God I hate debt, I really do. I do not own a single credit card for myself. As an individual I owe no one and no entity a single penny. There is nothing that anyone or anything can offer me that I would want to go into debt for. I plan to pay cash for the used cars I will use in my life and, along with my wife, will pay cash for our first home together. One of the biggest reasons I despise debt, and the only reason that I needed, is because it ties up your monthly income. Easy credit lead me to waste my own money and made it easier for me to be a hyper consumer. Need groceries? Swipe the card. Going out for the night and want to buy everyone a round? Swipe the card. Christmas is next week? Swipe the card. Using credit for everyday purchases put me in a mindset to keep up with the joneses and live beyond my means. But I was also being “sophisticated” because I was “earning” 3% on every item I spent on rewards. So if I spent, say $10,000 annually on my credit card, I “earned” $300. Now, instead of frivolously wasting that money, I invest it in a good growth stock mutual fund that earns 12%, in one year my investment earned $1,200 and the original $10,000 stayed with me and didn’t get spent. I was such a moron!
Using a credit card made it easy for me to spend more than I wanted to. Having one felt like a status symbol and being apart of an elite club. Truth is that companies that offer credit cards are not non-profit companies. Please do not get me wrong, I am not against running a successful business and earning as much money as possible (see title of this blog), but I am against us consumers buying into the myth that credit is how we get ahead in life and are “successful investors.” My wife, who has an advanced graduate degree, told me about one graduate level finance course. In a lesson, the class was taught about the advantages and strategy of using borrowed money to invest in the stock market. You know what was funny, in reviewing her notes and textbook, of all the formulas, theories, charts and suggestions, there was not a single recommendation of what to do, if you tap into your Home Equity Line of credit (aka HELL, the banks just left off an L) to invest money in the stock market and you lose your job/go on short term disability/take a pay decrease/the overall market is down and the value of your investments as well as the value of your home decrease faster than a speeding bullet. These things could never possibly happen right? *wink wink* *nudge nudge*
My strategy has been painfully simple and straightforward. When I shredded my credit cards I also established a liquid cash fund to cover myself in the event of any and all emergencies. My logic was and continues to be this: If I were in a true emergency, for example I lost my job/income and needed to pay rent, would I rather (A) use a credit card and have to pay the balance back, possibly with 18% interest, or (B) use a liquid cash emergency fund that can cover my living expenses for 6 months while I get back on my feet and stream income again. Between those two choices, I’ll take option B 10 times out of 10.
Living on a cash based budget has forced me to live below my means and invest the difference, making my financial independence priority in my life and erased the desire to convey to the world a perceived social status. Living on credit, it was easier for me to choose to live above my means and never have money to invest. Being cash based, I have no monthly payments and do everything I can, even on money budgeted, to stretch every dollar as far as I can. Credit cards did not encourage me to make the most with the money I earned. Frugality and credit cards do not go together. Which leads me to the definition of frugal, according to our friends at Webster: "Characterized by or reflecting economy in the use of resources"
“Economy in the use of resources.” That may be one of my favorite financial phrases of all time. Economy in the use of resources is not the illusion of using other people’s money and earning a piddly 3% back on your money, that doesn’t even keep up with inflation! AND I used to waste my money to get that pathetic amount back! So I had a great looking closet and nothing in savings, I certainly wasn’t born the brightest crayon in the box. Using cash has made me evaluate, re-evaluate and cross evaluate every spending purchase that I make, planned or not. Sure, I budget $380 every month for groceries, but do I really need those grab items at the checkout line? Do I really want to buy one shirt at H&M or buy five at my local thrift store? When I rationalized, thought things through, and refused to accept the argument that banks and credit card companies made, the choice and mantra became easy and truthful: CASH RULES!