Thanks for checking in. I apologize for the lack of posts lately but I’m afraid I’m a busy guy for the next month or so, then back to more frequent posts.
Two scenarios for you.
Skippy has just won the monthly 50/50 draw at his place of employment. It was a nice tidy some of $500. Not a bad haul for the old Skipster. He has already made plans on how he will spend this new found wealth. He is going to have one hell of a weekend out on the town, at the casino, at da club; drinks on him, and a whole weekend of restaurant meals, no cooking! It will be a weekend not be be forgotten. I will also mention that Skippy’s only debt consists of $500 on a credit card, which he has carried for awhile.
On the other side of the country, Pedro is down to his last dollar. He has no savings, and also has no debt. It will also be a big weekend for Pedro, his buddy is coming to town. Pedro knows his buddy loves to golf and then to hit the clubs at night, so it will be an expensive weekend. By sheer coincidence, Pedro figures he will also be spending $500 this weekend. Since Pedro has no cash to spend, he is going to have to finance his weekend via credit card. He will pay this balance off over the coming months.
Here is my question: What is the difference in terms of these two $500 transactions?
The Answer: NOTHING! No difference. None.
Did you fall for Skippy’s slippery shenanigans? How he is spending cash and not putting additional charges on his card, making this spending ok? I know my loyal readers would not fall for such nonsense. If you did fall for this, take a browse through my posts and hopefully learn something. Anyone out there shame Pedro for putting his weekend on his credit card? Well good for you, but you should also be directing that same criticism at Skippy. The point I am trying to make is that if you owe funds on your credit card or loan, then even if you are spending cash instead of charging to your card, this is exactly the same as if you had charged to your card with a zero balance or taken out a new loan for this cash/spending.
Same theory for any cash you spend, even on necessities. When I spend $400 on my groceries, I am essentially borrowing that money from my line of credit at 5%, because I currently owe some funds on my line of credit. Keep in mind this isn’t new money borrowed, but by spending the cash that could be applied to my line of credit, I am basically paying interest on that cash spent.
I thought of this scenario when I learned an acquaintance of mine was “making his mortage payment” spending the rest of his available funds on other bills and then charging entertainment on his credit card, which I figured to be a similar amount to his mortgage payment (this guy goes non stop). I felt like saying “Essentially, you are putting your mortgage payment on or credit card, you know that, right?” (Which means he can’t afford his house, which is a whole other post.)
Something else I want to talk about that I was going to make a separate post of, but I find it fits well here. I want to talk about “free money”. Im talking about the $20 you may find on the street, or the $50 you won on a scratch ticket, and even some types of reward points. I want to make this very, VERY clear, this is in NO way shape or form, FREE money, or should it ever be considered free money. This money is not free, the reason being is that this “free” money is perfectly good, normal money that can be spent or traded for any type of good or used for any type of purchase. This is just the same as if you got paid an extra $20 or $50, after taxes of course. So I admit it peeves me a bit when people say yeah, that $20 I found, I just did *whatever* with it because it was free, or because it didn’t cost me anything. “Yes, yes it did cost you something!” I want to say. “It cost you the amount you paid for it!” Just the same as always. The source of the funds is irrelevant. Still don’t believe me? Next time, take your “free” money, put that on your credit card/loan/mortgage whatever, and then take your “normal” money and burn it on the lotto or on the super fancy wine. Was your super fancy wine still free? See what I mean? Ask yourself this…would I be doing this with my normal money? If the answer is no, then this is costing you money! If the answer is yes, then it may be considered surplus. If I find $100 and I blow it on something such as a super fancy dinner out that was not planned, nothing has changed in my financial picture. If I find $100 and use that to purchase my gas for the month (part of my normal gas budget), then I would be ok with calling that free gas. Now rewards cards.. . if you earned say a free flight from frequent flyer points, and you cant sell this reward or transfer it to something else, then yes, you would have earned a “free” flight. Now if you take your points and buy an Ipod, and you could also have redeemed $200 in free groceries or gas instead, then your Ipod was not free, it cost you $200! Disagree? Let me know.
That is how the Fake Cheap sees it, hope you enjoyed.