Save or Spend: Give Money To Your Future Self … or … Take Money From Your Future Self

Oftentimes, when it seems easier to do the wrong thing (like, it’s easier to spend some money now to get some immediate gratification) instead of the right thing (like, avoid spending money unnecessarily), it can get easier to do the right thing if I find a different way of thinking about it.

credit_devilSure, I might like to have something from one of the restaurants next door to my office.  There’s a lot of ways to spend money: sandwiches, ice cream, doughnuts, pastries, iced coffee.  I could easily spend $5 or $10 there every day.  And why shouldn’t I?  I work hard.  I deserve a treat.

Then I think of my future self.  I see myself 20 or 30 years from today.  What about him?  Don’t I want him to be as comfortable as possible?  Maybe he would like to have money for a sandwich or some ice cream.

It’s as simple as that.  The more I spend today, the less I can give to my future self.  So, when I’m at work, if I can make do with the food I’ve brought from home, I can give a bit more to my future self.

  • Spending now is taking money away from my future self.
  • Saving now is giving money to my future self.

(And spending now by borrowing now, by means of charging today’s spending on a credit card and then having to pay interest, now that’s really taking money away from my future self!)

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I Don’t Want to Charge Anything (I’m Just Here for the Bonus)

Credit-card churning.  Is it for you?

credit_card_offersThese days, many credit cards come with a sign-up bonus for just applying for and getting approved and then using the card by charging some minimum dollar amount within a certain period.  For example, charge $500 within the first three months and get a $150 bonus.  Some cards will apply the bonus as a statement credit, some will send you a check.  Others give you the bonus in rewards points or airline miles, instead of money.  (Note that this sign-up bonus is separate from earning some percentage, say 1% or 2%, of your total charges in miles or rewards points.)

Credit-card churning is defined, basically, as doing everything you can to get as many credit card sign-up bonuses as possible.  This means signing up for lots of credit cards, spending just enough (but no more than necessary) to get the bonus, then putting the cards aside and eventually cancelling them.  Of course, you have to pay off everything you charge, but that shouldn’t be a problem if you only charge things that you would normally buy anyway.

The problem of course is meeting the minimum spending (i.e., charging — which actually means borrowing) requirement in order to qualify for the bonus.  Buying $500 worth of stuff you don’t need in order to get $150 doesn’t make you better off — just the opposite, you should avoid that like the plague!  But if you can charge the required amount by just spending what you normally would on things you have to pay for anyway, … then it’s a lot more like getting $150 (almost) for free.  (Of course, there’s the cost of your time and trouble and maybe some fees for using a credit card for certain purchases.)

This is where credit-card churners get creative.  Instead of going on a spending spree, the successful churners use their new credit card to buy their ordinary purchases such as groceries and gasoline.  Another way to accumulate the charges necessary to get the bonus is using the card to pay for things like phone, internet, cable, electricity, natural gas, and water and sewer services.  You might be able to pay for your car insurance with your new card.  Perhaps you can pay some small monthly bills, such as video or audio streaming services, in advance by paying for a year of service instead of paying monthly.  Local taxes (such as property taxes, vehicle registrations, etc.) might be credit-card chargeable.  Some credit-card churners even pay their rent or mortgage with the new credit card, though doing this requires some additional effort (see below).  All of these can be done online; the bonus wouldn’t be worth it if the bill paying couldn’t be done  just sitting in front of your computer.

It may or may not be possible to pay your utility bills with a credit card — whether these service providers take credit cards varies from place to place.  If you’re going to be a credit-card churner, you need to do some research.  Also, unlike using a credit card at a grocery store or gas station, you might be charged an additional fee to pay for things like electric, natural gas, and water service with a credit card.  Likewise for your property taxes and vehicle registration.

The easiest way to get up to the spending minimum is to put your rent or mortgage payment on the card.  In the past, landlords generally didn’t accept credit-card payments (after all, they have to pay a fee to the credit-card issuer and it’s not as if you’re going to buy more from them if you can put it on a credit card the way that restaurants and shops hope you will splurge when you’re not spending cash).  However, many landlords now accept credit cards for the convenience of their renters, but they pass the fee along to the renter.  Mortgage lenders pretty much never accept credit cards, at least as far as I have ever heard.  But now — the internet to the rescue! — there is a company called Plastiq that will allow you pay your mortgage (or just about anything else, … your university tuition, your utility bills, etc.) and charge it to your credit card.  You sign-up on their website, give them the name and address of whoever you want to pay, they send a check to whoever you so designate and they charge your credit card … and tack on a fee of up to 2.5% to cover their costs and make a profit for themselves.  2.5% of $500 is $12.50.  (Btw, here’s a link you can use to sign up for Plastiq.  If you click thru and sign-up you might be able to pay a bill via Plastiq for a reduced fee and I’ll get similar reward too.  If you sign up for Plastiq, I thank you.)  You need to decide: Is the credit-card churning bonus worth it if you have to do the work of setting up these credit-card payments and you have to pay $5, $10, or $15 in fees?  So ask yourself: Is it worth paying that to get your bonus?

Of course, it helps your bottom line if you avoid interest charges in addition to avoiding paying fees just to use the card.  In fact, if you rack up too many fees and interest charges, you might entirely offset the bonus.  Many new credit cards include an interest-free period during which 0% APR (annual percentage rate) is applied to your purchases; this interest-free period might last 6, 9, or 12 months, maybe longer.  Some credit cards come with an annual fee on the card itself.  In some offers, this fee is waived for the first year, but might be around $100 every year after that.  Check the details before you sign up.  You must read the fine print.  Carefully.

My experience: Over the past several months I’ve signed up for 4 credit cards that came with a sign-up bonus.  Three gave me a $150 bonus (or points worth $150) for charging $500, the fourth was a $200 bonus after charging $1,000.

  • With the first card, I used Plastiq to make an additional payment to my Bank of America mortgage.  Everything went perfectly.  BoA got the check for $500 from Plastiq and I got a $150 check from the card issuer.  I usually throw an additional $500 or so above the required payment towards my mortgage balance each month, so this is just normal spending.  However, as an added benefit, I can pay off that $500 over the next 10 months at 0% interest.  I put my check into my emergency savings account.  Kind of financial poetry, that I will be able to use that money to take care of some future emergency instead of putting it on a credit card.  Adding money to my emergency savings for just making an additional payment to my mortgage as I usually do … that’s good!
  • For the second card, I more than met the spending requirement by paying for a medical procedure.  This wasn’t exactly normal and typical spending, but it was something that was definitely necessary.  Some weeks later I got a statement credit which reduced the balance by $150.  I paid off the remaining balance during the zero-interest period.
  • I used the third card to pay my electric, water + sewer, natural gas, phone and internet, and car insurance bills (but I couldn’t use it to pay my cable bill, because I don’t have cable!).  The fees required to pay by credit card were lower than Plastiq’s usual 2.5% fee.  In order to get to the bonus level, I paid the electric bill for the current month and about the same amount in advance; this didn’t cost any more in fees, because the fee was a flat amount regardless of how much I paid with the credit card.  As soon as these totaled $1,000, I got a statement credit, which I used to buy groceries.  In essence, a free cart full of groceries just for spending money as I normally do.
  • I used the fourth card for groceries, clothes, and some Christmas presents.  For that one, I transferred the reward points I accumulated to my Amazon account, which allowed me to purchase $150 worth of food and household supplies, some tools, and a clock radio.  $150 for me for just spending money as I do normally.

Overall, I’m quite happy I’ve done this.  I’ve “earned” $600 for “work” that took about an hour or so and was mostly just doing what I would have done anyway.  To my way of thinking, it was very much worth it and I look forward to doing it more, just as I like opening checking accounts to get bonuses.

However, there are some downsides and considerations …

Temptation.  The only to win at the credit-card-churning game is to get a credit card, use it just enough to get the bonus by charging things you normally buy, then stop using it and eventually cancel it.  The sum of the credit limits on the 4 credit cards I got recently totaled about a quarter of my total annual income.  I could have used those cards to go on a cruise, fly off to a tropical-island resort, and gotten new furniture, TVs, and stereos for every room in the house.  That’s exactly what the banks want you to do.  Of course, I didn’t because that would mean compound interest would be working against me, making me a slave to credit card companies.  But if your financial discipline is not sufficiently stalwart, you shouldn’t have any credit cards, let alone credit cards you don’t need.  If you can’t trust yourself to resist the temptation to use the card extravagantly and buy things you can’t pay for the same month you charge them (unless you’re sticking it to the credit card issuer by making full use of a 0%-interest period), then you shouldn’t attempt credit-card churning.

Organization and Execution.  Getting the bonus only makes sense if you can avoid the fees, which requires research to know what could go wrong.  You have to read the fine print.  It’s a good idea to record the pertinent facts (like when the zero-interest period ends, when the annual fee comes due, etc., for each each card you have) in a notebook or spreadsheet.  You not only need to know the details and have them at hand for reference, you also need to remember to act so as to minimize your costs: this means you have to pay off the entire card balance as soon as it’s due or before the 0% interest period ends, definitely before any late fee accrues.  It means you have to remember to cancel the card before you’re charged an annual fee.  If you can’t manage this, forget about credit-card churning.  (Related: Banks are more than happy to issue a credit card to you, allow you to make charges, and then say you’re not getting the sign-up bonus because you already had the same card and canceled it some time earlier.  Keeping good records and reading the fine print or making a phone call to ask a question can spare you from this disappointment.)

Basically, you and the credit-card issuer are making a bet.  You’re betting you will be able to resist temptation and play (and pay) by the rules.  They’re betting you can’t.  If you fail, you might get the $150, but end up owing the bank many times that amount in interest and fees — which is exactly what the bank wants.

Your Credit Score.  Opening a lot of credit-card accounts and making charges will almost certainly cause your credit score to decrease, maybe by 30 or 40 points or who knows how much?  This is something you should not be doing if you are going to be applying for a loan to buy a house or a car any time in the next several months.  You might also want to abstain from credit-card churning if you’re applying for a job as some employers look at credit scores.

What Counts Towards the Getting the Bonus.  Banks are wise to credit card churning and certain charges may not count towards getting the bonus.  Cash advances and balance transfers don’t count.  Buying gift cards doesn’t count (although I wonder if the bank would know if an eBay purchase was a gift card?).  Some cards won’t allow you to use Plastiq to for a mortgage payment.  I’ve considered the idea of meeting the bonus-level spending requirement by buying something on eBay that’s valuable and easy-to-resell (maybe a collectible gold coin?), but I haven’t done this yet.  The transaction and shipping costs, along with the risk that the resell price might be a little lower than the price I paid, might be worth it — if the bonus was large enough.

Problems .  Things can go wrong in unexpected ways.  I logged onto the the website for my water and sewer service and paid the currently-due bill on one of my new credit cards.  A week later, they deducted the amount due from my checking account, as they normally do.  I had to call them to get a refund.  You would think their system wouldn’t take a payment when none is owed, but, oh well.  I guess I should have discontinued the automatic bank drafts payments before I paid with a credit card.  I’m afraid something similar could happen if I pay my property taxes with a credit card while they’re still being paid from an escrow fund by the bank that holds my mortgage: I would pay with a credit card and then the bank would pay too, and then I’d have a dickens of a time getting the extra payment back.

Credit card churning: for some it might be easy money … for others it might be playing with fire.  Proceed with caution.  If you want churn, make sure you first learn, then make sure it’s the bank that gets get burned!

Look Carefully at Every Bill

recieptOver the weekend my wife and I rented a wheelchair-accessible van so we could take her mother on a day trip to the big city.  My wife did a lot of shopping around (online) and found a place that had a weekend special.  Basically, the total rental cost for Friday afternoon to Monday morning was about $130 less than the normal rate for the same length of time.  When we returned the van on Monday morning, my wife paid the bill with her credit card and we were ready to go … until I looked at the bill.  The rental charge (before tax and mileage charges) should have been $250, but I saw $380.  I said, “whoa” and pointed it out to my wife.  She went right back to the company agent and asked what happened to the special weekend rate.  Oh, it was a mistake.  They had run the charge through at the normal rate.  Whooops!  They apologized and fixed it immediately.

There are two lessons here:

  1. Always look at the bill.  If you see something that doesn’t look right or that you don’t understand, then …
  2. Ask why the bill is higher than you expected and get an explanation.

In many discussions over the years, people have told me that they’ve lost money by not doing these two simple things.  It’s happened to me too.  Sometimes we’re too busy.  Sometimes we’re inattentive.  (Sometimes the sales clerk is a pretty young thing that distracts us.)  Sometimes we don’t want to cause a scene.  Sometimes we’re shy.  — Enough excuses!  We need to pay more attention to our money!

I Made A Mistake

amazon_store_cardA personal finance mea culpa:  During the recent holiday season I forgot to pay the balance on my Amazon credit card.  It was a store card, good only for purchases on Amazon.  I had paid the balance in full every month for over 3 years.  This one time I was about 10 days late, and wham — a $35 fee!  I called Amazon and cancelled the card, thinking they might wonder why I was cancelling and perhaps offer to refund the fee, but that didn’t happen.  So, just as an exercise in self-discipline, I’ll have no Amazon store card for at least a long while.  I’ve already purchased a couple things and charged them to my current I’m-only-in-in-for-the-bonus credit card.  Maybe Amazon will notice and they’ll make me an offer.  The $35 fee, the only fee I ever paid on this account, isn’t too bad.  I bought a couple computers when I first got the card, and Amazon allowed me 6 months to pay with no interest charges.  That might have been worth around $35. Still, my mistake means $35 is gone forever.

Update: A couple months ago, Amazon offered me a free trial Prime membership.  First one month free, and then when I started to cancel, another month free.  During this free trail, they offered me an Amazon Prime credit card with a $50 bonus.  Bingo.  I took the card, used it once, then put it away.  I’ll cancel the Prime membership before I have to pay for it.

Be Careful With Subscriptions

outlanderSometime last year, my wife got interested in a TV series, something about a woman who somehow was transported back in time to Scotland of the 1700s.  She (my wife, not the women in the TV series) watched the first few episodes on Amazon Prime, but then discovered that she would have to subscribe to a pay-TV service to see the rest.  She subscribed, watched the series, and promptly forgot about the subscription.  Just last month ago I noticed I could watch movies on Amazon Prime than seemed normal and I wondered if it was costing anything.  I soon discovered that her credit card had been getting charged $9 per month for several months.  Lesson learned.  Point is:  Are you paying for something you’re not even using because you signed up for it and then have forgotten about it?  Be careful with subscriptions and automatic payments.  Keep track of what you’re paying for every month.  Look carefully at your credit card and bank statements, your phone, cable, and utility bills.  Be sure and evaluate whether you’re getting value for what you’re spending.

Online Mistake Costs $70 (Which I Got Refunded)

I sorta like opening checking accounts (and setting up direct deposits and e-bill paying, maybe opening a savings account so as to avoid any monthly fee) just to get bonus of $150 or more.  One of the banks I’ve done this with offered me a credit card charging 0% interest for the first 12 months and paying me a $350 bonus if I charged $500 per month for the first 3 months.  I took the offer and earned the bonus.  All was going well until a few days ago.

I was online, making a payment, and I accidentally clicked the wrong button!  Instead of selecting to make a payment from the credit union where I keep most of my money, I accidentally selected the checking account at the same bank that issued the credit card.  I was paying off nearly the entire card balance (I guess it’s okay to carry a balance when the interest rate is 0%), which was a little over $1,000.  But I didn’t have that much in the checking account at that bank.  No matter!  Without any warning, the payment was made and the checking account had a negative balance.  I looked in vain for a way to un-do the transaction.  I was so flustered that I immediately made another mistake when I tried to transfer some money from the savings account at the same bank into the checking account, so as to partially offset the negative balance.  I accidentally did the transaction backwards, resulting in an even larger negative balance!  Finally, I transferred money from the credit union to the checking account at the bank (the money which I intended to use for the credit card payment in the first place) and I waited.
reverseJust as I feared, the next day there were two $35 service charges for insufficient funds.  Despite the fact that these accounts exist solely for the purpose of obtaining the bonuses for opening them, I felt pretty strongly about being charged $70 for just clicking the wrong button.  Especially when the bank’s online system didn’t give me any error message (“hey, you’re trying to make a payment of $1,000 from an account that only has a balance of $500”) or any way to un-do the transaction.

I did an online chat with one of the bank’s customer service people and, with sufficient amounts of politeness and contrition, along with the fact that I actually did transfer the $1,000 from my credit union account to the checking account at the bank, was able to get both fees reversed.

Moral of the story: Be careful not to click the wrong button. And, as is often the case with customer service, it often pays to ask.

The Cost of Credit Cards

Data from the Federal Reserve show that Americans owe close to 1,000 billion dollars of revolving debt* (which I’ll refer to as credit card debt).

Dividing the total credit card debt ($1,000,000,000,000) by the adult population of the United States (the 245 million (245,000,000) persons over age 18) shows us that, on average, every American adult carries a total balance of about $4,000 on his or her credit cards.

Note that this is an average for all adults.  Because we know that some adults have no credit card debt, we can be certain that the average total credit card balance of adults that do carry credit card debt must be higher than $4,000.  Many of them carry these balances for months, or years, or decades.

How much does it cost to carry a credit card balance?

The answer depends on two things:

  • the size of the balance
  • the credit card’s interest rate

Let’s assume Joe College gets his first credit card.  A short time later he has spent $1,000 — all charged on the card.  Thereafter, the credit card balance doesn’t go much higher (let’s say that’s close to the card’s credit limit, and Joe’s a smart guy; he knows he’ll be hit with a penalty fee if he goes over the limit and it will be bad for his credit score).  If Joe paid off the entire $1,000 as soon as he got the bill, then there’d be no balance and therefore no interest charge.  But that’s not what happens.  Joe makes payments in an attempt to pay it off, but too-often he gives in to temptation and uses the card to buy something he wants, or there’s something he urgently needs and he charges it.  Thus, the balance is sometimes a little below $1,000, sometimes a little above $1,000, but it averages $1,000 for an entire year.

Most credit cards have interest rates between 10% and 30% per year.  People with good credit scores (who are probably likely to have low balances) might get cards with rates that are lower, while those with bad credit scores might have cards with interest rates that are even higher. So let’s assume the interest rate on Joe’s card is 15%.

The average balance on Joe’s card is $1,000 and he pays 15% interest per year.  How much does that cost him?

The annual amount of interest paid is a simple calculation of the interest rate as a percentage of the average balance, or:

[interest rate] / 100 × [$ average balance] = amount of interest paid per year

which in our case is:

15 / 100 × $1,000 = $150

or:

0.15 × $1,000 = $150 **

The $150 is broken down into monthly changes of $12.50 that are added to each month’s bill. If Joe pays only $12.50 per month, the $1,000 balance would never be reduced.  If he doesn’t even pay the $12.50 interest change each month, the credit card balance would grow as the interest gets compounded.  His debt would also grow because he’d be hit with a late fee that would almost certainly be even higher than the interest charged for one month.  A payment greater than $12.50 would reduce the balance by whatever amount was additional to the interest.

We assume that Joe makes the payments that are normally required, which takes care of each month’s interest charge and applies some additional amount to the balance — but, as already noted, Joe keeps making purchases with his credit card, so the average balance is continually around $1,000.

This costs him $150 per year.  Consider that for a moment.  After 7 years, Joe will have paid more than $1,000 in interest, effectively doubling the cost of the first $1,000 worth of purchases he made soon after he got the card.  If he keeps going he will pay for those purchases several times.  After another 7 years, the credit card issuer will have another $1,000 of Joe’s money, … and so on for as long as Joe carries that balance on his credit card.

If Joe ever pays late or misses a payment on this credit card or any other debt, it’s quite likely, nearly a certainty really, that the credit card issuer will increase the interest rate on Joe’s card.  In fact, the interest rates might go up on all of Joe’s credit cards.

If the rate goes up to 20%, Joe will pay $1,000 every 5 years.  At 30%, he will pay $1,000 in interest charges every 3 and 1/2 years.

borrower_is_slaveLet’s remember that Joe’s spending spree stopped when he reached the card’s credit limit.  After that — after he charged that initial $1,000 — he was able to keep new charges on his credit card and the amount he was able to pay each month in equilibrium.  It’s that initial $1,000 that made Joe a borrower.  If he had been able to find that equilibrium when the credit card balance was $0, and kept his average balance at zero by charging only what he could afford to pay off each month, he would have saved that $150 each year.

The Bible says that the borrower is slave to the lender.  (“The rich rule over the poor, and the borrower is slave to the lender.” — Proverbs 22:7)  That should make us wonder:  What was it, in that first $1,000 of charges, that was so important, so essential, that Joe had to have it, even at the cost of turning himself into a slave?  It’s a near certainty that after he’s paid over $1,000 in interest, Joe won’t even remember what he’s paying for as he finishes paying for it for the first time and begins paying for it the second (or third …) time.  As the old saying goes, the purchase should outlast the payments.  If Joe can’t even remember what it is he’s paying interest on, can it be important enough to pay for it over and over again?

Think how much better off he would be if he had resisted the temptation to over-use his credit card.  If he had

  • cooked dinner at home instead of going out to a restaurant,
  • eaten DIY oatmeal instead of buying a fast-food breakfast,
  • invited friends to play cards or a board game, or just watch TV, instead of going to a movie, concert, or sporting event,
  • had friends over to his house to drink a few beers instead of going to a bar or club,
  • shopped for new (to him) clothes at Goodwill or similar thrift store,
  • gotten free or nearly-free furniture, television, stereo, etc., from Craigslist or hand-me-downs from friends or family.

Had he done those thing, he would have been at least $1,000 richer every 7 years.

Now consider that the average American has a credit card balance of over $4,000.  Take a look at Joe’s story again, but multiply every number by 4.  A balance of $4,000 at 15% costs $4,000 in interest payments every 7 years.  At 20%, it’s $4,000 every 5 years.  At 30%, $4,000 every 3 and 1/2 years — over $1,000 per year!

Look at yourself: Are you an average American?  Are you running a credit-card-interest tab (put it on the card, put it on the tab) that’s costing you hundreds, or thousands, of dollars each year?

Remember the annual-spending tip.  If you earn, say, $50,000 per year and you’re paying $500 in credit-card interest, then interest on credit-card debt is costing you a full 1% of your income.  Are you paying 1% of your income in interest payments to the banks when at the same time you’re not saving and investing even 10% of your income for your own future … and maybe telling yourself you can’t save 10%, there’s nothing you can cut down on.  Well, here’s an idea:  how about cutting down on the credit-card interest you pay?  Instead of paying interest charges to make other people (the people that own stock in banks, like me!) richer, you could be investing that money and earning interest and dividends for yourself.

The moral of the story should be clear: If you don’t have a credit card balance, do everything you can to avoid getting one.  If you have one, do everything you can to pay it off.


* Revolving debt is basically what people owe on bank-issued credit cards and retailer-issued store and gas cards, which allow the borrower to make additional charges without any additional application process. Thus, many borrowers add new debt as fast as they pay off old debt. Home equity line of credit (HELOC) loans would also seem to fall into this category, but the Federal Reserve does not include loans secured by real estate in total revolving debt.

** The actual calculation used by credit card issuers is a bit more complex.  It involves dividing the interest rate by the number of days in a year (~365) and multiplying that by the average daily balance each month.  But our approximation works well enough for our purposes.