Friday, March 30, 2007

How To Spot Bad Financial Advice #1: Charging Groceries

This bad finances article included cringe-worthy statements such as,

“Remember when debt was fun?”

“Time was when that embarrassing chunk on your credit card carried a teeny bit of cachet.”

I remember no such time.

The misleading “Don’t charge groceries” badvice (I just made a new portmanteau) gets basic budget and financial principles completely backward:

  • Charge everything as long as you pay before you incur interest. The rule is “Don’t pay interest/fees,” not “Don’t charge.” Charging can save you money if you have a pragmatic rewards program (cash or food, usually not airline miles that make you spend far more on an unnecessary trip than you save).
  • The few things that can justify interest charges are necessities and groceries are a necessity; so groceries are one of the few things that would be on your credit card bill in a true emergency. What on Earth does “Don’t charge groceries” mean except imply that you can charge new televisions and i-Pods?
  • Money is fungible so what matters is your bottom line, not a shell game to artfully keep one type of item off one type of bill. Don’t waste energy and fool yourself with cooked books.

The main problem is that “charging the necessities” usually includes hundreds or thousands of dollars of unnecessary spending:

  • Being on a grocery-store receipt does not make it necessary: Many people continue to buy overpriced, non-nutritious products even when the financial wolf is at the door.
  • Eating out is not necessary: One misleading example for charging “survival debt” was that fast-food restaurants accepted credit cards. The person who wrote that has no credibility in giving budget advice. Eliminating prepared foods is one of the first basic rules for saving money.
  • Your current home is probably unnecessary even though a home is necessary: Using a credit card to pay rent is another misleading example for “survival debt.” Almost no one lives in minimum housing even though doing so is a great way to get ahead. Overcome laziness or embarrassment and downsize the home. You might find that using a credit card for a moving van can save 5% or more of your total income in lower housing costs.

We have only scratched the surface but the lesson for now is to learn to spot bad advice before it ruins you.

No comments: