In parousing BankRate.com, I found this article about college students, debt, and bankruptcy. It’s pretty alarming:

Gen Xers yearn to carve a new direction for society. Unfortunately, the direction appears to be straight into debt. Americans between the ages of 25 and 34 now boast the second-highest rate of bankruptcy, just behind the 35-44 group. The average credit card debt for this group increased by 55 percent between 1992 and 2001, with the average young adult household now spending approximately 24 percent of its income on debt payments.

Let me warn you right now that I might come across a bit harsh in this article. I want to arouse some strong feelings in you about the absolute disaster that is taking place with my generation (at the time of writing this, I’m a wise 24 - there goes my credibility).

Let’s talk about why college students go into debt. Remember this: I live on student family housing at a private university. I have been going to Brigham Young University since April of 2002. Virtually all of my friends are college students. Because we are all broke, we can talk about personal finances with little inhibition. What I mean by all of this is that I am privy to very real information from real college students.

At times, we hear an initially sad story from a college student. Their car breaks down and all of a sudden they’re in need of some cash. So they charge the repairs to the credit card. If you aren’t careful, your first instinct might be: Well, that poor college student. How could they have known their car would break down? It’s unfortunate.

Yes, it’s unfortunate the student’s car broke down. And no, of course they couldn’t know the car was going to need some major repairs any time soon. But this is the crucial issue:

What transactions took place before the unfortunate event?

In my experience, usually you can find the following transactions: a ski pass they just had to have, multiple transactions that took place at any number of fast-food chains, a gym membership that’s a “necessity”, wireless internet, new software/games for a computer, and a few new DVDs for the apartment’s collection. This is just an example and I am not exaggerating. I’m speaking from direct experience here.

Is it bad to purchase these things? Of course not. I merely want to make a point. The college student is strapped for cash come car-repair time not because they do not have any money, it is because they already spent their money. That is a critical difference.

With undergraduates holding average credit card balances above $3,000, we really shouldn’t look at what they purchased with the credit card, because often-times we’ll see that those purchases, at first pass, appear legitimate. You’ll see a charge for textbooks, tuition, car repairs, etc. And you think, well, these things can’t be helped. But look at the previous purchases. Where did the money go before these credit card transactions “needed” to happen? That is the key.

I can think of no demographic that is in more need of a budget than the college student demographic. Budgeting certainly does not sound cool. You don’t talk about it on your way up to the slopes. If you really do budget, you probably keep it to yourself. You’re a nerd, and you don’t want people to know about it.

But the college student population, with all of their supposed wisdom and street smarts, apparently doesn’t know how to live within their means. Those car repairs did not necessitate use of a credit card - your overspending prior to that unfortunate event is what necessitated the use of that card. Your lack of planning is what gave that credit card transaction its supposed blessing.

College students: budgeting is hip. It’s cool. I’m one of you, but I budget. I don’t owe anybody anything. I’m a graduate student with money socked away come time to drop my several thousand dollars each semester to pay for some (hopefully) great wisdom. Where did the money come from? I earned it, and didn’t subsequently spend it. Has my car broken down? Yes. Did I charge it? No. Where did the money come from? I earned it, and didn’t subsequently spend it.

Please don’t see this as a bragging session, but allow me to be even more open. I am married with a little boy and my part-time income is the sole source of cash for our family. I do not make a lot of money. How do I make each dollar work so hard? I tell it where to go, and it does what I say, because at the beginning of the month, I sit down with my wife and we plan.

Budgeting is in.

So you want to build a financial fortress, eh? You want to be financially independent. You want to be rich. You want to have enough money to do whatever you feel like doing. You want to be able to retire with dignity. You want your kids to be able to go to college. You want a nice home. You want to travel the world. You want to be financially secure.

THEN YOU NEED TO LEARN TO BUDGET MONEY.

In Thomas Stanley’s outstanding book, The Millionaire Next Door we find that millionaires (those with a net worth of at least one million dollars) budget their money.

Why are Mr. and Mrs. Rule millionaires today? Because Mrs. Rule plays tremendous defense! She is responsible for budgeting and spending for both her household and their business. Is anyone in your household responsible for budgeting? All too often the answer is “not really.” All too often people allow their income to define their budgets. When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictable question: Why would someone who is a millionaire need to budget? Our answer is always the same:

They become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.

Often people will tell me, “Well, I want to be rich so I don’t have to worry about money.” That’s like saying you want to be fit but not worry about what you eat. You became fit by sticking to a regimen of quality food and consistent exercise, and the only way you can stay fit is by maintaining the status quo. So if you equate budgeting with “worrying” about money then you will be broke (out of shape) - forever. Budgeting takes the “worry” almost completely out of the equation.

When you learn to budget money you learn how to “play tremendous defense.” This is absolutely crucial. Let me re-phrase that. This is critical.

Examine the following two people and tell me who is in a better financial position:

Why is it that Person A, who is making $30,000 more per year, invests less in retirement and carries credit card balances? Person B learned to budget money. Person A still needs to learn.

Person A is on the fast track to nowhere, as far as finances are concerned. This is a pretty typical picture of households these days. Sure, they make a good amount of money, but what do they have to show for it? If they could learn to budget, money would be plentiful.

Is the Person B situation realistic? Of course it is! It’s just not common. Those are two vastly different ideas though. Most people in America are broke - or at least on the verge of it - living paycheck to paycheck, hoping that somehow their financial situation will change. Yet they refuse to actually do anything about it.

Budgeting is the bedrock for your financial foundation because it enables you to do things with money that would not have been possible before.

Learn to budget money and expect the following:

1. Debt-free living
2. Increased cash flow (it’s like getting a raise)
3. Growing retirement investments
4. Ability to give to worthy causes
5. Money for kids’ college
6. Paying cash for cars, boats, dishwashers, washing machines, etc.
7. A dramatic if not complete reduction in marital arguments regarding money

I’d like to discuss #2 for just a second. When you learn to budget, money seems to go a bit further. When you have told your dollars where to go before the month begins, it’s as if those dollars work a bit harder, and more efficiently. You will truly experience a sensation akin to receiving a raise from work. Your cash flow increases. It’s one of the fundamental laws of the universe: objects in motion will remain in motion, and budgeting increases household cash flow.

Your financial foundation can only be built once you have learned to budget your money. You may see fancy homes, fancy cars, name-brand clothes, or any number of “staus” symbols, but know that so many times, that “fortress” you see has little to no foundation. The slightest financial storm will send it tumbling to the earth. Begin at the bottom and work your way up. When you budget, you’ll free up avenues you never thought possible before. These avenues, when explored, will allow you to not only save more money, but also earn more money in the long run.

Let’s suppose a friend comes by and asks if you want to invest in a great piece of property at a bargain price. If you have learned to budget, money will be available for you to invest in such a venture. Your risk tolerance may usually be low, but when you have money to spare, your risk decreases to almost zero. However, if you need to borrow money to invest in the property? You have increased your risk exponentially and should, therefore, not enter the deal.

Remember, budgeting is a means to an end, not the end in itself. You can explore a whole slew of articles about how to learn to budget money throughout this site. Also, following YNAB’s Four Principles of Cash Flow Management will take you a long way towards building your financial fortress.

Budgeting is in.

Nobody likes to talk about it, but a lot of people have a serious problem with their money. They spend more than they make. Use these three steps to stop your money spending problem before it gets you into too much trouble!

Symptoms of a money spending problem:

1. You feel guilty when you spend money - even if it’s on legitimate purchases.
2. You lie to your spouse about how much you’ve spent.
3. You have increasing amounts of credit card (consumer) debt.
4. You don’t know how much money you’ve spent on clothes, food, entertainment, etc.

If you’re experiencing any one or a combination of those symptoms listed above, you need to do yourself (and your wallet) a favor and implement these three ways to curb your money spending problem.

1. Talk about it
If you’re married, you need to talk about it with your spouse. If you aren’t married, talk about it with a good friend and/or confidant. When you openly talk about your money problem with someone you trust, you will feel better. You’ll be able to transfer a bit of the burden from your shoulders.

It can be especially hard to go to a spouse to talk about money problems if you’ve been hiding things from them. You really must though! You will need to sincerely apologize for your actions and also express a true desire to get things right. Give your spouse time to forgive you - but patiently expect them to do so.

2. Write it down
Now, you need to write down every single purchase you make from today until forever. I discussed how writing down purchases will help you spend less money in another article. I’ll just briefly go over it here again.

When you have a money spending problem, the gist of it is that you don’t make a conscious, mental connection between what you take in (income) and what goes out (expenses). You tend to get caught up in the moment of the purchase, be it from peer pressure or the thrill of a great “sale” you might see. Usually you experience some buyer’s remorse, but that can be quickly rationalized.

When you write down everything you spend you become accountable to yourself. It is almost magical what happens - you spend less money. This will not solve your problem with over-spending money completely, but it will put you well on your way.

It is vital that you write down everything. If you don’t want to have to write it down, then don’t spend it.

Also, just because you possibly use plastic for purchases does not mean it’s already being “recorded” for you. That’s not the point of writing down your purchases. The bank does a good enough job of tracking transactions. You want to make a mental accountability connection when you spend money, and that can only happen when you’ve made the special effort to write it down.

3. Plan to spend
Number three deals mainly with possible guilt you feel when you spend money. It’s quite possible for people to feel guilty buying milk, eggs, or paying the electricity! This should not be so! As a matter of fact, you shouldn’t feel guilty for any single purchase you make. The best way to enjoy guilt-free spending is to plan to spend.

Using some type of personal budgeting system will go a long way in helping you in the planning process of your finances. If you are married, it is vital that you plan what you will spend with your spouse. It must be a combined effort done by both of you, where purchases are agreed upon before they are made.

You will not be able to plan every expenditure you make. That’s just the way life is. However, once you have written down what you spend, you’ll begin to get a pretty good idea of what you need to plan for. Sure, emergencies come up (that don’t merit using your emergency fund) and you’ll overspend what you originally planned. You just need to remind yourself that you’re doing the best you can and that life goes on.

A money spending problem can be serious. It can destroy marriages, cause bankruptcy, and seriously impair your ability to live the way you really want to live. If you have a problem spending money, implement these three steps to get started in the right direction.

Most people are trying to go eighty miles an hour in third gear (in a Honda Civic). Not only does it make a really annoying noise, it’s not too great for the engine and is stressful on the driver.

When it comes to your finances, you’re probably about the same - sick and tired of trying to get somewhere with only three gears. You feel like you’re giving it your all, trying your best, really cutting back on spending, yet your engine just sits there whining and whining.

You need to make a personal budget
When you make a personal budget you are now operating efficiently. You’re not trying to pump those financial pistons with an inadequately small gear. Welcome to FIFTH gear my friend. It’s faster driving, a smoother ride, and easier on your nerves. You’ll get to where you’re going - and faster.

How to make a personal budget
The trick to making a personal budget is to really just do one thing: Begin writing down every single solitary time you spend money. If you buy a soda from the soda machine, you write it down. If you buy a piece of five-cent bubble gum? Write it down! When you give your son or daughter a few bucks for doing some extra chores? Write it down!

This does not have to be some fancy notebook you go out and purchase. (If you do purchase a fancy notebook in which to write down your expenses, make sure to write down the notebook as your first purchase). You can do this on some lined paper that is stapled together. You can record it on your computer.

The important thing about all of this is that you develop the habit of writing things down. This alone will move you into fourth gear.

How does writing everything down help me make a personal budget?
Well, after you’ve written down at least one month’s worth of expenses, you’ll have a pretty good idea about where and how you spend your money. You’ll also be really surprised to find how much crap you buy. Yes, I said crap.

This why most people say they feel like they’ve gotten a raise once they’re done making (and using) their personal budget. You start to realize how much money you waste and you naturally cut back. To stick with our car theme - it’s kind of like cruise control. Or, another analogy, it’s kind of like the highway patrolman waiting to pull you over if you speed (overspend).

So, you’re in fourth gear. Congratulations! You notice the engine (your checking balance) isn’t screaming for relief, you aren’t as stressed, and you’re actually getting somewhere (some extra cash on hand?).

Now that you know roughly how much money you spend per month, you can begin budgeting. This is where you spend on paper (or in your spreadsheet if you’re using YNAB) every single dollar you’ve made before the month begins. This planned, thought-out, intentional spending will somehow make your dollars go further. I promise. Once you begin operating on a written budget - with a plan - you will be in FIFTH gear. Your finances will feel relieved (you’ll feel relieved along with it), your checkbook will say thank you, and your savings account just might begin to expand its horizon.

All because you decided you wanted to make a personal budget.

One of the big reasons people don’t budget is because they get hammered by unexpected expenses. Perhaps you’ve experienced the same thing. Your budget has been going well for, oh, about 19 minutes, then “WHAM!” You need to pay the car insurance premium. Oh, and property taxes are due. Did I mention your daughter’s annual dance recital fee needs to be paid by Thursday? The oil needs to be changed. It’s also time for a transmission flush. Enter the rainy day fund.

Rainy Day Fund Overview
Welcome to life. It just came and hit you upside your head. And it will continue to do so as long as your ticker is ticking. Get used to it and do something about it!

The rainy day fund is a relatively simple concept. Let’s take the car insurance premium that you pay every six months. It costs $400. You don’t have to pay it every month, so most people would simply not worry about it. Whew! Wrong. It’s a predictable expense that will happen. You need to face reality. So $400 every six months is $66.67 per month.

Your rainy day fund will grow for six months by $66.67 per month, until you have $400. In that month, low and behold, your insurance premium is due! You cut the check for $400 and you haven’t felt a thing. Welcome to rainy days - where you have an umbrella.

The rainy day fund is one of the most critical aspects of your personal finance strategy. The personal budget that I built for my wife and myself (and now sell - obviously) has this rainy day fund capability built in. It’s quite nice - I almost get emotional seeing it in action…

The way we do it personally? If we know there’s an expense, even a small one, like a magazine subscription for $20 ever year, we keep tabs on it. How much goes into the magazine category of the budget each month? $1.67. We have a separate sheet where we track these reoccurring, predictable expenses and we budget accordingly. As a result, we can pay our insurance premium in one lump, instead of monthly. This saves us $15. I don’t mean to beat a dead horse, but let me show you what kind of return this rainy day fund can potentially give you:

$415 premium paid every six months, discounted to $400 because of rainy day fund…
gives me an annualized return of 7.5 percent.

And here people worry so much about what rate this is getting and what rate that is getting. I just got 7.5% on my money. That’s not bad - aside from the fact that the rainy day fund gives you a return on (of) your sanity.

Rainy day funds with variable expenses
Now, what about something like auto repairs? You aren’t exactly sure when those are going to come about. Should you set up a rainy day fund for those also? You might consider it. I know that we spend X dollars, on average, each month. How do I know this? Because we track our expenses, which gives us a monthly average. So if I notice that our “Car repair” category is running a bit low - even though I don’t anticipate having any car trouble - it’s wise to throw some money into that category during the budgeting process. That way, if something does happen (and statistics are telling me it will), I won’t be left out in the rain.

The YNAB personal budget system works in such a way that all of your spending categories can function as rainy day funds. You simply put in your monthly allocation and let the balances grow as needed. When you spend some money from that category, it obviously declines. My wife and I have had a lot of success with this one powerful aspect of the YNAB system. I also explain it here.

Take a moment to write down - simply brainstorming - all of your expenses. Work through it methodically. Write a little ‘RF’ next to the expenses where a rainy day fund would be helpful. You might find it helps with property taxes, Christmas, birthdays (gifts in general), car insurance, health insurance, vacation, magazine and newspaper subscriptions, etc. And that was just a little one-minute brainstorm. Keep a look out for any services you use that might give you a discount if you pre-pay your bill. Most companies appreciate the increased cash flow that gives them. So, you’ll “pay yourself” during five months, then during the sixth month, you’ll actually pay the provider. And there you have it, a great return on your money, and a return on (of) your sanity. The rainy day fund will keep you out of debt and on your way to financial peace and security.

Give it a shot!

It was nearing the end of October several years ago and I had just proposed to my then fiance. We were going to be married in February of the following year. I was excited to begin our life together - more excited than I had ever been about anything - but I was also nervous. No, I wasn’t nervous she’d run away at the altar, or pretend she was abducted to avoid the marriage. I was worried that we wouldn’t have enough money. At the time, both of us were full-time undergraduate students. I was teaching German part-time for $9 per hour. She was working at the University library for $8 per hour. We were lucky if we both were able to work 20 hours per week.

One common myth about money is that if you just increase your income, you’ll be alright. You’ll be able to pay down your credit card debt, start investing for retirement, and maybe even put away some money for a rainy day. Nine times out of ten, if a person would first focus on eliminating wasteful and/or unnecessary spending, their finances would improve by leaps and bounds. They just need a solid budgeting process. I knew we didn’t have much chance to increase our income and still do well in school, so I thought we’d focus on keeping our expenses down.

One Saturday morning I began the process of creating a simple budget in Microsoft’s Excel. At first I thought we’d just track our expenditures. That was straight-forward enough. I made one sheet for the entire year, with categories going horizontally across the top, and a row for each date of the year going vertically down. I ordered the categories from left-to-right by importance to me and my future family. First was tithing, then savings, then rent, then food, etc.

The sheet looked good. But then I thought, “Why not track our income here also?” So I set about making another sheet to track our paychecks coming in. As the weeks progressed, I would find more things I wanted the budget to do. For instance, I wanted to be able to see how much I had spent in each category for the entire year, total (since starting the budget), and an average per month. I thought that monthly average would help us budget realistically. It does. I also made an income statement that summarized all of our inflows and outflows. I really liked being able to see at a glance what our biggest expenses were, and where we might need to cut back.

Well, February came and we were married. We started the budgeting process and ran into the first problem: How did we know how much we had to budget each month? We didn’t always work 20 hours each week, sometimes 18, occasionally 23 or 24. Our income was variable and I thought this would immediately throw a wrench into our budgeting process.

We took some of our wedding money we had received from family and friends that equated to one month’s expenses and stuck it in our checking account. Because we now had one month’s expenses already sitting in our account, I knew we could actually lag one month behind what we spent. So what we made in March, we actually could wait until April to spend. This solved our variable income problem because we knew exactly what we had to budget in April - it had already been earned in March!

Through experience we also noticed that we occasionally received income from other sources, such as birthday money, selling a textbook back to the bookstore (for pennies on the dollar), or doing some extra work for someone. I knew it was necessary that each dollar that came into our hands had a home - a purpose. So I made another sheet that allowed us to capture these supplemental inflows, and budget them into spending categories. The budgeting process focused us on one number that the budget generated for us automatically: How much did we have available to budget for the month? Once we had allocated all of the money from that available pool into our categories, the budgeting process was done. It takes us about 20 minutes per month to knock it out.

The next problem with our budgeting process was that we had big one-time purchases. The biggest one for us was car insurance every six months. If I remember correctly, our premium was about $400 every six months. I made sure the categories in the budget acted like virtual accounts. So for our “Car Insurance” category, we would budget $66.67 ($400/6 months) into that category each month. At the end of six months we had our $400. Because we had already “spent” portions of it each month, cutting the check when the bill was due saved us some stress - and $15 - since we could pay in one lump sum instead of on a monthly installment plan.

The final real benefit of our evolving budgeting process was the way we handled spending too much in one category. It seemed like every month there were at least a few categories where we were in the red. We didn’t fret too much about them, just tried to do better the next month. What we ended up doing was this: If we went over $20 in Groceries, $10 in Electricity, and $5 in Entertainment, we would deduct the total ($35) from our money we had available the next month. Well, I shouldn’t say we deducted it - the budget actually just did it automatically. So if we had $2000 to budget in April, but had gone over in those categories in March, the budget would tell us we actually had $1,965.

The great thing about having this built-in “overdraft protection” was that we really didn’t feel the money was missing the next month - and we paid ourselves back for any mistakes. It has really helped us stick to the budget because you don’t even feel the budgeting system make its gentle corrections.

So, we don’t live paycheck to paycheck because we spend the paycheck one month later, we allocate every dollar to its “home”, we save for big purchases so we don’t even feel the stress, and we pay ourselves back for any mistakes we’ve made. This has allowed us to stick with this budgeting process for several years now. I won’t say we’re even close to where I would like to be financially (how could we? I’m still finishing up graduate school!), but we are on the way. Best of all, we have enough for our needs and even some wants. We talk openly about money. We haven’t gone into debt. We’ve saved an emergency fund of 3-6 months’ expenses, and we’re on our way to having a down payment for our first home once I finish school. I attribute all of this to the fact that we have followed these four rules of managing cash flow. I encourage each of you to give this system a shot also. You won’t regret it!

Let me warn you right from the get-go. You’re hearing this from a guy that is pretty darn close to totally anti-debt. Now that I’ve disclaimed my bias, let’s discuss briefly an early mortgage pay off. Should you do it? Maybe.

I discussed a lot of the issues with mortgages, interest, saving that interest, tax-deductible interest, etc. in a discussion on the 15 vs 30 year mortgage question and the tax advantage of owning your home.

We’ll just breeze over the issues once again here, then you’ll be armed with the information you need to answer that immortal question: Should I pay off my mortgage early?

Alright. Everyone needs a roof over their head. There’s a cost involved there, whether you own your home outright or are still trying to pay off the mortgage. You need shelter. That’s a fact of life.

It is relatively easy to get quite a bit of money from the bank and be pretty well leveraged with your mortgage. I mean, you can get a loan-to-value of 5% ($5,000 down on a $100,000 home) pretty easily these days. I would say an LTV below 10% is pretty highly leveraged. This can be very advantageous with a mortgage.

Mortgage rates are extremely low right now (May 2005). This is cheap money! That is another advantage to a mortgage.

Your interest is tax-deductible. This makes an already cheap interest rate even cheaper!

The disadvantages of a mortgage? The interest cost is huge. For a $120,000 home, you could easily be looking at $170,000 total interest on a 30-year mortgage! Another disadvantage is the fact that you lose that monthly cash flow. If your home were paid off you could put those monthly “payments” to good use in an investment. Also, there is a lot of peace of mind that comes from not owing anybody anything. And you wouldn’t.

Consider the following scenario before you decide if you should pay off your mortgage early. Let’s take Ron, who is just crazy about owning his own home. He has an emergency fund in place with 3-6 months’ expenses. So he just goes to town paying off his 30 year mortgage in 13 years by paying an extra $300 per month. The result? In 13 years his mortgage is paid off.

But what could he have done with that $300 over the last 13 years? Invested it in the S&P 500. What would it have grown to? Without calculating all of the numbers, we can be reasonably assured that it would have amounted to a lot more than the interest he saved when he decided to pay off his mortgage early (alright, alright, his investment would be worth just above $95,000 invested at 10% for 13 years).

The general rule is this: if you have to decide between the early mortgage pay off or investing that surplus cash into something else, you would financially choose the one with the highest return (your after-tax interest rate is your rate of return because every dollar you spend paying it down is a dollar you don’t have to pay interest on). So if you can invest that $300 at 10% in a tax-conservative (low turnover) S&P 500, or save 6% after-tax, you would always choose to invest the money.

Is that 10% guaranteed? Heavens no! But over the long-term you’d be hard pressed to make an argument otherwise. Is that 6% return guaranteed? Heavens yes! That must be included in your decision to pay off your mortgage early.

I think Dave Ramsey has a pretty good plan. You need to make sure your foundation is well-laid before you consider paying off your house early. And this is coming from a guy that is about as anti-debt as you can get. He counsels his listeners and fans to follow his baby steps 1-5 before paying off the house. Why? Because steps 1-5 include getting together an emergency fund, getting rid of all debt excep the house, investing 15% in retirement, contributing to college funds for kids and then finally paying off the house early.

What this amounts to is that if you are already sitting on 3-6 months’ expenses in cash (money market, savings account, i.e. liquid), you don’t have any debt except for your house, you’re contributing 15% towards retirement (taking advantage of those possible 10% returns from the stock market and the great tax benefits that come along with investing for retirement), you’re even planning on helping your kids out with college, and you still have excess cash left over to pay off your mortgage faster? Man - go for it!

Forget about the possible 10% return of the S&P - you’re already making a killing contributing consistently 15% of your income - make a guaranteed return of 6% on that excess cash. And when you’ve paid off the house, take that payment you were making and go on a cruise. When you get back from the cruise, start socking it away for retirement.

The debate rages on across America. What are the advantages to certain credit cards, what are the disadvantages? Shouldn’t I be using at least a card that gives 5% cash back on gas and groceries? A gallon of gas, normally costing $2.25, would now only cost $2.14. A gallon of milk costing $3, would now only cost $2.85…

And then there’s the advantage of free(?) airplane tickets. One family member I know used their free tickets to take all the kids to California - something they otherwise wouldn’t have been able to afford.

I personally am somewhere in the middle.

One huge disadvantage to credit cards isn’t from the credit card itself. It’s from the people that use them. Now, I know of the studies that have shown that you spend somewhere around 18% more when you spend with plastic instead of cash. Dave Ramsey touts that statistic at least every day. I did hear him mention a caveat the other day. Basically he said that if you are operating on a written budget, then you probably only overspend by about 10% - totally just estimating. The point he was trying to make was that if you have a plan going in to the grocery store, or wherever, you will probably not spend too much more if you use plastic or cash.

And then there’s the advantage of convenience. I personally don’t like to carry around cash (except for a $20 bill). Everything else I run through with plastic. I’ve also spoken with people who say that if they have cash in their wallet/purse, they burn through it quicker than anything. Psychologically - they explained - if they have the cash in their hand instead of in the checking account, it’s as if they’ve already “spent” the money. So they do.

However, back to that disadvantage. I just can’t take the extreme approach: ABSOLUTELY NO CREDIT CARDS! I feel it’s a bit simplistic. I don’t believe personal finance is really that complicated, but to throw out that absolutely NOBODY should ever use a credit card, that it will destroy them, that it will drive them to bankruptcy, that it will cause them to not live within their means, is just a bit too much.

Especially when we see how much companies are now looking at the FICO score to evaluate whether you can get auto insurance, property insurance, etc. Statistics drive these choices, and statistically you’re likely to make more claims, with a higher dollar amount per claim, if you have bad credit than good. Why is that? I have some guesses, but that’s for another time.

So you need good credit. Should you go out and borrow money to build your credit? No. That’s pretty silly. Should you get a credit card in spite of the disadvantages, or because of the advantages? That’s your choice.

Let me make this totally unsupported statement: 95% of all credit card holders would be better off financially without ever having their credit cards in the first place.

Just take a look at how many people want to get out of credit card debt so badly. I think 95% is a safe shot in the dark.

So, I have established my own set of rules to evaluate whether you are worthy of the advantages of a credit card - and protected from the potential disadvantages. If you follow these rules, I think you’ll be alright.

You must be:

1. Operating under a written budget.
2. Debt free except your home (owing on a car or student loans is debt).
3. Protected against emergencies: 3-6 months’ expenses in a good savings account.
4. Paying the credit card balance in full each month.
5. Writing down exactly how much you spend.
6. Contributing at least 10% of your income towards retirement.

If you cannot say “YES” to all six of these rules, then you are not yet ready for the advantages of credit cards. You are still to exposed to their disadvantages. Work on getting these six rules down, then evaluate whether you think a credit card would further you along on your road to financial success. Be aware of the fact that spending 3 hours finding the “perfect” card, could have been spent working, and earning the equivalent of probably six months’ worth of rewards! Keep all things in perspective.