Call Your Credit Card Companies

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If you are not aware of this you need to be.

Since the global financial markets went into a tailspin last September, credit card companies have taken it upon themselves to cancel your credit cards without discussion or warning.

So, if you have a zero balance, and think you are being so responsible by doing that - and you are - some credit card companies have just decided to cancel those cards.

Why? Well, they have a host of reasons. But whatever they may be, what I want to know is that since for the most part, people work very hard to maintain a good credit record, and work very hard to have access to affordable credit, then 1) why are these companies not required to discuss this matter of cancellation with you and 2) why is there not a process for appeal or review?

Today's Wall Street Journal did a nice short piece on this: Credit Card Issuers: Buy Something Or Else! I submit it is well worth your time to read these few paragraphs.

Now, if you are not concerned, you should be.

Credit cards serve some very useful functions. For example:

• They provide access to funds when you have none - albeit at a price. Hence, you should always have one for emergencies
  
• For many services like a rental car or a hotel room, you must provide a credit card to secure the room and also in the event of incidentals.
  
• Credit cards allow remote purchases via the phone and internet.

So, they are very useful. I just insist that prudent money management necessitates that credit card use must be moderated and managed.

Let's talk a bit about your credit rating. A good credit rating gives you access to credit, and access to lower rates. Did you know that when your credit cards are canceled, your credit rating could be negatively affected? Your credit score is determined by your debt relative to credit available. So when a card is canceled, your available credit falls.

Oh, and by the way, if you are depending on your rewards from any card - zero balances or not - you need to rethink that. Check out CNBC's article today: Credit Card Firms Slash Rewards To Cushion Losses

My two cents? Go call your credit card companies. Decide which cards you want to keep. And then if you must make small purchases regularly to keep those cards that you have zero balances on, you may want to consider doing so to keep your credit lines open. But make sure you don't sacrifice your debt management for it. And as for the 'by the way" with the rewards, I'd use 'em before I lose 'em.

Food For Thought

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A few weeks ago, the Jamaica Gleaner ran an excellent piece in Money Management: You are financially unprepared if....

I have found that some people have great intentions with regard to money management, but have not fully grasped the context of how the various pieces fit together. For example:

• So maybe they go looking for great deals, but charge purchases on credit cards and pay only the minimum until it is paid off. That defeats the purpose of money management.
  

• Others, have a difficult time prioritizing and saving a nest egg, because they see the "now" and not the "what if". That also defeats the purpose of money management

In this piece above stated, the author gives a great job of spelling out where people typically make the big mistakes, and her opinion of what you should do. I would not necessarily advocate every single one of her solutions concurrently, because it really depends on your personal circumstances. However, the basic arguments she makes are very sound.

A worthwhile read!

The Easy Way to Make a Budget

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Remember, money management begins with a realistic assessment of your financial status. See my earlier post here: More Money - The Basics.

It's time to make sure your budget is realistic, and if you don't have a budget then you need to make one.

Budgeting and sticking to the budget is critical to money management. The most successful budget will be the one you make for yourself - only you know what you are realistically willing to do and not do. By all means, get advice. And another opinion of someone you trust is always helpful to give you ideas. But be honest with yourself about your priorities. After all, it is your money that you're spending.

If you are not familiar with budgeting software (are there are tons), start with Microsoft Excel. You are just entering what money comes in and what money goes out - categories and amounts. Excel makes it easy to increase and decrease numbers in each category to see how you can get a better result.

This is a great post I happened upon: How to Make a Budget in 10 Easy Steps

It's a worthwhile read on how to make a budget - easily!

Plan to Take Action in 2009

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I remember watching the opening bell on the first day of trading. Trading is a speculative activity, involving risk with the hope of reward.

And here was perhaps the most famous personal finance expert/author, Suze Orman - someone who counsels about money management, the virtues of saving, the importance of managing debt, and taking risks only when you have evaluated them, understand them and can do so depending on your age and stage in life - doing the honors.

It was a very interesting note to start the year. And to me it signaled that this should be the year of financial literacy, and greater risk/reward determination, and ultimately responsibility.

About Economy
Read the Article at HuffingtonPost

More Money - The Basics

Image via WikipediaTo get you started, there are 3 basic things you need to remember about money management.

1. SAVE, SAVE, SAVE.

No matter what, you HAVE to save; you MUST save. Saving is not - I repeat not - investing. This is saving - take money and deposit it with a regulated financial institution where your deposits are insured (by the FDIC in the US or the JDIC in Jamaica) up to a limit, and where that regulated financial institution will provide interest at a pre-defined interest rate on that deposit over a period of time.

Why is saving the foundation, the key?

• When you save, your money earns interest for you. Now, other than working to earn more or receiving a gift, how else do you get "new money"?
  
• Save more, earn more interest.
  
• Save longer, earn more interest.
  
• Save your interest and your interest earns interest.

Saving is the absolute basic minimum you must do!

What is the best way to save?

Heard of the "Pay yourself first" principle? Before you do anything else, as you get a paycheck or a payment for services rendered, take a portion and save it - don't invest it, save it. It would be best if you could get into a habit and decide on an amount and do it by salary deduction. That way you don't agonize over "should I' or "shouldn't I". Trust me, after a while you won't even miss it and you'll be happy to watch those savings grow every month. Remember this if you remember nothing else.

2. SPEND LESS.

Easier said than done, right? If you are in Jamaica, this sounds impossible given the cost of basic necessities. Well, here are some suggestions:

• Exercise discipline in consumption. Buy what you need, not what you want. Yesterday's post gave you an idea of how that can work.

• Find out all benefits and discounts available to you and use them. Trust me in 5 minutes what you save by using these discounts and benefits can exceed one year of after-tax interest, dollar for dollar. Come back tomorrow for some specific tips on this one because I discovered big savings and small savings here. Regardless, they all add up.

• Take on reducing spending in your utilities as a special project - phone, electricity and water. I've done experiments with those and I'll share them later in the week.

What's the one thing to remember with spending less: When you spend less, you have more money to save which earns interest.

3. MANAGE YOUR DEBT.

This needs some clarity. Not all debt is bad. Debt that is unsustainable is bad. Debt that you cannot afford to service is bad. If the price you pay for being completely debt free is depleting your savings, I would say that is too high a price. So let's think of debt as something you manage.

• First, dollar for dollar interest charges will exceed the after tax interest earned on savings. This means that you are paying out in interest more than you earn in interest. So, if you have debt, the experts advise you to rank them starting with the highest rate and aggressively pay down that one, then the next highest rate etc. Now important: always service all your debts because not only is it the responsible thing to do, if you don't, then you pay penalties and fees, and it's bad for your credit rating. So, when I say "aggressively" pay down debt, it means pay more than the minimum to eliminate it faster.

• Second, really try to minimize using credit cards. Use cash and ABM cards (fee free preferably). If you can wait, save towards the goal to purchase the item. If you can't wait, remember that you are paying more for the item in finance charges. Would you want that item if it were $150 instead of $100? You may have paid $100, but if the charge sits on your card, then you may end up paying more like $150 (depending on interest rate, time to pay etc.).

What's to remember with managing debt: Less debt, lower rates, shorter time periods means less in interest charges which you could have saved to earn interest. Oh, and pay your debt on time to avoid late fees because those add up!

Those are the absolute basics.

For each category - savings, expenditure and debt - there is much more we can discuss. But we'll get into that later.

Now to get you started on your journey, you need to make an assessment of your current financial picture. What do you earn? What do you save? What do you invest? Did you remember saving and investing are different and do you treat them as such? What are your expenses? Can you track every cent you spend every month? If not, start a log and write it down. How much debt do you have? What interest rates are you paying?

Want to know what I did? I have had an Excel workbook for years, and I have different tabs for different categories and its color coded and everything. I know every single dollar that comes in goes out, and have different scenarios for debt, saving and investing.

• That means I track my accumulation of savings and make conscious decisions about when and where to put my money.
• That means that I have an extremely detailed budget and I know all my regular expenses, and make a provision for contingencies
  
• That means before I even use a credit card I know what it is likely to cost me even for one month in interest.
  
• That means before I decide if I should invest, I know the expected return, I evaluate the risk in terms of the market environment and my own personal finance goals. I know where the funds will come from, and I do not sacrifice my savings goals.
  

My model is very straightforward and I know where to find everything, and change parameters for scenario planning. I have projected at least 5 years into the future. And it's very conservative. It works for me. Some people prefer to use software. Find what works for you.

Now assess the picture, do you like what you see? Are you saving? Are you saving enough? Do you know what enough is? Have you figured that out? Are you meeting your expenses? Do you see anywhere you could cut expenses? Have you looked at your monthly interest charges on debt? Did you realize that if you paid even a little more in debt payments you could reduce your interest charges, and therefore the total cost of the debt?

Now, don't worry. If this is all new to you, we can walk though all of this to make it manageable. But the very first place to start is with that picture. If you don't know what is broken, you cannot fix it.

As I said, come back tomorrow for some big and small savings I've discovered through benefits and discounts.

Getting Started - Earn and Save More Money Now

Cover via AmazonWhy reinvent the wheel? There are best selling books on Personal Finance. There are countless websites and blogs. Do a little reading and see what is applicable to your situation.

How did I start?

In the first few days of 2009, I read the best seller "Smart Women Finish Rich" by David Bach (don't worry - the information is generic enough for anyone, and he does have different versions). The book was already in my personal library, I just hadn't read it yet. Given the uncertainties we all face, I figured the time was now right. I would highly recommend the book to to help with thinking about saving vs investing (reminder: they are not the same), and also general money management. There is a lot of information specific to the USA, but the general principles are universal, I think.

Next step - application of principles.

For example, that book inspired me to read another personal finance book - but it was a best seller motivational book not a classic "how to" book. Now, I did not have that book in my library, so I went to buy it. But, here's something key, Bach's book had taught me the importance of discipline in spending (which I will get into in a later post), so although I picked up 10 books in the bookstore, I decided that I did not need them - although I wanted them - and decided to buy only the book I intended to buy when I went to the store. By exercising discipline in my consumption of my favorite impulse items, I saved significantly that day! I had saved money by not spending it and not losing savings interest on that money. What's your favorite impulse item or items? Does this story sound familiar - walk into a store for one thing and buy a ton of other things? Now, am I likely to purchase those books later? Sure. But for the time being I can earn interest on that saved money since I am unlikely to read 10 books at the same time :)

Despite the habitual convenience of using a credit card, I used cash to avoid interest charges. This tip came directly from the book, and in a later post I'll get into how to think about various forms of debt. But the main point is that dollar for dollar, interest rate charges will exceed after tax income on savings. So, as much as you save, your net will be negative if you pay high interest rate charges.

Lesson Learned:

• Learn from the experts and start applying the principles immediately. Make personal finance a lifestyle change
  

• Make a list of needs - not wants - before shopping. Take the list. Try to stick to it. With discipline and habit, foregone consumption can add up to real savings which earns interest.
  

• Make cash or fee-free ABM cards the preferred payment type. Debt reduction and avoidance reduces the amount of your hard earned savings lost to debt service.
  

Check back tomorrow for a summary of basic personal finance principles to get you started on your journey!

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