How I earn credit card rewards responsibly

The Rewards Card

The topic of maximizing credit-card rewards seems to be a popular one lately, especially in the world of personal finance blogging.

Many of us use our credit cards to pay our bills and monthly expenses. We earn cashback and rake in the rewards. Some of us have even mastered the envious ability to churn credit-card rewards to pay for awesome vacations.

Because personal finance readers are so financially savvy, we usually take for granted that, for many people, this is a dangerous habit. After all, the average US household credit card debt

is upwards of $15,000.

If you do it right, earning credit card rewards is a great money hack. Last year, for example, I earned $450 in cash-back. But you should have control of your finances before trying any kind of hack like this.

Let’s say you have control of your financial situation and you’re ready to play this credit-card-rewards game. How do you play properly? And what precautions should you take?

Here’s what’s worked for me.

Budget meticulously

I use a zero-sum budget, which is ideal when you use a credit card for monthly expenses.

Spending less than you earn is important anyway, but I think it’s crucial when you’re credit card churning. When I decided to start using a credit card

, I made sure to calculate my budget meticulously.

I double- and triple-checked that the grand total of my expenses was less than my monthly income. I also considered my quarterly and bi-annual expenses.

Once you’ve established a thorough budget, monitor it. And whatever medium you use to budget, include your credit card account in it. I use Mint, and my card is linked to my account.

I make sure to spend within the limits of my budget so that I don’t have to worry about overspending on the card. But, just to be safe, I also monitor my budget. I subtract my credit card debt from the amount in my checking account.

I make sure this amount is enough to cover the rest of my monthly expenses.

When I first started playing with credit cards, I didn’t budget properly. I didn’t use Mint, and I’d check my checking and credit accounts separately. Basically, I would just do the math in my head, which is a bad budgeting habit, according to the fuzzy-trace theory. So, of course, I would spend more than I meant to spend. I’d bust my budget.

It’s pretty simple. You should monitor your budget the same way you would with a debit card, to make sure you don’t overdraft. But you have to be even more careful with credit cards because there’s no overdraft protection. And worse, if you don’t make your payment, you’re officially in debt.

Pay your card regularly

In order to keep up with my spending, I pay off my credit card every two weeks. This is also a good way to avoid incurring a late fee or interest, which would cancel out the rewards.

I used to pay off my card on the due date, and that’s definitely an option if you don’t want to worry about making a payment every other week. Paying it more frequently is just an added precaution. Plus, it helps me keep my budget organized.

Don’t spend to your limit

This is pretty self-explanatory. Obviously, you shouldn’t budget according to your credit card limit. If you’re tempted to do this, then you probably shouldn’t be playing the credit-card-rewards game in the first place.

But, for the sake of being thorough, I’ll put it out there: Don’t spend based on your credit card limit. And avoid raising your limit, too.

If you’re planning for a big expense, you might consider making an exception so that you can earn rewards for said expense. But if you think you might equate a raised limit with more spending, just don’t do it.

Pick a good card

When you’re tempted by an enticing offer, do your research. Read the terms and conditions. Read reviews. Here are a few things to consider when choosing a card:

• Is there an annual fee?
• What’s the cash-back incentive? How does it compare with other programs?
• If you’re planning to use the card internationally, are there foreign transaction fees?
• What’s the interest rate?
• Is there a minimum finance charge?

Ideally, the last two shouldn’t matter, but it’s still good to know.

Have an emergency fund first

Because there is a risk of using a credit card, it’s really important to make sure you have an emergency fund first.

Common sense, but worth addressing.

It’s bad enough to over-budget and not have an emergency fund — you have overdraft fees and returned check fees. But when you over budget with a credit card, there’s the added nightmare of interest and late fees.

You shouldn’t play with credit card rewards if…

• You have a shopping problem. A credit card is way too tempting for shopaholics.
• You’re in consumer debt. I wasn’t in massive debt, but I used to have $1,000 worth of credit-card debt. I paid that off before I even started thinking about using my card for expenses.
• You’re living paycheck to paycheck.
• You have bad credit. According to Girls Just Wanna have Funds you should have excellent credit if you’re going to churn cards. “A credit score of 720 or higher on a scale of 850 is considered excellent, and you should have at least a few years of good credit history.”
• You’re considering applying for a mortgage or loan within the next year. “Applying for a credit card will lower your score modestly — about 5 points for each application,” Girls writes. “But if you are about to get a mortgage or other big loan and are borderline on being qualified, they may frown upon opening too many card accounts just prior to applying for the loan.”
• You’re incredibly disorganized and forgetful: There’s the risk of paying your card late and incurring interest. If you’re so forgetful that even reminders sometimes don’t help, I’d probably stay away from credit-card churning.

Rewards are great, but, again, they’re more of a money hack. And having control of your finances is way more important than any hack.

I should also mention that, because lots of people do have trouble managing their finances, many financial counselors advise against playing the credit-card game. Yes, there’s definitely a disconnect because the topic of credit card rewards is hugely popular in the personal finance blogosphere.

With organization and self-control, I think it’s possible to take advantage of credit-card rewards without getting into trouble. If you have a spending problem, however, it’s definitely a bad idea. In that case, you should wait until you get your finances in order and have more control over your situation.

And, anyway, this is just what’s worked for me.

If you earn rewards, what’s your system? And what do you do to prevent any small credit-card disasters?

How to Start Saving For Retirement

Perhaps you heard it from your parents, some guy you know who “really has it together” or maybe you’ve read it on a blog like this one. Regardless of where you got the advice: You know that it’s never too early to start saving for retirement. That means if you have a steady job, you should start to save for retirement

. But how? We get more questions about retirement savings—including 401(k) plans and individual retirement accounts—than any other topic. And no wonder: It seems complicated, it’s boring as hell and, at the end of the day, retirement seems like a long way off when you’re in your twenties.

No matter. You can learn how to start saving for retirement in the five minutes it will take you to read this article, and you can probably start doing it in less than an hour. So if you know that you should start saving for retirement but have no idea where to start, roll up your sleeves, brush off your fear and let’s get started.

Retirement Savings 101

Okay, so why do you even need to save for retirement, anyway? Because lucky for you, thanks to our modern quality of life and medicine, chances are good you will live to a ripe old age. And when you’re approaching 80, you may want to do something other than work. And although Americans receive Social Security benefits after a certain age, our younger generations cannot count on these government benefits alone. They won’t be enough to live on if they’re still around at all. We need to take charge of our own financial future and we do that by saving for retirement. The government will even give us some tax benefits if we do.

Finally, the earlier you start saving for retirement, the better: The more time you let your investments grow, the less money you have to stash away in the first place. (For more about retirement saving basics, read 23 Things Every Beginner Should Know About Retirement Savings).

How to Start

Anybody can start to save for retirement. We’ll cover the two most common ways.

The 401(k) Plan

If you work full-time, ask your human resources manager if your company offers a 401(k) plan or 403(b) plan (if you work at a non-profit). These plans allow you to save for retirement with automatic deductions from your paycheck up to $16,500 a year (in 2010). The best part is you do not have to pay taxes on the money you save. Even better, some employers will match some of your savings (usually a percentage of your salary). When you enrol in your company’s 401(k) plan, you will need to choose among a limited number of investments your plan offers (typically, you are limited to a few choices). Ask to speak with your plan manager for recommendations, or simply choose a target-date mutual fund for the year you will retire. These funds are collections of investments that the plan continually adjusts to maintain appropriate risk and return for your anticipated retirement year.

The Individual Retirement Account (IRA)

If your employer doesn’t offer a 401(k) or 403(b) plan or you want another option, start an IRA. You can open an IRA for free and often with no minimum deposit at most any online broker and can invest however you want (in any stock, bond, mutual fund, ETF, etc.) Investors under the age of 50 can contribute up to $5,000 a year (for 2010) to either a traditional IRA or a Roth IRA. These two types of IRAs often confuse new investors, but choosing can be easier than you think:

• Traditional IRA: Money you put in is tax-free (you can deduct the contributions on this year’s tax return). Choose a traditional IRA if you don’t have a 401(k) or other retirement plans at work.
• Roth IRA: You cannot take a tax deduction for the money you put into a Roth IRA, but you won’t have to pay taxes on the money you withdraw in retirement. Choose a Roth IRA if you do have a 401(k) or other plans at work and you do not earn more than the Roth IRA income limits.

Upon opening an IRA, simply set up automatic investments: transfer money from your checking account to your investment account every month or pay period and forget about it, just like employers do with 401(k) plans. Finally, whichever type of IRA you open, you will need to choose how to invest the money. Choosing from the entire universe of investments is more intimidating than selecting from among a few mutual funds in a 401(k) plan, so proceed carefully. You can research investments yourself using a free tool like Morningstar or enlist the help of a financial advisor (paying an advisor big bucks in your twenties rarely makes sense, but you might pay a fee-only planner for an hour session once a year to help you pick out your starting investments). Whatever you do, resist the urge to do a lot of trading: Even if you get lucky, the commissions and fees will eat up your returns, especially when you’re just starting out.

That’s really all there is to starting to save for retirement. Whether you sit down with your HR person at work or open an IRA account at an online discount broker now, you can probably be saving in less than an hour. The only question is: What are you waiting for?

4 Savings Methods That Really Work

When it comes to saving money, there’s no one-size-fits-all.

We all have different lifestyles, incomes, and preferences. This means the ways we save as well as our abilities to do so, are completely different.

If you have yet to find a savings method that works for you, here are four winning ideas you can try:

1. Save a certain percentage of your income

Saving a percentage of your income is a strategy often used for retirement savings — but it doesn’t have to stop there.

This is a particularly good method for those of you who receive a variable income. Instead of committing to saving $50 per paycheck (and falling short every time your pay dips), you can instead save a certain percentage of your take-home pay.

By doing this, you won’t feel like a failure for not being able to keep up with your intended plan.

Plus, if you’re working on more than one savings goal, you can easily break down your contributions by percentages. For example, you can put 5% towards a down payment, and another 5% towards an emergency fund.

2. Save a set dollar amount

Second, on the list, we have a very popular method of saving a specific dollar amount in a set time period. This method is used frequently because it works and can easily be automated.

Unlike saving a percentage of your income, with which you have to manually calculate your savings, you can save a specific number in a “set it and forget it” type of way.

Saving a set dollar amount each week/month/pay period also works particularly well when you’re running on a short deadline. For example, if you need $6,000 in exactly one year, you know you have to save $500 a month to reach your goal.

3. Save the (virtual) change

Throwing loose change in a jar has always been a common way to save. But now that a lot of money comes electronically, saving your change isn’t as powerful.

To save your virtual change, you’ll need to round up the purchases you make on your debit cards to the next dollar amount, then put the difference in a savings account.

One of the big banks (Bank of America) has started offering this “save the change” feature as one of its perks. Hopefully, more banks get on board with this, as it’s a great way to save if you’re on a tight budget.

4. Participate in a savings challenge

Sometimes, you just need a good ol’ challenge to help you get into the swing of saving. Lucky for you, there are plenty of money-saving challenges for you to try.

Here are a few:

• Saving all of your $1, $5, or $10 bills
• Saving every bill that’s older than you are
• The 52 Week Challenge: Saving $1 for each week of the year (e.g,. $1 for week one, $2 for week two, and so on. In one year, you’ll have accumulated $1,378.)

We all have different preferences when it comes to personal finances. If you haven’t found a money-saving method that works for you, experiment. Keep trying different methods until one click.

What’s your favorite method for saving money? Have you tried any of the ones above? 

Source: 4 Savings Methods That Really Work

Why Am I Having a Hard Time Getting a Credit Card?

Baffled man image via Shutterstock

If you’ve been applying for credit cards, but issuers repeatedly are declining you, it may be time to examine exactly why you are getting dinged. It certainly doesn’t have to do with your personality. More than likely, you aren’t getting approved because you either haven’t established a credit history or you’ve got a poor credit history.

Find out your credit score

When it comes to credit approval, everything is dependent on your credit score. Getting your credit score from a place like myfico.com is the first step in your investigation. Your credit score consists of five elements: payment history (35%), the amount owed (30%), length of credit history (15%), new credit (10%), and type of credit (10%).

All of these factors are what determines the level of risk you present to a creditor. They have no idea who you are. They are taking a risk on you. All they have to go on is your credit history, and you have to prove you are a good credit risk.

Build your credit history

Let’s say you do not have much of credit history. Then you’ll need to establish one. There are many ways to do this. The best way to begin is to obtain a secured credit card. With a secured card, you deposit a certain amount of money with the credit card company that it will use to pay off anything you charge if you default. Now you have a card you can use, and if you pay off your balance on time every time, you will establish a powerful baseline. The secured credit card will report your good behavior to the credit bureaus.

Another approach is to get utility services, like gas or electric or cable TV. Credit bureaus consider your on-time, in-full payment of these services to be of value in risk management because you receive services before you pay. But you must check to see if your utility company reports those payments. Most will, but only if you’re delinquent.

You can also see if your landlord is a member of, or would consider joining, WilliamPaid. This service reports your rent payments to Experian RentBureau. If you can also get a loan to buy a new or a used car, and make those payments in a timely manner, that will help. So will a mortgage or a personal line of credit, providing you make those payments on time every time.

Once you start down this path, go back to those five elements of your credit score. Pay on time every time. Try not to use too much of your available credit. Establish new credit as often as possible. Vary the kinds of credit you have.

Identify what’s holding you back

If you have a credit history, but can’t get a card, then chances are one or more of those same five elements are holding you back. You need to pay on time every time. If you are using up too much of your available credit, remember that issuers analyze your debt-to-income ratio. The higher that ratio is, the harder it is to get new credit. These are the two biggest obstacles you’ll face. Applying for a secured card will also help.

6 Types of Financially Toxic People

Wouldn’t it be great if the world was truly fair? Where every person you knew was truly 100% reasonable in every way, including with money?

Watch out for Financially Toxic People!

Well, as we know, that isn’t the case. The world isn’t always “fair”, as many of us define that term anyway.  And no, not everybody is totally reasonable, certainly not with money.

The reality is that when it comes to money, there are a variety of different approaches that people take and the habits that they possess.  Some people are highly responsible, some are not. These differences can cut across many dimensions, to the point where some people can pretty much be classified as having toxic money personalities.

They aren’t always a joy to deal with.  But, often there is no choice but to deal with them. They could be friends, family, or acquaintances. Maybe even coworkers.  But deal with them we must.

Here are some of the more insidious ones I’ve come across:

The Extractor

An Extractor is the type of person who tries to others to pay for as many things as possible but accomplishes this through sneaky means.  I’ve dealt with a few of these, including one couple in particular in which both husband and wife were of this type.

One way they get free things is by employing stealthy, conniving measures to get you to pay for them.  The best example of this that I can think of is an Extractor couple I knew that would regularly find ways to avoid paying for dinner.  The initial tactic was to come up with “alligator arms” when it came to reaching for the wallet when the check arrives.  In other words, pretending to reach for the wallet but always coming up short, so the other party pays. Or, in other cases, getting up to walk to the restroom when they see the waitress coming toward us with the bill.

In short, they’re wired to slither out of paying what they owe.

The Chiseler

This isn’t someone with a chiseled physique or some type of artisan. Rather, it’s someone who likes to chisel away at others in order to get something.

A woman I knew would fit this description.  One tactic was to complain about the quality of a product or service that she had purchased.  Whether it was writing letters to companies, calling them, or simply complaining at restaurants - she would get free things by expressing displeasure at how they didn’t get what they expected.

I suppose that I wasn’t being “chiseled” away at in those cases. But as Confucius reportedly said, “it’s hard to smell like a rose when you’re rolling in a dunghill”.  In other words, keep the company of people like this, and your own reputation can get tarnished!

The Moocher

This person is always looking to borrow from you.  Whether it’s a book, a lawnmower, or simply a small amount of money – this person always has a “need” to borrow.  They never seem to have enough money

on them, or time to actually buy or rent something they need. Rather, they want to borrow from you.

Why not? It saves them time and money for the time being and offers an escape for their laziness. Plus, if they keep borrowing when needed, they can use your stuff and let it depreciate while avoiding spending any money of their own.

These people sometimes also have the additional attribute of being forgetful. As in, they forget to pay you back, or they keep forgetting to give back what they borrowed from you.  It takes time and effort to remind such people to return what they borrowed.

Thankfully, it has been a long time since I have dealt with one of these. Since college, actually, which was quite a while ago. But what a treat that was!

The Over-Giver

This person, actually, is NOT trying to take your money. That’s a good thing.

However, what he or she will do is insist on paying for your dinners every time you go out.  They will try to be the one who handles things, who gives expensive gifts or just does more for you financially than necessary.  It makes them happy – or so we think – when they do things for you.

The problem is that when they’re spending on you like that, you might be indebted to them. You feel like you owe them, and it’s not great having something like that hanging over your head.  I knew a person who was an Over-Giver, and this person always paid for dinner and was strongly insistent about doing so. He had all the excuses, and was quite popular for being “generous”.  I didn’t like the idea that no matter how much I wanted to pay my fair share, he always had to pay. Not just for me, but for everyone at the table.

So, with this person, there might not be direct financial debt

. But there’s some type of debt, be it time, emotion, or whatever.  It’s not worth dealing with.

This person could also be labeled “The Show-Off”

The One-Upper

This type of person was some kind of undying need to be competitive with others in terms of status symbols. This could manifest itself in terms of homes, cars, vacations, clothes – you name it. If there is something that others have done that is impressive, it eats away at them and they find a way to be better. They simply can’t accept or admit to having less than their “competition”.

The problem with such people is that they prey upon those with the propensity to try to “keep up with the Joneses”.  Sick of hearing such people brag, well-meaning folks might splurge for things out their budget. Why? Well, it might be a matter of getting lured into a competition, getting sick of being made to feel lesser, or maybe just to shut up the braggart. Whatever the case, the One-Upper is someone who can be toxic to your finances, and get you to spend much more than you might otherwise want to.

The Slacker

Truthfully, I can be very soft when it comes to helping those truly in need. I think it’s honorable to give to those genuinely needing help, particularly when we know how that the other person as few other palatable options.  Generosity can be a beautiful thing.

However, it can be important to draw the line on giving.  Some people truly need help, while others act like they need help though they really don’t need it.   These people – the ones crying wolf – are the ones that can be a challenge.  They ask for money, though they actually aren’t doing anything to try on their own. Living off others is what they would rather do, instead of taking the difficult step of trying to be self-sufficient.

Thankfully, I haven’t dealt with such a person yet. However, I know of others that have.  Apparently, it can be draining time and energy.

My Questions for You

Have you dealt with any of these 6 personalities than I described?

Which ones do you think are the most challenging to deal with?

Do you have any others to share?

Source: 6 Types of Financially Toxic People

How Credit Cards Can Make Your Household Budget Work Better

My wife and I budget a little differently than most families. We use a credit card for most of our purchases instead of cash or checks, and use that to monitor our family's monthly spending.

According to a recent Gallup poll, fewer than one-third of Americans follow a detailed written budget every month. Out of those who do, not all of them strictly follow their budgets. This may be a stark indication as to why American families are in financial trouble, with shrinking savings and increasing debt.

So why do we have such a hard time sticking to a budget? Perhaps we feel our spending is often too hard to track. If that's the case, we might need to simplify things.

Budgeting the Traditional Way With Cash and Envelopes

Many financial experts, like Dave Ramsey, recommend that families use a written monthly budget and account for every dollar they spend. Ramsey even goes so far as to suggest that families use a cash envelope system, in which there's an envelope for every category in your budgets, such as housing, entertainment, gas, or groceries. For example, if you and your family budget $100 each month for eating out, you would place $100 cash in an envelope. You spend the cash until it's gone. When an envelope is empty, your family has to stop eating out.
My wife and I found that the envelope system worked -- as long as I remembered to bring her the receipts after making a purchase. But I can't even remember to use a coupon I have in my pocket at the cash register most days, let alone track receipts. So the envelope method of budgeting just didn't work for us. That's why we switched to budgeting with America's favorite financial invention -- the credit card.

The Many Advantages of Budgeting With Credit Cards

You might not realize all the perks that come with credit card budgeting. Using a credit card for all our purchases gives us a real-time accounting of our spending. We can see exactly what we're spending and where it's going. And many credit cards will categorize your purchases on your monthly statement.

Cash, on the other hand, is a nightmare to track. It's far too easy to lose track of your cash. There's a reason people say cash burns a hole in your pocket. It's so very easy to fritter away. There's little documentation to accompany our carefree cash spending. When you use cash, you have to keep receipts and reconcile them with your written budget. But by using a credit card, you have a paper trail of your spending all in one place, either online or in your monthly statement.

Another advantage of using a credit card for budgeting is that it gives you an opportunity to accumulate reward points for your everyday purchases that you wouldn't otherwise earn. My wife and I pay our rent, utilities, cellphone, cable, and other monthly bills with our rewards credit card. We then earn an enormous amount of reward points through these purchases every month -- all while budgeting.

Consider Budgeting With a Charge Card

If you're nervous about budgeting with a credit card, consider using a charge card instead. Many people don't understand the subtle difference between the two. A credit card allows you to roll purchases over from month to month and only make a minimum payment. A charge card, on the other hand, requires you to pay off your total balance every month. Using a charge card allows you to build credit, earn reward points, and budget while not going further into debt.

As with any budgeting system, it takes effort, discipline, and consistency to make it work for you and your family. Budgeting with a credit card isn't for everyone. I understand that. My wife watches our credit card statement like a hawk every month to ensure that we're only spending the amount we've allocated. 

Another hang-up we sometimes run into is when a business doesn't accept credit cards. Believe it or not, there are still a few businesses out there that deal only in cash. For example, my wife loves to shop at our local farmers' market. This is always an interesting expense that we struggle to reconcile in our budget, but that's normal. There will be hiccups.

We budget with our American Express card every month. Some merchants still don't accept it, which makes budgeting a challenge. It's not always smooth sailing, but we do our best to make budgeting with a credit card work for our family.

No matter which system you're using, budgeting is hard work. But using a credit card for budgeting the vast majority of your purchases every month can be a great way to keep your family's finances on track.

So how do you budget? Have you ever thought about using a credit card for your family's monthly expenses? Or are you like so many Americans who are still struggling to write and follow a written budget every month?

What Are You Teaching Your Kids About Money?

How did you learn about money? Did your parents teach you how to write a check, balance a budget, and open banking and investment accounts? Or did you learn through another trusted adult, like a teacher or college professor? Or did you overdraw in your checking account, go into credit card debt, and had to spend your 20s or 30s digging yourself out? Well, you're not alone. The state of financial literacy in America is scary. According to numerous studies conducted by a variety of organizations, America needs to improve its financial literacy. Participants in a Financial Industry Regulatory Authority's Investor Education Foundation survey were asked these questions:

1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? More than $102, exactly $102, less than $102, or don't know?
2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same, or less than today?
3. If interest rates rise, what will typically happen to bond prices? Rise, fall, stay the same, or is there no relationship?
4. True or false: A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest over the life of the loan will be less.
5. True or false: Buying a single company's stock usually provides a safer return than a stock mutual fund.

Only 39 percent of participants answered four or more questions correctly. Yikes! How do we fix this? One step forward would be to have parents take a more active role in teaching kids about money and financial responsibility.

Monkey See, Monkey Do

Kids watch what their parents do and learn from what they observe. (Many children believe that money originates from the ATM since they observe parents using ATMs to withdraw cash.) Use cash whenever possible around them so they can see money being exchanged for a good or service (and they can also see when it's spent, it's gone). Hold on to receipts and explain that you need to keep a record of your purchases so you can track your spending. Share, Save, Spend has great tools for parents and kids. With older kids, encourage them to ask questions about budgeting and investing -- and give them a glimpse of how you successfully manage your own money. Show your teenagers your paycheck stub and teach them about how taxes work, what a 401(k) contribution is, and the difference between gross pay and net pay. Many people go to college without realizing how these basic money concepts work. The Jump$tart Coalition is committed to "educate and prepare our nation's youth for life-long financial success." How can you help educate the next generation?