Using credit cards… or not

The subject of credit cards can be a hot topic — hot like fire. They’re extremely useful, but if you’re not careful, you can get burned. Most people use them, and in fact there are a few things you can’t do unless you have a credit card — staying in a decent hotel being one of them.

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Most hotels, like this one near the castle in Heidelberg, Germany, won’t let you book with them unless you have a credit card.

I have had a credit card since I was a university student, and I’ve abused it a few times along the way, but I wouldn’t be without one now as it makes budgeting and tracking our finances so much easier.

 

Top reasons to use a credit card

  • Ease of use — you don’t have carry around large amounts of cash
  • Spending is documented on statements
  • Credit card acts as a secondary form of ID and guarantee (think hotels, etc.)
  • Builds your credit rating (if used wisely)

Top reasons to NOT use a credit card

  • Too easy to spend money you don’t have — spending is not documented until the statement arrives
  • Interest rates are insanely high!
  • Misuse of your credit cards results in a poor credit rating

Many years ago, I made a partial payment on my credit card by the due date, and then paid the remainder off a few days later. When I got my next statement, I was appalled. I had to pay $85 in interest! At that time of my life, $85 was a huge amount and not money I had to spare. I vowed at that time never to let that happen again — and it hasn’t. (More on the calculated use of our line of credit in a further post.)

Credit cards are an ideal budgeting tool, mostly because your spending is documented. If you use them in conjunction with your budget, you’ll know what costs to expect, and you won’t be surprised when you get your statement.

The best way to use your credit cards is in planned spending, not impulse buying. If you think about your purchases ahead of time and find ways to fit them into your budget, then you can use your credit cards with a clear conscience.

 

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Getting a handle on your spending

One of the first steps I will take with you as a finances coach is to get an idea of your recent spending. If you buy everything on credit card and you bank online (like we do), then it’s reasonably straightforward. You can use a spreadsheet like Excel or Google Sheets to keep your information organized. Most credit card sites allow you to download information in a .csv (comma separated value) file. You can open these directly in the spreadsheet program. You may have to fiddle a bit with it to clean up the data, or you can use it as is.

The numbers for the amounts that you’ve spent will show up in one column. You can use one of the first few rows to label your spending categories, such as groceries, restaurant, insurance, etc. Keep all of your amounts in that one column, and copy and paste each number to its appropriate category, trying to stay on the same line, if possible. Because I had so many categories, my sheet stretched past one screen going sideways, which made it a little difficult to keep amounts on the correct line.

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I cleaned up my spreadsheet by deleting everything but the business name and amount. I also shaded every second row to make it easier to put the category amount on the correct line — although that doesn’t really matter.

Once you’ve categorized everything, total up the data. Find the total of the month’s spending (making sure you only include purchases, not payments), and find the total for each category. As a cross-check to make sure you’ve included everything in the categories, find the total of all of the categories. It should match your total for the month.

If you do that for three months, you’ll have a good idea of your recent spending. You should also be able to start identifying spending anomalies, purchases that only happen once in a long time, or may never happen again.

If you do a lot of transactions by cash rather than credit card, then you’ve got an extra bit of work ahead of you, and you may not be able to track your three-month historical spending unless you’ve kept all of your receipts. If you don’t keep receipts, you may have to start — and look forward to organizing your spending over the next three months. But that’s something I can help you out with, too.

Thinking about retirement

This CBC article addresses two issues for people moving into their pre-retirement phase (late forties to mid-fifties): massive debt, and not knowing if they have enough money to retire.

Canadians burdened with hefty debt worry about retirement: CBC Toronto

In the article, a financial advisor offers the following advice:

  • Look at your total net worth (everything you own vs. everything you owe).
  • How much are you earning today and how much are you spending?
  • What do you want to live on when you aren’t working — be honest, is that doable?
  • Break it down to “pots” of money (RRSP, pension, savings, property value).

Then it’s time to do the math and she says your answer should be pretty clear.

As a finances coach, these steps are what I would help you with. Many people I’ve talked to have stated that they want to organize their finances, but I suspect that most find the process a little overwhelming.