period.
I would never recommend buying a house as an investment unless your happy with an average return of 4%. (even the S&P500 averages 7.5%) True, owning a house may mean that you are building equity, but you do so accepting the risk that… OMG I have to say it… your house will lose value….
While many in the US are facing foreclosure (mostly for not understanding what they were being sold), it fed the perfect storm of economic disaster when the housing crisis affected the economy so much it killed their job.
No job, no house times 30 million…. you get the picture. Needless to say, the demand for rental properties hasn’t been so high in decades.
As for credit cards, even if you are disciplined enough to pay off every month someone is paying for the rewards. The credit card companies do an amazing job selling us their product, using your money to do it (charges that they force on retailers per transaction are hidden in the retail price).
If you pay with cash, if I were a betting man I’d wage you would spend less and save more . How about an emergency fund???? or are you using a credit card for that too? What would you do in the event of a real emergency homeowner? parent? driver? ….
Really I do mean well when I say WAKE UP!
Uncle Kevin
This just in….
Average changes in the Canadian housing price 2008-2010
http://www.cbc.ca/news/story/2008/11/14/f-realestatemap.html
Click the red icon in the map (did I say I love maps 😉 )
Sherry
In the case of a real emergency (when we bought our new car, when our dishwasher broke and leaked water all over the floor in the middle of the night, etc), we used the savings accounts that were set up specifically for these purposes. As well as we just paid cash for the $700 repair bill on the old car. Some people can AND do use credit responsibly.
With us, it is mostly a safety measure for me, as people have tried to rob me before because of the things I transport for my job. It is also a nice backup for tax reasons.
Sharon
I have to agree with Adam about the mortgage stuff – this is something I simply dont see eye to eye with Dave Ramsey about. This is our third house and the first one we have put 20% down on. Our first place cost very little (it needed a lot of work!) and we only had 10% down. We bought it because the mortgage per month was *half* the cost of renting an apartment. We put $10,000 into it and sold it for double what we paid for it. So not only did we save the rent money, but we were able to move up the property ladder. We only buy places that we know will appreciate in value if we put a little work in. However, if the market at the time had dropped out from under us, we would not have sold and would have just lived there, happily paying less than rent. Was there some risk involved? Yes, but I simply cannot pad a landlords pockets when I know I could be paying myself instead.
We also use our credit card for everything, but I understand why Ramsey warns against it. Different strokes for different folks 🙂
I think the biggest solution to debt is that once you wipe alll of our debt out, start *saving*. We have an emergency fund, a travel fund, a fund for car repairs, a fund for Carolyns stuff, etc. which means that we are never tempted to use credit when an emergency happens. I hate saving, but I make myself do it. It has saved us more than a few times.