It’s a new year. A fresh start. Whatever cash flow problems you may have had in 2015, let it go. I propose taking baby steps today. Let’s start with cutting up your credit card/s. I suggest getting an emergency fund instead.
• The pros don’t outweigh the cons of using a credit card.
A non-legal colleague of mine once lamented that her Php 18,0000.00 paycheck was just enough to cover her Php 17,000.00 credit card bill. So I asked why doesn’t she just stop using the card then. She responded with several perceived advantages of using her card such as: a) reward points; b) free fastfood meals ;c) online bookings and purchases.
Another friend says he needs the card in case of emergencies when he needs cash. My sister says credit cards can substitute as cash deposit at a hospital, in case of emergency.
A former officemate, a lawyer, uses her credit card to tide her through until the next payday. (Sidebar: a lot of lawyers that I know use credit cards. ) The situation is worse for her because it’s clearly apparent that come payday, all of her paycheck will be enough to cover her credit card bill. However, this doesn’t stop her from joining in our pricey after-office drinks. She even has the time to go on out-of-town vacations, despite her negative monthly cash flow.
Thus, the perceived advantages of credit card use are convenience and emergency use. However, using credit cards carries with it an average monthly interest rate of 3.5% and an annual renewal of about Php 2,000.00.
In your defense, you’ll say I’m a good payer so you’ll never get hit by that interest rate. I highly doubt that people can maintain a zero balance on their credit card statement for very long. Studies show that people tend to spend more when they use credit cards for their purchases. Paying with cash is different because you have to physically part with your money. It just feels more painful to spend more. The result? You’ll end up being tempted to live way beyond your means by just spending more.
Thus, you’ll keep accumulating that credit card debt, by just paying the minimum balance due every month, because that’s all you can afford to pay, in reality. Before long, you’ll end up like my friend who only has a net cash flow income of about Php 1,000.00, after paying majority of her income to the credit card company. You therefore forego receiving the entire Php 18,000 that could have been used for investments, saving toward a downpayment on a home or car, and building up an emergency fund.
• What is an emergency fund?
It is a liquid (consists of cash, certificate of deposit, etc.) fund that should cover your expenses for 6-12 months in case an emergency comes up in the form of unemployment, illness, car repair, and the like.
One major advantage of an emergency fund is that it earns interest while it sits in your bank, unlike a credit card that earns you nothing and merely encourages you to live beyond your means. Second, an emergency fund gives a feeling of security that credit card debt never could. I love to travel and for third world passport holders like us Pinoys, an emergency fund can double as your proof of liquid income to show at the foreign embassy for visa purposes.
For online bookings, we can use a debit card. These are good as cash and you will be a disciplined spender because once the money in your account runs out, you’re done. For hospital deposit use, I suggest keeping about Php 10-50 thousand pesos in your atm. Hospitals now have varied ATMs for the convenience of patients.
The reward points you earn from credit card use are paid for with the high-interest payments you make. Deceiving, isn’t it? Those free but cheap fastfood meals you get as rewards are not worth it.
• The point of an emergency fund is to start living within your means this 2016.
As you can see, credit cards are convenient for a reason. To make it convenient for us to spend our money and even money that we do not have. This 2016, I urge you to break free from the credit card trap.
20 something lawyer