Tools - Millionaire on the Prairie

Tools vs. Anvils – How to Use Your Credit Card

Credit cards are an exceptionally useful tool if used correctly. However, they can also cause great financial harm when the basic rules of use are ignored.

There are two terms that you should know: deadbeat and revolver. Deadbeats do not carry credit card balances from one month to the next and they reap the benefits of rewards programs. Revolvers are the people who do not pay their credit card bills in full and they have to pay interest and fees.

For the purposes of this post, deadbeats use credit cards as a tool. Revolvers are the people who are carrying the anvils, which are in the shape of credit card debt.

Just in case it needs to be said, banks love revolvers and they really hate deadbeats.

The Tool

Your credit card is a tool if you pay it in full every single month before the balance is due. You can use it throughout the month, happily collecting points (or not) as you spend. When the bill is due, it’s paid in full. This is the only correct way to use credit cards, in my humble opinion. So long as you never pay interest, then I think it’s perfectly fine to use a credit card for all of your purchases.

For my part, I know how much I can spend on my credit card before I pull it out of my wallet. I’ve been tracking my expenses for years. As such, I have a good sense of how much I spend in a given month. It’s around $2,500. As such, I never spend more than this amount on my credit card.

Spending more on my credit card than I earn in one month is a recipe for disaster! Expenses go on my card simply so I can earn points towards free groceries. (If I were coupled, I would use the credit card that earns points towards companion fares. If I could find a free cash-back reward card, then that’s the one I would use on a regular basis.)

There are a myriad of reward cards out there. I don’t really care which one you pick. My advice if the same whether you accumulate travel points, grocery points, free movies, or any-other-benefit-that-works-best-for-your-goals. Pay off the entire amount of your credit card bill every single month.

If you’re never carrying a balance, then I think credit cards are a wonderful tool that should be used with abandon.

My opinion changes drastically if you don’t pay off your credit card every single month.

The Anvil

If you carry a balance from one month to the next, then your credit card is an anvil. It is holding you back from spending your money the way you want to. No one wants to send interest to the bank.

If you are paying interest on your credit card balance, then look at your statement. It will tell you how much extra money you have to pay to cover the interest. So on top of the $100 you spent on your initial purchase, you’ll be spending an extra $9 – $29.99 to pay for your whatever-it-is depending on your credit card’s interest rate. Keep in mind that the interest will continue to compound until you pay the credit card balance in full.

This is how credit cards become an anvil. It’s very, very hard to repay a debt when the interest is over 5%. At double-digit rates, your best bet is to cut up the cards, go cash-only for a year or two, and get a part-time job to pay off the debt.

Get Rid of the Anvil

Cash-only means stopping all subscriptions until the credit card debt is gone. We now live in the world of streaming services, wine-club memberships, gym memberships, online subscriptions of every sort, Patreon & Only Fans account, etc, etc, etc… You don’t have to give these up forever. Far from it! Maybe you have to give yourself a hard “No!” for 6 months. All of those “small” subscriptions add up to a decent amount.

Take the amount of those subscriptions/memberships/fees and add them to your minimum monthly credit card payment. Continue to do make these payments until the debt is paid off. While you are paying it off, do not use your credit card to pay for anything! When you make a new purchase, that purchase will only increase your outstanding debt and it will also be subject to interest. You’ll be working backwards if you continue to make purchases on your credit card while trying to pay it off.

Once you’ve paid off your credit card(s), you can re-start your memberships/subscriptions/fees that you were paying before but only up to the amount that you can pay for in full every single month. If your monthly financial commitments are more than you can pay for in full, then you need to cut some of them out permanently until you’re earning enough money to cover their cost.

Once you’re out of debt, you can continue to use your credit card. You need only follow my 3-step plan for staying out of credit card debt for the rest of your life.

Make a purchase on Day 1.
Wait for it to post to your credit card account on Day 3 so that you can earn your credit card points / rewards. (You can check your credit card account online. I check mine every few days.)
Once the purchase has been posted, make a payment in the amount of the purchase on Day 5.

By the time you receive your credit card statement, you will have paid off nearly every charge from the prior 30 days.

Real Life Experience

I think the interest rate on my credit card is 23.99% per year, or maybe even 29.99% per year. I don’t really know because I never pay interest. In my case, I follow the 3-step process outlined above so that I never pay interest on the balance.

Believe you me, the only time I ever want to see a rate a high as 29.99% is when I’m looking at the rate of return of my investment portfolio.*** When I’m the one earning this kind of return, it’s a great thing because compound interest is working in my favour.

Paying 23% or more on a credit card means that compound interest is working against me and hurtling me down into a deep, dark pit of debt. I don’t ever want to pay this amount of interest to a bank!

I’ve had a credit card ever since turning 18. Thankfully, I knew enough to pay it in full ever since the first day. I’m not the bank’s favourite customer because I’ve been a deadbeat since the beginning.

So take this information and do with it what you will. While I have strong suggestions, you are best-positioned to know the circumstances of your life. You will make the choices that you think are appropriate with the knowledge that I’ve shared. The choice to be a deadbeat or a revolver lies with you. Choose wisely.

*** Interestingly enough, I don’t earn anywhere close to these returns even though my portfolio has a significant weighting in the financial sector.

Banks are not evil – they’re simply a tool.

Truth be told, it took me a very long time to realize that banks are a tool that will help me achieve my personal finance goals. Every three months, the Big Banks release their earnings. More often than not, those earnings are in the billions, if not the hundreds of millions. And people start frothing with anger at the size of those quarterly earnings. Ink is spilled all over the Internet about how banks are evil and their earnings are obscene.

Two days later, the angry mob has moved on to some other topic upon which to unleash their rage. The banks go back to the business of earning more money so they can hit their next quarterly target.

And I wonder to myself if any one person in the mob realized that banks are a tool?

How banks make money

First off, I want to be very clear that I’m not an expert on the banking industry. I’m just an online citizen who has watched banks operate for the past 35+ years. I even used to work as a bank teller, which was an incredibly educational experience. However, being a bank teller and being a banking expert are two wildly different things.

I’ll share with you what I know.

Banks take money from depositors then lend it to borrowers to earn money. This is the heart of banking. Everything else is a detail.

Depositors have bank accounts and they expect to earn interest on their deposits. As we all know, most bank accounts pay less than 1% interest. Every so often, an online account has a higher rate but it’s usually not anything to get overly excited about.

Banks lend money to people at rates that are higher than what they pay to their depositors. See, from the bank’s perspective, the 1% interest rate is a liability because the bank owes money to someone. Money that’s lent out to borrowers is an asset because it’s going to earn money for the bank.

If the bank owes Depositor 1% per year on a $10,000 bank account, then the bank has a $100 liability since it has to find a way to pay $100 to Depositor in a year’s time. How does the bank do that?

Easy. The bank takes the Depositor’s money – $10,000 – and loans it to Borrower at a rate of 5%. Borrower has promised to repay the bank $500 in a year’s time, because 5% of $10,000 is $500. The Borrower’s $500 debt is the bank’s asset.

The bank collects $500 from Borrower, and pays $100 to Depositor. The bank keeps the $400 spread for itself. Now, I’m sure there are expenses that go along with running a bank, procuring loans, administration of bank accounts, and staffing costs. Whatever is left after paying those expenses is the bank’s profit.

Banks are good at making profits.

Understanding the spread between what is owed to depositors and what is earned from borrowers is what keeps banks profitable.

So how do you turn this to your advantage?

It’s very simple, Gentle Reader. Banks are a tool for you as soon as you buy your first bank share.

Remember how I said that bank earnings are reported quarterly? One of the best features of banks is that they pay dividends to their shareholders. The more bank shares you own, the more dividends you’ll receive.

I used to get irate over bank fees. How dare the bank charge me for using my money? The little vein in my temple would visibly throb if ever I saw so much as a $1 taken from my account to cover an ATM withdrawal, or for anything else.

Eventually, this financial annoyance was removed from my life through 2 actions that I took. First, I opened bank accounts with institutions that did not charge bank fees for daily banking. I was no longer paying bank fees every month. Secondly, I started earning money from everyone else who chose to continue paying bank fees. I bought shares in banks and cashed the dividend cheques every quarter.

I can confidently say that the idea of bank fees no longer enrages me. Even if I do mess up and bounce a cheque, I might have to pay the $35 NSF fee. However, I know that I’ll be getting my money back in a few weeks’ time via my next dividend payment. That fee is a nuisance, but hardly a reason for me to get upset.

Banks are necessary.

I firmly believe that everyone needs atleast two bank accounts – a chequing account and a savings account. The chequing account is for your day to day money. It’s for receiving your paycheque, buying your groceries, paying utilities bills, and the expenses of day-to-day life. Your savings account is for your emergency fund. It’s meant to be a liquid pool of funds that can cover 6-12 months of your monthly expenses. Some people argue that an emergency fund can be 3 months of expenses. I’m a big believer in the idea that more money is better when an emergency strikes so it can’t hurt to have more than the minimum.

Banks are not evil, in and of themselves. Used properly, they facilitate the transfer of money into your investment account. You know that I’m a huge fan of automatic transfers. I’m a proponent of paying yourself first. A portion of every paycheque should be sent to your investment account, so that it can start working to ensure the Future You has a financially comfortable lifestyle.

For my part, I have several bank accounts. And all of them are designated for a specific purpose. Some accounts hold money for my annual travel. (Even during the pandemic, I’ve socked away a few coins for the eventual day when I feel comfortable enough sharing a plane with others.) Other accounts hold money for my annual insurance premiums and property taxes. I have an account for little luxuries like my theatre subscription to Broadway Across Canada. There’s also an account for maintenance and repairs to my home.

Again, banks are a tool – they’re not evil. Learn to use them properly and you’ll find that they offer many great methods for handling your money. Better yet, become a shareholder and receive a slice of their profits every three months. I’ve no doubt you’ll enjoy the feeling of the banks paying you instead of the other way around!

The Secret Sauce Isn’t Being Bright

Being bright isn’t a requirement to being successful with personal finance and investing. I speak from personal experience as I don’t consider myself to be overly bright. There are many people in my circle who are much smarter than me and who learn things much faster than I do. Their net worths are not necessarily larger than mine. It’s taken me a long time to accept the fact that being bright has very little to do with whether someone will succeed in the realm of money.

Those who’ve read this blog for a little while know that I’ve erred during my investment journey. I’m the first to admit that I’m not the smartest investor in the room. I’ve made so many mistakes!

When I first started investing years ago, I put my money into mutual funds instead of index funds and exchange-traded funds.
Investing in mutual funds instead of index funds & ETFs means I paid higher management expense ratios than I needed to pay.
I invested in dividend-based ETFs instead of buying equity-based ETFs.
I didn’t earn as much as I could have during the 10-year stock market bull run that ended in February of 2020. (D’oh! How I would love to be able to unwind that mistake.)
And I don’t increase the rent on my rental property every year. I’m sure there are some in the real estate investment community who see this as a very grave mistake.

Despite these mistakes (and I’ve made way more than 5), I’ve learned that you don’t have to be all that bright to do well in personal finance. You do need to have disposable income, since you can’t invest what you don’t have. I’ve crafted a list of traits that I believe are essential to successfully building wealth.

Being smart is not one of the traits!

You have to start from where you are. No investor has ever made money without starting to invest. Thinking about investing is great but people don’t earn 7% returns on investments they only dream about. They only earn returns on money that’s actually invested in real life, whether that’s in the stock market, in real estate, or in a business. Investing your first dollar isn’t a function of being bright. It’s a function of taking action.

Consistency isn’t dependent on how bright you are either. I’m a huge fan of automated transfers. Every time I get paid, some of my net income is siphoned away from my chequing account. That money is invested to pay for my future goals: retirement, travel, house renovations, whatever. If the money is for a planned purchase that’s not part of my day-to-day basic life, such as groceries, gasoline, and utilities, then the money is automatically whisked into various accounts and it stays in place until it’s time to make those future purchases. Automated transfers have ensured that I’ve always had money going towards my investments.

No one needs to be all that bright to be disciplined. You’ll need to be disciplined if you’re going to stick to your priorities. You’re the only expert when it comes to how best to spend your money because only you know what’s most important to you when it comes time to spend it. It also means that you’re the only one who’s responsible to say “No” to the things that don’t move you towards your dreams. Believe me when I say that there is alway someone who wants your money. Being bright is not a pre-condition of only spending your money in ways that align with your priorities.

Finally, never stop learning. Like I said earlier, I’m not particularly bright. And it takes a long time for me to learn new things and for concepts to sink it. THAT’S OKAY!!!! Learning at my own pace isn’t an obstacle to achieving my goals. If anything, it’s a benefit. Once I’ve been exposed to a new concept, I can learn it as thoroughly as I want to. And once I’ve done that, I can determine whether it will help me meet my financial priorities.

No one is grading your progress.

I’m not in school anymore. There’s no teacher under a time pressure to get through a pre-set curriculum. I’m my own teacher now. Taking as much time as I need to teach myself a particular concept is a good thing in real life. Unlike a school setting, there isn’t a fixed number of hours to be spent teaching one concept before the teacher moves on to the next one. I’ve been investing for over 25 years, and I still don’t understand how Price-to-Earnings ratios work. Is it better if they’re high or low? What exactly do they mean? Do they fluctuate every day? What are the factors that impact them?

Hear me now: I’ve been investing in the stock market for 25+ years, and I did not let my ignorance about P/E ratios stop me from building a solid portfolio that kicks off a nice amount of dividends each year. Admittedly, I’m not a stock-picker. In other words, I don’t buy individual stocks after analyzing their annual reports and doing research into both the company and the industry. If I were an investor who had gone the stock picking route, then I would have learned a lot more about P/E ratios and other nuanced stuff. The information is out there and I would have spent my time learning about it.

When it comes to being good with your money, habits will always beat brains in the long run. Being smart isn’t what helped me the most. Having the investing habit and putting automatic transfers in place has been my secret sauce. Together, these tools have been tremendously more beneficial for my portfolio and for meeting my short-term goals. Once I had prioritized how to spend my money, relying on habits and tools propelled me towards attaining my goals.

Being bright is not an indicator of whether you will be successful in handling your money. Again, speaking from personal experience, you can make stupid money mistakes and still set yourself up for future financial success.

“Your relationship with money?” Clarification is required.

Lately, I’ve been seeing the phrase “your relationship with money” all over the place. What is that?

Clarification is required.

How can you have a relationship with money? It will never remember your birthday, tuck you in at night, check on you to see how you’re doing, worry about your health, or care about your feelings. Money is an inanimate object without feelings towards you. The fact that you have feelings for money is not the same as you have having a relationship with it.

If you have feelings for a movie star or sports figure whom you’ve never met, it doesn’t mean you’re in a relationship with that person. You’re in even less than a relationship with money than with a famous person because there’s a teeny, tiny chance that the Fates may smile on you, let you meet your heart’s desire, and that s/he becomes your friend/partner/spouse/boss/mentor.

Believe me when I say that money will never be any of those people to you or for you.

Money is merely a tool – that is all.

Much like a hammer or fire or a fork, money can be used to help you achieve your life’s goals, ambitions, and dreams. Money does not have feelings towards you, and it never ever will.

Take your birthday, for instance. Money allows you to buy candles for the cake. Money is useful if you want to buy yourself a present. Money is spectacularly proficient at assisting you to throw yourself a birthday party. However, money will never take the initiative to plan a birthday party for you or take the care of all the little details that will make your birthday special. The details, the organization, the planning – those all have to be done by a human being in your life.

Your parents, your friends, your boss, your elderly next neighbour down the street, your barista – these are people with whom you can have a relationship. Good or bad, your interactions with these people will create memories for both of you. Your shared experiences will be the foundation of your relationship with other people. You can influence whether those interactions are friendly or forgettable, frosty or fabulous.

No matter how you use money, the fundamental nature of your use of money is that of a human being using a tool to achieve a purpose. It is akin to you using a knife to butter toast. It is not a relationship, no matter how many times you use that particular tool.

Though we imbue it with many attributes and power, never forget that money isn’t a person. It has no loyalty towards you. It will never love you, never care about you, never think about you for one second. When you die, money will neither remember nor mourn your passing. Money is an inanimate object without feelings, reason, or morals.

Make no mistake. I am perfectly aware that money is extremely useful when it comes to buying things. However, money will never – not even in a million years – satisfy your emotional need for connection with another human being.

The high that comes with spending money on stuff never lasts because it doesn’t satisfy what people really want. They want the joy of connecting to someone else, so they buy the golf clubs or the sweater or the car or the house. What they really want is to feel heard, loved, and appreciated by special people in their lives.

You cannot have a relationship with money. This is why I’m so very perplexed by this phrase “your relationship with money.” You don’t have a relationship with money – it’s impossible. You have more of a connection with someone whom you’ve never met on the other side of the world that you do with money. You know what you have in common with the other-side-of-the-world-stranger? You’re both living on planet Earth and you share a common interest in ensuring that climate change doesn’t destroy the planet.

See? Money is not a person. That means it cannot relate to you. It also means that there’s no relationship.

Money can be used to build relationships.

You can use money to build relationships with people. If you want to do something nice for your co-workers, you can use money to buy the ingredients to bake for your colleagues or to bring in a box of pastries for all to enjoy. If you want to spend more time with your friends, you can use money to host potlucks at your house, to attend concerts with them, or to partake in a once-a-month-no-matter-what dinner date. If you want to improve your relationship with your family, you can use money to do those things that you know will bring the most joy and create the best memories for your kin.

Do you understand what I’m trying to say?

Money is useful for assisting you to achieve some of the relationship goals that you may have for relationships with the people in real life. Allow me to be clear. Money won’t solve all relationship problems, but it can certainly facilitate the creation of experiences & memories that you wish to share with those who are close to your heart. Do you want to take a vacation with friends? Attend a concert with a sibling? Try a new restaurant with a fellow foodie? Money can help you do all of those things.

Money is a tool that permits you to create experiences with other human beings. Those shared experiences are the foundation of your relationships, whether positive or negative. Money has no feelings about those interactions one way or another, which means money is not relating to you. It is simply a tool that you can use to achieve what you want.

You can have as many relationships as your energy and time will allow. But I’m here to tell you that you simply cannot have a relationship with money.