13 – Beware of Credit Card Float

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Episode Overview:

Have you ever thought about cutting credit cards out of your life? Seems like a good idea, right? You increase visibility on your finances, avoid interest rates and reduce stress. According to Ken, it turns out that this may not be the case. Ken shares his story of a year long freeze on credit cards and the anxiety that came along with it. Ken shares what he learned including the reality of his supposedly managed debt. Ken shares the way to “respect the credit card debt” and how he manages to utilize credit cards to the fullest without the stress of looming incurred debt.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy Day to you. This is Ken Kaufman. And I am thrilled you’re here for Episode Number 13 – beware the credit card float. Now let’s jump right into exactly what this means and what I’m talking about by the credit card float.

It was about seven years ago when I had been consuming some content from Dave Ramsey, and I decided you know what I am going to go for the debit card methodology, I’m going to drop all my credit cards and stop using them. And I’m just going to cut over to using debit card and cash only cold turkey just go straight over. So I learned quite a bit in this process. Going into it, here’s what I thought. And here’s the logic I had in my mind that I thought would be the benefit that I would get from doing this.

Benefit number one I thought was going to come was that my expenses would go down, I thought that somehow I would gain more visibility to my expenses. And my the same for my wife, and that we would somehow find ways to save money or do things differently didn’t happen. Because it turns out, we check our balances every day and all our transactions that post every day in our credit cards and bank account. And so what that really ended up being wash, the second thing I thought would happen is I thought that it would reduce stress in my financial life. And it didn’t. In fact, for the first few months, it increased it dramatically.

My financial stress skyrocketed. And here’s why. So I’m going to just layer in some round numbers and some basic assumptions into this scenario to try to make it easy to understand and easy to follow here on the path podcast. So I made this cut over on January 1. In order to understand the pain of making the cut over to using debit card only and putting the credit cards on ice, we did it figuratively, I know some people actually freeze their credit cards and in in a bucket or bowl of water and you know, put them in the freezer and all that didn’t do that. But figuratively, we put those credit cards on ice, you actually in order to understand the impact of that decision go all the way back to November 1. And here are the assumptions that I’m putting in here. The first one is that the credit card statement cycle begins on the first of every month, and it closes at the end of the month. And then the grace period, which by the way, the statement cycle just means that period of time where you make all your purchases, and then at the end of the cycle, it closes and you get a statement to say here’s the total that you owe. So that statement cycle is a month long from the first to the last day, the month. And then let’s suppose that the grace period, which is the period of time between when the statement cycle closes, and when I have to make a payment before I start incurring any interest charges or any other penalties or anything. Let’s assume that that is either 31 or 32 days long.

I’m saying that because mostly it’s just I want to push that date, just to make it really easy to understand this example. Let’s push that I want to push that to the first of the following month. So if November 30, my statement cycles from November 1 November 30, that captures all my transactions, I get a statement. And then my grace period says I’ve got 30 or 31 days or the first the following month, which will be January 1 that says that’s the date, I have to make payment. And if I go past that date, then I’m out of the grace period and interest and fees will be charged accordingly according to whatever the credit card contract is. So in that scenario, when I made the cut over on January 1, the story started on November 1 and the expenses that I was incurring from February 1, or I’m sorry, from November 1 through the end of November. And let’s assume I’m us a nice healthy number here. Let’s assume that was $5,000 of expenses. Christmas time we do lots of our shopping, then I could probably justify how it could be that much.

But let’s assume it’s $5,000. And you need to know that I was a heavy credit card user, again, never carrying a balance over, you know, passed a grace period. But definitely trying to maximize the reward points, the cashback options, I had three credit cards, one I used exclusively for business expenses, and the other two were personal. And they had you know, some different rewards if you used it for these types of purchases, you know, one of them, I got better rewards. And then for different other types of purchases, I got better rewards on the other one. So kind of cycled through the three based on the needs and what was being purchased trying to maximize those points. So it did hurt a little bit to say I’m going to make this change because I liked all that. But I figured man, I’m going to save money with all the visibility on expenses again, didn’t happen. So all of that money that I spent $5,000 in the month of November, I get that statement. It says your $5,000 it’s due January 1, great December rolls by let’s say it’s another $5,000. Great it, then that’s going to be due February 1, because it’s the for the grace period ends the first of the following month.

So on January 1, here’s the problem I had, because, and by the way, I paid off all of my October expenses and September expenses, everything before because I’d always paid off before the grace period ended. And I even told everybody, I don’t have credit card debt, I pay my balances off completely. I use them. But I pay my balances off. I actually think I misunderstood. I wasn’t intentionally telling a lie. But I actually did have credit card debt. And here’s why.

On January 1, when I cut over debit cards, here’s the problem I had. First I had to come up with $5,000, which was normally expected I needed to have that $5,000. And I and I generally would have it as of today first. However, my debit card was also getting swiped as of January 1 through the whole month, which meant that I was spending another $5,000 out of my bank account that I was not used to and wasn’t prepared for.

And so this then started to build some some stress because I knew that I not only was spending the cash, that the $5,000 I was going to need February 1 pay for December’s expenses. But I also was going to need to pay for February’s expenses on that debit card too. So it created a lot of stress. But I was determined to do this because I thought for sure there’d be all these benefits on the other side, fought through it move money around, got creative. So that was probably kind of helpful, but it actually created a lot more stress and a lot more busy work, then it was worth. But I did learn a lot. And so I think I did get quite a bit of value out of it. And here’s some of the major things that I take that I learned. The first one is this whole concept of me saying I don’t have credit card debt. That was actually a lie, I had two months worth of credit card expenses is debt. I hadn’t paid them off. It was real debt. And it was silly to say that I didn’t have that debt, because I was relying on that float that two months of credit card expenses that I didn’t have to pay for. And getting out of that float required me to come up with paying off each of those two months $5,000 each worth of expenses, getting that paid off, wow, I wasn’t incurring any more float or keeping that float alive. The second one is, credit cards are debt, even if you wait to pay them at the end of each billing cycle or statement cycle or the you know, the last day of the grace period. It’s legitimately debt. That float, that you have that two months worth of those credit card expenses is real debt that introduces financial risk into your financial life.

And in your net worth calculation. It’s real, it’s legitimate. If for some reason, in January, I lost all my sources of income. Well, I would have had the $5,000 to pay the bill that was due for November, but I would have had no cash available to pay for my expenses. With that debit card that normally would have been on the credit card, I would have had no money to be able to do that. And then definitely not enough money on February 1 pay December’s expenses, let alone keep up with everything else. So it introduces significant financial risk into our lives. It when we use credit cards, even if we pay the balance off, even if it’s we paid off at the end of you know, the month when that statement cycle ends, you still have those 30 days worth of purchases, that are legitimately debt that need to be accounted for and add risk into your net worth. And if there’s some tragedy or crisis or some life thing happens that’s messy financially.

You have this debt that has to get paid and resolved and you have to respect it. Now let me tell you, how I learned to respect it and why I went back, I didn’t stick on debit cards for more than a year it was I think about might even been as early as the summer, early fall. When I said all right, I’m going back to credit cards because I missed the points and the rewards. And I learned this amazing lesson that basically said, hey, look, if rather than we we do this whole process where we have this two months where the credit card float again, what if we just take our, our cash and as we spend money, that is for example, if we use a debit card, it would come out of the bank account. What if we took the cash and put it over in a bucket over here to the side, every time we anything was charged to the credit card, and it would sit there ready so that when the credit card statement needed to be paid, the cash was set aside and ready for and it wasn’t being pulled from anywhere else. And I can explain to you sort of the mechanics of how that worked.

But it actually has worked really, really well since then. So we’ve gotten all the benefits of having a credit card having several credit cards earning the rewards and points. Also, the deposits and and the whole overcharges and the things that happened when you travel, it’s way easier to handle and take all that on with a credit card versus a debit card where there’s a hold on certain amounts of your cash in your bank account versus on the credit card, it’s not that big of a deal. If you’ve got a balance, I should say, a limit big enough to handle whatever your financial track transactions are for the period. But the key point here is is stay out of the credit card float by having the cash set aside to pay that credit card, the day you make the purchase. So if I buy something for $10 on the credit card, there’s $10 set aside, that’s not going to get used for anything else, anything in the future. Anything today it’s set aside so that it can be used to pay off that credit card when the statement comes at the end of the grace period where wherever it is you choose to pay your credit card, whatever timing it is that those dollars are right there and available.

I came across a tool that made this so easy to do that you need a budget or YNAB budgeting software has been so powerful for us to be able to handle credit cards. Because what happens is at the beginning of the month, I will let’s say budget, a few hundred dollars for gas. And I go and I let’s say I fill up for gas, and it’s a total of $50. Well, that $50 of my money that I budgeted to spend on gasoline. If I use my debit card, it just comes straight out of my bank account. And so we reduce the category from 300 to $250. Left and all would be good and it’s paid for. But on a credit card. What the software allows you to do is reduce your category balance from 300 to $250 $50 goes into a credit card bucket and it sits there ready and waiting as soon as you want to pay your credit card. It’s there ready to go. So when you do it this way, when you are charging expenses on your credit card, you are not creating this significant subtraction to your network, you have the cash already there ready prepared. And it’s a net zero transaction. Or as it sums up to zero between the positive and the negative of I’ve got $50 more credit card debt, but I’m now taking the cash and allocated to it to that. So it doesn’t impact your net worth. And it doesn’t create this financial risk because even if there’s a financial crisis, you already have the dollar set aside to pay whatever you’ve charged on that credit card regardless of where you’re at in the statement cycle and where you’re at and your grace period. So YNAB has been a great tool and introducing it to handle credit cards has made all the difference, taking our credit card float from almost two full months down to zero and keeping it there but still getting all the benefits of using the credit card.

So there it is, beware of the credit card float that means know that its debt account forward accordingly to protect your to protect your net worth and not introduce additional financial risk into that equation or into that scenario. And then you’ll know that those dollars are set aside and ready to pay that statement whenever it is time for you and whenever you want to make that payment. Many many thanks to you for joining today. It’s been awesome to have you feel free to send me some comments or remarks leave a review on the medium that you’re listening to this on. I’d love to hear any feedback you have about the content being provided. This is a wrap for Episode 13. Happy Day!

Transcribed by https://otter.ai

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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