Sunday, December 23, 2007

A Christmas present from me to you!

Alright, it's Christmas time, and we all know it means family, friends, good food, gifts...and long lines, bumper to bumper traffic, and more likely than not, some holiday debt. Okay, for a lot of people, A LOT of credit card debt. And that means more interest payments, and more chances to be late or miss one payment, and have the interest rates on all your cards jacked sky high.

So, what can you do about it? A few simple things. First, an attitude change. STOP buying on credit, unless you know for sure you can pay the balance off, or have the money in your account, that you can have payments auto drafted from your checking account each month (be careful of bounced check/insufficient funds fees as well). Credit has it's place, but not as a means to satisfy the "I gotta have it now" mentality. I talk to people all the time who want to find a great investment that will give them huge returns, so they can retire later in life. Know what I tell them? Look at your credit card statement. What interest rate are you paying? That's your investment right there. But wait a minute, you say, how can what I am paying, be an investment? If you weren't paying that interest to a credit company, who would have that money? You would still be in your pocket. If you have an 18% interest rate, SOMEBODY is getting a pretty good return on their investment (their loan to you), but it isn't you.

Let's pretend you have a small balance of $1000 because you found a great deal on an HD LCD big screen tv, and it is the first purchase on a brand new credit card card (assuming you make no further purchases on that card after the tv). At 18% interest, with a minimum payment of $25, it would take you 60 monthly payments to pay it off...and you would have paid a total of $1500...that's right, you paid $500 in interest, half the cost of the tv to begin with. If you had saved $25 a month, it would have taken you 40 months, just over 3 years, to save enough to buy it. Seems like a long time to save (which it is), but you also save the $500 to begin with. Now, after the 40 months, you keep putting that $25 a month you were saving into an investment fund (say a money market account - MMA) for the last 20 months you would have been paying on it if you bought it on credit. There are currently some MMA's paying you 5% interest, and you need as little as $1 to open it. If you continued to make that monthly $25 payment, but put it in your investment instead, you would make about $60. After that, if you never put another payment in that account, but let it sit there and grow, in 20 years, you will have just shy of $1500. Granted, this is a simple example, with a low dollar amount, but it helps to prove my point...if you don't have to pay the interest on a credit card, you've just saved and made yourself a nice little return on your money, by simply keeping it in your wallet. SAVING MONEY IS MAKING MONEY!!

Another simple thing you can do to save around Christmas time is to save before Christmas time. Banks and credit unions have Christmas Club programs, or you could simply put money aside into your own account (like the money market accounts mentioned above), for next year. By only buying in cash, and saving for it ahead of time, you'll keep more in your wallet. If you spend $1000 on Christmas gifts, that's only saving $100 a month, from January to October. Put it in a MMA at 5%, and you would actually have about $1075 to spend. Put it on credit cards, and in order to pay it off in 10 months, you'll pay $108 a month, for a total of $1080. But it really cost you $155 extra, between the interest paid and the lost interest you could have earned, so we could say the true cost of putting it on your credit card would be $1155. SAVING MONEY IS MAKING MONEY!!

Finally, you can try something my wife and I do with our families (this works really well with big families). Draw names. Yep, it's that simple. Put everyone's names in hat, and draw one name per person. That is who you are buying a gift for. Just between our adult siblings and our parents, my wife and I would have 14 people to buy for. Trying to buy a nice gift of somewhat decent value for each of them can get pretty expensive, for EVERYONE involved, even if the gifts are relatively inexpensive (say $20-30 a piece). By picking one name, we eliminate the pressure of having to find and fund all those gifts, and we can spend extra money to find a really nice gift for that one person we are shopping for, and still save a couple hundred dollars. Of course, we still buy small gifts for all the kids, nieces and nephews, and our own spouses, but by not having to buy a gift for all the adults, everyone saves money, and SAVING MONEY IS MAKING MONEY!! (notice a theme, here?)

MERRY CHRISTMAS and happy savings!

1 comment:

Chris said...

interesting, I never thought of the cost of credit cards the way you showed.