April 2022

April 10, 2022

Optimal Use of Credit Cards

Unless you’re Warren Buffet, Bill Gates or Patrick Motsepe, chances are that you will most likely need credit from the banks at some point in your life. In fact, the ubiquity of credit cards has led to banks offering them to people who simply cannot afford them. When used correctly, credit cards can be powerful.

The first consideration point of optimal use of credit card is to pay the debt in full every month AND on time. Paying the outstanding balance means you avoid unnecessary interest payments which the banks would honestly rather you paid. All credit cards have an interest free period in a month. If you pay off your amount owing each month before the end of this period means you would have avoided paying any interest to the bank.

Credit cards are a great vehicle for earning rewards offered by various bank. For example, with FNB’s eBucks program, customers are linked to the various tiers depending on the type of credit card they have. The customer earns eBucks each time they spend using the credit card and these can be redeemed later. When the customer’s earnings increase and they qualify for a credit card in a higher category, say Private Wealth, so does their eBucks’ earning potential.

Some people are tempted to use the entire credit limit available. This is risky as your credit utilization is increased. The credit score is negatively impacted by a high utilization.

For those who travel a lot, owning a credit card could be the difference between spending hours in an uncomfortable airport bench waiting for your delayed flight; and enjoying the comfort of a good sofa with glass of wine and snacks to go with it. The benefit of using a lounge at the airport is provided by the credit cards of most banks. FNB offers its premier, private clients and private wealth clients 8 free entries to the SLOW and Bidvest lounges per month.

Using a credit card for small purchases like groceries seems like a non-threatening activity but it can be risky. A discerning customer typically knows they have to pay the “loan” back to the bank but the danger with many small purchases is that it seems like a trivial amount here and there until 15 swipes of R800 are done. That equals R12,000. The brain is biased into thinking about the “now” and not the other 6 times that you’ve already swiped on the card. By the time you do the math and realise that you’ve spent R12k, it’s too late as you already owe the bank. What happens thereafter is that at month end you will most likely pay the minimum expected amount and will continue swiping until you’re in a spiral. It is rather preferable to use a credit card for big purchases say for instance a TV of washing machine for R6000 and then plan the number of months to pay it off over. Ensure to not use the credit card on any other purchases until the balance owing is full paid up. Yes you will pay interest for the R6k so make sure that is you want to pay it over 6 months, you plan to pay around R1050 per month.

The key points for optimally using a credit card are:

Plan plan and plan – it is rather prudent that one plans what item they will purchase using the credit card. Impulse buying is the quickest way to end up in a quicksand place where you use most of your hard-earned cash paying interest.
Pay more than prescribed minimum amount – Do not fall into the trap of continuous spending without a repayment plan. Define the number of months you will need to pay off the balance. If you are not paying off the outstanding balance at one go, divide the amount by certain months and include extra to cover the interest.
Know what rewards are offered on your credit card by your bank and take full advantage of them.
Know when to stop – When the credit card is close to its limit, it is risky to continue making purchases.
Earn those rewards for FREE – Why not use the credit card to achieve cashbacks, petrol discounts, free airport lounge usage etc. Everybody loves free goodies right?
Keep a low balance – It is by far easier to manage credit card debt that is low. Anything lower than 30% of your limit is manageable.

A credit card can wreak havoc in your life. If you don’t want to be the casualty in its path of destruction, you owe it to yourself to learn the discipline of optimally managing it so you can control it. Not the other way round.

Owning and using a credit card optimally requires deliberate intentionality on how to not let it have the upper hand on you.

April 10, 2022

Money Rules

Seven Money Rules We Never Break

To be a successful player in the money game, there are rules you should never break.

Never borrow/lend money from family and friends

The fastest way to end a relationship is to borrow money to friends and family. Here are a few things that you need to keep in mind

You are their last resort. They most likely have a terrible credit record and do not qualify for credit and cannot repay the loan.
You are enabling their bad spending habits. Unless it is a true unforeseen emergency, do not do it.
Be prepared to never get your money back.
What if you need the money for an emergency?
It is uncomfortable consistently asking for your own money back. Are you prepared for this?

Don’t go shopping on an empty stomach

My gran always said: “Don’t do your grocery shopping when hungry or angry.” The shareholders of Pick n Pay will be smiling all the way to the bank as you pile your trolley with all sorts of goodies you don’t really need. A rush of blood to the stomach or heart will reduce the normal blood supply to your head. This forces your blood-starved brain to make short-sighted decisions. Eat first if you’re hungry. Cool down first before walking into your favourite shop.

Never let emotions get to you

We work very hard for the money we make, so it makes sense that we become emotionally attached to it. The problem with emotions is that they could get it in the way of the decisions that you make, especially when it comes to investments. Removing emotions from money is something that takes time to learn but a skill one needs to learn to allow money to grow.

Peer pressure and other forces sometimes connive to propel us to spend more than we earn. It is in your best interest to defer that purchase and keep the debit or credit card firmly packed away in your purse or wallet of you don’t the cash right now. Money savvy people don’t spend more than they earn.

Don’t go broke trying to get rich

We don’t apply for loans to invest into crypto or forex schemes. Sun City was not built in a day. Bogus schemes are one way to get broke trying to get rich. Desperation is what makes us fall into “make 100% of your investment in 3 days”.

Always remember that nothing worth having comes easy, especially when it comes to money. Wealth takes time to accumulate, so don’t think you are special and there’s a shortcut to getting loaded. Take the time to learn to keep, make and grow your money. The journey is far more fulfilling.

Invest 10% of any money you make

You will often hear people say, “Pay yourself first”. What does this mean? It means every time you earn income, a portion of it is used to buy your time back in the future. We use money to buy time and freedom. This rule is easy to apply from your very first pay-check, however if you are used to spending everything you make, you need to make some lifestyle changes. It is not easy, but it can be done.

If you cannot decrease your expenses, your best bet is to increase your income with side hustles.

Do not spend money you have not received yet

You’ve scored a nice gig that will pay you R20 000 for three hours’ work promoting top end suits at a top Sandton hotel. That money has not come through yet. This is the time when patience pays. Don’t use your overdraft or max your credit card with the hope that you’ll replace that with payment from your client. The future is never guaranteed…wars break out, pandemics start etc. Wait until you get a notification from your bank before you tap you consider spending.

Never tap into your retirement savings

You don’t break into your retirement savings to take care of your day-to-day needs. If you change jobs or are retrenched, save your provident or pension fund in a preservation fund and not use it for immediate needs. Using retirement funds is like stealing from your future self.

To win in this money game, we need to make, keep, and grow our money.

April 10, 2022

Couples and Money

Josh Bhasera

I decided to compile a set of questions that are worth asking your partner if things start to get serious. These are definitely not the questions for a first date, maybe let’s use that date as an opportunity to get to know the basics. But once you’re further down the road towards deciding this person is the “the one” for you, these are the kind of questions that I believe are important to ask for the long-term success of your relationship. Several studies have shown that finances and infidelity are leading causes of divorce in the USA so it’s a conversation worth having.

Marrying purely for love is therefore a virtually certain to ensure that the relationship ends in disaster. I believe having a good understanding of where both parties stand on financial issues respectively, sets up the union for success and a lot fewer arguments.

Questions

Set I

On a scale of 1–10 where would you rank your level of financial literacy?
Would you be willing to sign a prenup? (Prenuptial agreement)
What are your thoughts on gender roles? Particularly, do you believe the responsibility to provide should be on one member of the relationship?
What is your relationship with money? Is it meaningless to you? Do you want a lot of it? Do you find it intimidating?
What was your financial situation growing up? In what ways has that impacted the way you handle money as an adult?
What is your money personality? There are 5 money personalities theorized by Scott and Bethany Palmer:

Big spenders (Enjoys luxury, expensive brands, and lifestyle, etc.)
Savers (Very frugal, avoids debt, minimalist)
Shoppers (Emotional spender, impulse buyer, can’t resist a sale)
Debtors (Deep in debt, poor/no financial plan)
Investors (Delayed gratification, plans for future)

Set II

Do you have any debt (Student loans, loans, mortgage, car payments) If so, what is your plan to pay them off?
What sort of purchases do you consider worth taking on credit/higher purchase? Do you prefer to “save up” and buy a product, or would you prefer to take the product now on credit?
How do you structure your budget? Are you strict with it?
Does anyone depend on you for their living? (Friends, family, etc.)
Do you have any bank accounts or sources of income I am not aware of?
Are you an emotional spender? Do you shop to raise your mood when you are sad?
What are your personal aspirations? Secondly, what aspirations do you have for our union?
Do you want to have children? If so, what is the ideal lifestyle you would like to provide for them?

Set III

If either of our parents were to run out of money in retirement, is that expense you would allow me to undertake with our finances?
In the event that we were to fall on “tough times” financially, what expenses in your life would you be willing to forego temporarily?
In your opinion, how should our household bills and expenses be split? Should they be split evenly? Should the person who earns more, contribute more?
If I were to lose my income for whatever reason (job loss, changing careers, maternity, starting my own business, etc.) would you be willing to support me financially? If so, for how long?
When it comes to financial decisions, should the person who earns more have the final say? Justify your position.
Share your genuine thoughts about the experience with your partner. (Express grievances, agreement, optimism, concern, etc.)

Bonus Question: If you had all the money in the world, what’s the first thing you would buy?

Month: April 2022