Rule Five: Reduce or Eliminate All Recurring Monthly Costs

All the time I am offered all sorts of free stuff. Usually, I am asked to sign up for some “benefit” that incurs a fixed monthly charge to my credit card. This could be anything from a 53 cents per month “payment protection”, to a $12.99 “credit monitoring service”. I always refuse.

The quickest way to loose control of your finances, is to give someone permission to automatically charge you every month. Beyond, automatic charges, there are a myriad of other monthly expenses that really add up. Earlier this year, my wife and I made the painful decision to cancel our cable TV. We were paying about $50 a month for HBO and expanded basic in High Definition. We did the math and concluded that we were giving $600 a year to the local cable monopoly, and that we would save little, if anything, from switching to a dish. That $600 a year was really something like $900 a year in pre-tax earnings. By canceling cable, it was like my boss calling me into his office an offering me a $900 a year raise for dropping cable; we just couldn’t turn that down. Even though we are not struggling financially, I know that that money adds up. We could have spent thousands of dollars on television over the next ten years, and we just knew that we could find a better use for our entertainment dollar. Now, we order movies and TV series on NetFlix or watch free digital broadcast television in high definition, and our picture couldn’t be better.

I am constantly trying to trim our necessary monthly expenditures, such as energy, phones, and Internet service. I even purchased a used cable modem on Ebay for $10 to avoid paying the $3 a month “modem rental fee”.

I know that when times are tough, I will always have fewer bills to pay, and a larger cushion ensuring our family’s financial security.

How The Rules Work Together

By now, you have probably noticed that my rules overlap quite substantially. Not ing anything (other than appreciating assets) that you cannot pay for now, Rule One, implies that you can’t get a car loan, part of Rule Two. Not having a car loan payment every month, helps tremendously with Rule Three, being conservative, and Rule Five, reducing recurring monthly expenses. Rule Four, being organized relates to all of the other rules and so on.

These rules interact by design. They are a part of a philosophy that eliminates all interest payments on non-appreciating assets, reduces recurring monthly payments, and ensuring financial stability and flexibility.

Aren’t You Just Taking An Oath Of Poverty?

On the contrary, I love to splurge on stuff. I travel frequently, eat out often, and own lots of electronic gizmos. I don’t consider myself wealthy, I just have more money left over when I don’t have perpetual obligations such as car payments, credit card payments, or cable bills. Other than mortgage and school loans, both tax deductible, we always pay zero a month in interest. I drive a ten year old car, but it is a 1999 Mazda Miata with 30,000 miles on it that is fun, reliable, and gets great mileage. Our other car is a 2005 Subaru wagon rather than a new Volvo or Audi. Obviously, much of my travel is with awards gained through reward cards and other loyalty programs. It is rare that I go out to a restaurant without a coupon from the Entertainment book or Restaurant.com. I legally rent DVDs for free at the library or at the Redbox using promo codes.

How Did You Come Up With This Stuff

It is not like I sat down one day and figured all this stuff out, and only then tried to live the Rules. The true story is that this is what I was brought up to practice, and it is only recently that I have thought about it, and tried to make some sense out of it. Until now, the “Rules” have not existed in any written form, they were essentially an oral tradition in my family.

Exceptions

I have been very fortunate to have been raised with these traditions, and thankfully, I have not experienced any tradgedies or other circumstances that have devestated me financially. I know that not everyone has it so easy. I freely admit that I would max out my credit card and declare bankruptcy in a moment if someone I love required an medical procedure to save their life, and insurance wouldn’t cover it. I know that families have children with special needs, and wage earners that are unable to find a job. These are the rules I try to live by and they have served me well, but I still make mistakes. I welcome your comments, concerns, additions, and revisions.

What rules do you live by? What works for you?

Yesterday, I wrote about how reward cards are just one part of an overall financial lifestyle that allows you to profitably seek rewards. Today, I will continue to explain how this philosophy works for me.

Rule Three: Be Conservative

I am not talking about politics, I am talking about how you make large financial decisions. I remember the first time I purchased a house. I had just gotten my first job after college, and I was ready to move out of my parents house (my parents were very ready). When I spoke with a mortgage broker, they explained that I could borrow up to the extent that my monthly payments would equal one third of my monthly pre-tax income. I did the numbers and was shocked.

If I earned, for example, $36,000 a year, or $3,000 a month, that would mean that I could get a loan with monthly payments of $1,000 a month. Federal, State, and Local taxes would eat up about a third of my paycheck as deductions, so then, I would really be paying half of my take home salary as a mortgage payment. Then, you have to figure in heat, air conditioning, electric, water, sewer, trash, phone, and insurance. That would have easily added up to a substantial fraction of the remaining $1,000 a month. Finally, I figured a house required repair and upkeep that would be paid by management if I lived in an apartment. Lawns needed to be mowed, plumbing would have to be fixed, and appliances would spontaneously break down.

Had I borrowed the maximum amount, I would of had to live off of a few hundred dollars a month for food, gas, clothes, and entertainment, let alone savings. I would be living paycheck to paycheck. It would have been a recipe for default, foreclosure, and bankruptcy.

In the end, I chose a property well below what I could have gotten a loan for, and I got a roommate to help pay the mortgage. Not only was I easily able to make my mortgage, but my roommate became my best friend, and I had the money to replace the air conditioner when it failed during a heat wave.

When I make a large financial decision, I always choose the more cautious option. You never know when you might be laid off of your job, or come down with an illness that is not properly covered by your health insurance. These things happen, and being able to cut back when times are tough is often the difference between making your mortgage and loosing your home or worse.

Rule Four: Be Organized

I have written before about organizing your personal finances. If you have not read it, I encourage you to do so. While the methods I outlined are great ways to ensure your bills are paid on time, it is more of a financial tactic than a strategy. The overall strategy for keeping your finances organized is at least as important as the way you do so. Pay off all of your high interest debt before your low interest debt. This practice is well known to people who carry a balance on their credit cards, but is also useful to people who have other outstanding loans such as car, home, and school loans.

President Elect Barack Obama remarked during the campaign that he only paid off his school loans a few years ago. That would be a smart strategy, even though he could have paid them off earlier. Subsidized education loans are typically at lower interest rates than home loans. If he has a home loan, he is better off paying the royalties from his books towards his mortgage than his school loans.

The other way to be organized is to maximize your return on cost saving efforts. This blog is devoted to saving money with your credit cards, and I provide tips daily on maximizing your reward card returns. Some people clip coupons for 10 cents off of this or that, but I prefer to find two for one dinner specials that save me $15 when my wife and I eat out. It is not about being frugal, after all, we are still eating out. It is about realizing that we don’t have the time to find every coupon out there, and we will only focus our energy on finding the largest discounts.

What To Expect Tomorrow

Tomorrow, I will conclude with Rule Five, but also share some notable exceptions to the rule. Until then I welcome your comments, concerns, additions, and revisions.

It has been said (by me), that credit cards are like fire, they can be powerful tools or an incredible danger, depending how they are used. My specialty, reward cards, is a very powerful tool, but there is a bigger picture out there that needs to be addressed.

Credit Cards Are Just One Aspect Of Your Financial Lifestyle

Attempting to gain rewards from your credit cards is really part of a larger philosophy of personal finance that allows me to hunt for rewards in my spare time. I am lucky that I have been brought up to practice several healthy fundamental financial strategies. I would like to share these with you, not because I think I am perfect, but in the hope that it will provoke some thought and discussion on your personal finance practices, and how to improve them.

Rule One: Never Charge Anything To A Credit Card That You Cannot Pay For Now

This would seem to be the opposite of “credit”. I was brought up to treat all credit cards more like charge cards, like the original American Express card. My first credit card in my wallet was in my parents name, and I was only to use it on their permission. If I wanted to purchase something for myself out of my allowance or savings, I had to reimburse my parents when the bill was due. Paying the minimum balance was not an option. As I grew older, and was earning money for myself, I kept this practice. To this day, credit cards are merely a method of payment for me, not a loan.

Rule Two: Only Borrow Money For Appreciating Assets

Would it surprise you to know that I am currently hundreds of thousands of dollars in debt? That is what my mortgage statement on my house tells me each month Obviously, credit is a valuable tool, but only when it is leveraged in your favor. While the recent housing crisis has shown that real estate does not always increase in value, I would have to argue that this phenomenon is the exception that proves the rule. Owning an appreciating property, especially as your primary residence, is one of the few reasons to borrow money and pay interest. When your house is your primary residence, you get a generous tax advantage that ensures this is a great investment. The only other time I have ever borrowed money was for education. A degree is another appreciating asset, and school loans often come with heavily subsidized interest rates and payment terms.

The Implication Of Rule Two: No Car Loans

I once heard Bill Clinton remark that his mother was so frugal, that she would only used cars that she could pay for in cash. That remarked surprised me as I do not consider myself to be especially frugal, yet most people are stunned to find out that I do not have a car payment.

Taking out a car loan would be a gross violation of Rule Two. Everybody knows that a new car depreciates dramatically the moment it is driven of the lot. With the exception of a few rare classics, all cars loose value every day. Borrowing money to pay for a car is just not making your money work for you. When you purchase the car, you are paying a fixed monthly rate on it. As time goes by, the car will be worth a fraction of what it was when you bought it, yet your payment stays the same.

Almost all of us still require a car to get around, and the answer is similar to Rule One, always a car you can pay for immediately. If you are ing your first car, choose an older, used car. If you are currently in a car loan, pay it off and continue driving the car until you have saved up enough to upgrade it. While my first few cars were used, they were low mileage when I bought them, and very reliable. Ultimately, I was able to afford a new car in 2002, yet last year, I sold it and bought a used 2005 version of the same car. I applaud Jenna for her decision to choose used car over a new car, and to pay cash instead of taking a loan.

More Rules Tomorrow

I know this is a lot of info. I swear I am not trying to be preachy, or hold myself up as a perfect example. I frequently mention that reward cards are only for people who pay off their balances in full, and I honestly hope that some of these suggestions will help bring more people into this category. By doing so, you will also become more financially secure, which is a far greater reward than mere frequent flier miles.