Beating Broke

Personal Finance from the Broke Perspective

Beating Broke Rules: Bonuses

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Beating Broke Rule: Spend your Bonuses wisely.

Every year, many of us are lucky enough to receive some sort of bonus from our employer.  (If you’re self employed, that’s bonus enough. 😉 )  And when we do, the inevitable question arises.  What do I do with the money?  And then, how to budget for it?

The simple answer is to spend it wisely.  In a more complex answer, it depends on what your goals are for your financial life.  Using your bonus to buy Christmas presents may make you feel good for a month or two, but will you feel guilty afterward?  You’ll feel much better, in the long run, if you spend the money wisely towards your goals.

198/365 - paydayHere’s the downside to that, though.  You’ll also feel guilty if you use it all for debt repayment.  Each of you will have a different situation, but here’s how we usually use our bonus here in Beating Broke.

Consider taking 10% of the bonus and blowing it.  Buy some presents.  Take your family out to dinner and a movie.  Whatever you want.  Give yourself 10% in cash and free rein to do whatever you want with it. You’ll feel better when you do.

With the remaining, take a look at your situation.  Do you have a purchase that you’ve been saving up for, or putting off until you could afford it?  I’m not talking about those gifts, or the television upgrade, but things that you really need.  Maybe some costco eyeglasses? For example, a portion of my bonus (if I get it) will go towards buying new tires for one of our cars and paying for a repair that one of them needs.  It won’t take the whole bonus, but a good portion of it.  And it will be extremely relieving to not have to come up with that money out of my normal paycheck.  If the bonus doesn’t come, I’ll still have to pay for those things, but it might take a little longer to pay for them.

Maybe your situation doesn’t have a purchase like that that you need to pay for.  But, maybe you’ve got some debt that it could help retire.  What we don’t spend on tires and repairs, will likely go towards paying off a debt.  It won’t pay off any of them all by itself, but it will cut the payoff by several months.  And, while that doesn’t give me the same feeling that just blowing the money on stuff does, it will leave me feeling much better for a far longer time.

The bottom line is this.  Think about how you spend your bonus and spend it wisely.  You’ll feel much better for it.

photo credit: jypsygen

Are Your Personal Finance Skills Holding You Back?

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One of the reasons that I started this site was because it forces me to learn new personal finance skills.  Sometimes, the tree is sitting there in the forest and you need someone to point it out and make it stick out from the forest.  The more skills that you learn in any given subject, the closer you are to what could be considered an expert on that subject.  There are a few subjects that I consider myself to be an expert, but personal finance is not one of them.  But, I am trying.

It occurs to me, however, that in our journey to become experts at personal finance (even if it’s just our own finances) we can sometimes hold ourselves back.  We can sometimes become so focused on the topic and that one slice of our lives that we forget that there are other parts of our lives that must also be taken care of.  For many, personal finance is a deeply religious topic.  As a Christian, there are many places in the Bible that specifically mention money and the manner in which we should handle it.  In fact, you might notice the tag line here at Beating Broke as being a quote from the Bible.  But, nowhere in the Bible does it say that I must be perfect in the handling of my money before I should begin to work on any other aspects of my life.

If we focus too long on any one aspect, many of the other aspects can quickly fall behind.  Baker, from Man vs. Debt, recently called himself a hypocrite.  Why?  Because he’s been a crusader for paying off debt and doing so unrelentingly.  He has preached a very die-hard approach to debt retirement that is based in the teachings of Dave Ramsey.  But, Baker and his family have put their debt repayment on hold while they travel and experience foreign living and working.

If you only glance at the situation, you can’t help but agree with Baker’s assessment of himself.  And in a some ways, he is a hypocrite.  However, he also is not entirely a hypocrite.  He and his wife planned for this trip.  They budgeted for it and saved for it.  Yes, they put some of their goals on hold, but they did so to take advantage of an opportunity that may have never reappeared for them.  If he and his wife had passed up on this opportunity, they would have been kicking themselves for it for the rest of their life.  They’d be debt free, but at what cost.

It is a lifetime opportunity.  If they had to choose between debt repayment and a trip to Disneyland, I would say that they would be stupid to not skip it.  After all, Disneyland isn’t likely to go away anytime soon and they’d be able to visit at a later date.  Yes, you have to maintain your vigilance and do whatever you can to meet your goals.  But you also have to live your life.  If your goals are holding you back from living your life, then you really should rethink your goals, because they may be causing more harm than good.

Baker is a very skillful personal finance person.  He’s been writing about the subject for quite a while now.  He and his wife have made great strides towards their goal of being debt free.  But, Baker didn’t let his personal finance skills hold him back.  He didn’t let them keep him from living passionately. And he didn’t let them keep him from taking advantage of a once in a lifetime opportunity.  He and his family will have a wonderful story to tell and experiences that you just can’t buy.  If that makes him a hypocrite, then so be it.  I don’t think it does.  After all, if he hadn’t been walking the walk, he wouldn’t have had the ability to take advantage of the opportunity.  If anything, he’s an example of why you need to stick to your guns.  If you do, you will be able to take advantage of opportunity instead of having to let it pass you by.

Using 0% Interest Rate Credit Cards

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The introductory and balance transfer 0% interest rates on some credit cards can be a very enticing benefit. The fact that we see it offered so often proves that it works as a marketing ploy for the credit card companies. Some people take advantage of the offers and do what they call “0% rate arbitrage”. They take the CC company up on their offer and then pull the money out as cash and dump it into a interest bearing account where they can make several percent on the money. It’s like free money. But are the offers worth using if you’re like me and just want to be debt free and live a financially responsible life?

The answer is not a straight yes or no answer. In fact, it isn’t really even a straight “maybe” answer. Much like most financial products, it is very dependent on your personal situation. Make no bones about it, I dislike credit cards. If I can, I will be credit card free some day and use only my debit cards. However, until that day happens, I’m stuck with them. I don’t use them, but merely pay them off. Until they are paid off, I’ve still got a few.

While I have no intention of ever trying the arbitrage that some people try, I have and will use the 0% offers to help with my debt repayment. It’s a free loan. Sure, the rate is temporary, and the rate on expiration is likely just as bad as the card I transferred from. But, for that introductory period, I pay no interest, and every penny that I send as a payment goes towards paying off that balance. Essentially, I’m making 8%, 9%, and in some cases 20+% on my money. The offers can be a great tool while you are repaying your debt.

Once you are done repaying your debt, however, credit cards have little to no use to you. The concept is that a credit card is a way for you to have a open line of credit whereby you can access your “credit” anytime you want from virtually anywhere. However, if you are a financially responsible person and maintain a debt free lifestyle, you’ll likely want to pay cash for nearly everything. Obviously, a debit card or good ol’ cold hard cash is your tool of choice.

One exception that could be argued for is reward cards. These are cards that give you rewards based on the amount of money you spend using your card. If you are responsible and pay off your balance within your grace period, you can make a pretty good argument for the use of a reward card for the sake of the rewards. And some of the rewards can be quite tempting. Airline miles, gas discounts, gift cards, and even cars are among the lists of rewards.

Some folks (like Ramit of I will teach you to be Rich) think that the reward cards are a horrible thing. The possibility of missing a payment or letting your spending get out of control is always there and one slip up can cost you well more than any reward you might get. And unnecessary risk is something you don’t want in your financial life.

Back to the 0% cards though. The bottom line is that if you are already using some self control and not using your cards, transferring the balance to a 0% offer can save you quite a bit of money over those few months that the rate is that low. If you can’t manage the cards you have, though, forget it. The risk of causing more harm to yourself is too great to add more accounts to your portfolio. Also, don’t let a great introductory/transfer rate buffalo you into signing up for what would otherwise be a horrible card. Do your due diligence and read the fine print for annual fees, grace period, other fees, and most importantly the normal rate. I’ve seen several of these offers that are great, until the offer is over and then you’re hit with a 29.99% rate. Obviously, the extra savings of the low rate wouldn’t outweigh the normal rate if you’re transferring a balance from a card that only had a 8.9% rate!

Be careful. Learn what you can and make as educated of a choice as you possibly can. I don’t condone using credit cards because I know first hand the damage they can do to a persons financial life, but I recognize that these offers can be a very valuable tool for the responsible few who have learned to handle their money properly.