Freshman Finance: Credit Cards

Credit Cards

As I mentioned in this post, I am a professor. But, what I haven’t shared yet is that I’ve been teaching a freshman seminar on personal finance this semester. Just to be clear, I am not a finance professor or any kind of finance professional for that matter.

However, I got an opportunity to teach a freshman seminar on a topic of my choosing.  Naturally I chose to discuss personal finance since most people’s financial education is virtually non-existent.

It’s been fun to teach and I like to think the kids are learning at least something in the class. We’ve talked about a variety of topics thus far, and I thought I’d write a few posts about topics I’m discussing with my class, and some observations I’ve made while teaching it.

Without further ado, here’s the first installment in a series I’m calling Freshman Finance. I’ll start with a basic overview of what I taught them about the subject, then list some of the questions they had, and end with observations on their comments and reactions.

Credit Cards

Credit cards are not free money.  When you see a credit card in your wallet you should be thinking, “that’s a loan waiting to happen.” A credit card is a standing offer of a loan from the credit card’s issuing bank. The size of the maximum loan you can take out is called your ‘credit limit’ on the card.

Credit cards can be a great way to build credit.  The reason is that you don’t have to pay any fees or interest to build your credit, unlike an installment loan.  However, that benefit goes away the minute you begin to carry a balance on your credit card.  Let me explain.

Carrying a balance refers to not paying all of the money that you owe on the credit card at the end of the month.  If you pay back all the money you borrowed throughout the course of the month, then you don’t have to pay any interest.  That’s a pretty sweet deal.

So why are all the big banks offering free loans to everyone?  Because they know that most people won’t pay the full amount at the end of the month.

See, when you spend money on the card, you’ll get a bill that tells you how much you owe.  The total will be in regular text. Then you’ll probably see something called the minimum payment: a much smaller dollar amount that is written in bold to get your attention.

You might be tempted to only pay the minimum balance.  Don’t.  As soon as you pay the minimum balance rather than the full amount owed on the card, you get charged interest on all the money you borrowed.  Without going into too much detail, the bank calculates your average daily balance for the month and then applies a set interest rate (usually 20%+ for people with little or no credit) to that balance.

The bank knows that people will want to pay the minimum, which means that the bank will make money on most of the loans.

By the way, that’s how banks make money.  You give them your money in a savings or checking account and they pay very little or no interest to you, and then they loan out your money to other people for much higher interest rates, pocketing the difference.  But I digress…

There’s basically only one thing to look for if you are signing up for your first credit card.  You want a card that has no annual fee. An annual fee is charged for some cards if they come with a lot of fancy bells and whistles.  But if you are getting your first card, you want one that won’t cost you any money.  Because, ideally, you will never close this account.

Credit scores are a topic for another day, but part of your credit score depends on how long your credit accounts have been opened.  This means that you want that first account to be open from now until you die, essentially.  That means that you don’t want to be paying for the account for all those years.

That’s essentially it for the basics. Credit cards are a free loan if you are disciplined and a nightmare if you treat them flippantly. If you get one, just make sure you pay the balance in full every month and you’ll be fine.

FAQ:

Q: I’ve heard that you have to carry a balance on your credit card to build your credit score.  Is that true?

A: NO. Definitely not.  Your credit will be affected exactly the same if you pay the money back the next day, or if you just pay the minimum balance forever. The only difference is that it’s free if you pay it off every month.

Q: Do I have to spend a lot of money on the card to build my credit?

A: Again, NO. It’s just a box that gets checked that says you paid on time.  The box doesn’t care whether you paid $1 or $10,000, it only cares whether or not you were on time.

Q: What if I sign up for a bunch of credit cards and then rack up a bunch of debt and then settle it in court for a fraction of the cost.  Can I make money that way? (I seriously got this one in class)

A: FOR THE LOVE OF GOD, NO!!! Please, please never try to do this.  Also, stop watching so much damn TV.

Q: What’s the best card to get for someone who doesn’t have good credit?

A: Any card that doesn’t make you pay an annual fee is fine.  You won’t get a good rewards card with bad credit or no credit, so just try to get one that doesn’t make you pay a fee to own it.

Observations

I was pretty surprised at how little the class knew about credit cards. They didn’t even know that they represented loans. This is a serious oversight by society in general. How in the hell are young people supposed to know better if they don’t even understand that the plastic represents a loan?

Of course, the information is readily available, but geez.  If you’ve got kids, please talk to them about money.

See you for the next installment, young Padawans.

Are you surprised by the questions they asked? Do you have any feedback for what I should emphasize if I teach this course again?

 

 

The Hoard: October 2015

The Dragon's Hoard

Every good dragon has a hoard.  You know.  The collection of gold, jewels, and other valuables that the dragon guards in his or her cave.  For me, The Hoard is what I call my assets.  The collection of stocks, bonds, and other income producing assets that Mrs. Dragon and I have collected thus far.

Mythological fire breathers have to protect their hoard from knights seeking glory, wizards wanting power, etc.  Real-world FIRE breathers have more mundane, but very real dangers to their own hoards: the tax man, the cable company, lifestyle inflation, high-fee brokers, and many more.

This is one post in a series that documents my progress towards financial independence.

You might recall that I don’t include our primary residence in the assets (it doesn’t produce income) and I don’t include our primary mortgage against the assets.  If we had a rental house, I would include it in both parts of the equation, but I’ll address the primary residence in a separate category.

I do not differentiate between tax-advantaged accounts and taxable ones in the number for The Hoard.  Assets are assets.

We use the excellent (and free!) service Personal Capital to keep track of how The Hoard is coming along.  It lets you view all your accounts on a single homepage for a convenient snapshot of your financial life.  It is a top-notch service.  Highly recommended.

Mrs. Dragon and I want $600,000 in liquid assets and a paid-off house to consider ourselves financially independent.

How are we currently doing?

The current market value of the hoard is $105,345 (vs last month’s $95,372).  This is about 17.6% of our $600,000 goal.

Primary residence: The mortgage is $96,447  (vs last month’s $96,708), which means it’s about 1.58% paid off.

Hell yeah! This is the first time that The Hoard has broken the six figure mark!!!

They say the first $100k is the hardest and I certainly hope they’re right.  It took thirty years to get the first one, and I’m hoping for more like 1.5 years to get the next one. 🙂  I guess time will tell.

I was actually a little surprised to see such a big jump in our net worth this month. We didn’t do anything out of the ordinary.  After looking around in Personal Capital, I see that our investments grew by about 3.5% over the last thirty days.

Thus far, fluctuations in the market haven’t really affected our bottom line very much.  But now that we actually have a decent chunk of money invested, I can see that going forward the market will start to dominate the performance of our bottom line.

This is, of course, to be expected, but it’s very different to know that theoretically versus seeing your bank accounts shrink and swell as the market moves.  Either way, I’m pumped for this new development.  It means we’re starting to pick up some momentum.

We continue to invest versus aggressively paying down the mortgage and I don’t think that will change any time in the next 6 months at least.

Right now we are making a really aggressive push to try to fill up all our tax-deferred accounts as much as we can before the end of the year.

As I mentioned in this post, between the two of us Mrs. Dragon and I have a total limit of $83k a year that can be put into tax-deferred accounts.  We won’t quite make the full $83k this year (mostly due to buying the house), but I’m hopeful that we might get it all next year.

Anyway from now until December we are trying to squeeze out any extra dollars that can be put in those accounts before the year ends.

All in all I’d say this was a kickass month for The Hoard.  Any time we get a $10k boost from one month to the next is definitely a huge win. We’d be completely FI in five years if we could do that every month.  But, as they say, “if ifs and buts were candy and nuts we’d all have a merry Christmas.”  Am I right?!

How did the last month treat your investments? Do you think we are on track for FI by Feb 2025?

A Day In The Life

Steak dinner

If you’ve been reading about financial independence and retiring early (FIRE) for very long you’ve probably heard a few of the following comments from non-believers about retiring early:

“I don’t know what I’d do all day if I retired!”

“I already watch too much TV.”

“I love my job! There’s nothing I’d rather be doing.”

This post is about a recent Sunday I spent and, more generally, what I imagine an average day will look like after I call it quits.  Here’s the schedule from last Sunday:

9:00am – Woke up with no alarm. Brushed teeth and got dressed. Checked email, then cruised around the internet for a bit.

10:15am – Made and ate breakfast (green smoothie and pancakes), then put together a slow-cooker meal that we will eat for lunch through the following week.  Then made bbq sauce (family recipe) to go with the pulled pork we’ll be making later in the week, and made some vegetable broth.

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Expenses: September 2015

ExpensesExpense report!  Since I’m a total voyeur for finance, these types of details are exactly the kind that I love to read on other people’s blogs.

Don’t get me wrong though, these numbers are primarily written for me and Mrs. Dragon.  Every good FIRE breather knows that to be successful, you have to track your expenses. You have to track them like a kid tracks candy on Halloween.

How else will you know when your Hoard is big enough?

Without further ado, here are the numbers for September (rounded to the nearest dollar):

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