Personal Finance in a Plastic Economy

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As we move more and more towards a cashless economy, many of the traditional techniques for saving money don’t work as well as they used to. Many of us no longer have as much pocket change or as many loose dollar bills because we make most of our purchases with a credit card or a debit card.

Of course, this is what many merchants want; people are now spending the contents of their piggy bank rather than socking it away for the future, meaning there is more money for them to make. It is so easy today to just buy something with plastic and not think about the consequences and, before you know it, you’re in debt up to your ears and you don’t even have a little pocket change jar to help you out any more.

If you want to save money and build up your personal finances in an economy growing more and more cashless by the day, some new approaches are called for. Here are six principles worth considering for managing your finances in a cashless economy.

Take advantage of the information available to you.
Many people have moved on to using plastic as their primary tool for small purchases, but they don’t have any idea what they can really afford to spend on a day-to-day basis. They don’t have the convenience of a checking ledger like their parents had; instead, they just charge it and figure that their future selves will work it out. This is the path to guaranteed debt problems.

Action Plan: Make sure you have online access to each major account that you hold and keep checking them regularly so that you know exactly where you stand.

Budget, budget, budget.
Now that most people have their money actually held by banks and other entities and only move it around electronically, the need to budget is even more intense if you want to be sure that you’re actually getting ahead. You can no longer rely on “socking away loose change” as a way of saving; you have to allot a certain amount each month or else you’ll always be falling behind.

Many people are entirely unfamiliar with how to construct a budget; if this is true for you, try using The Simple Dollar’s guide to building a simple budget. Once you get this down, you will be ready to go.

Action Plan: Make a simple monthly budget in Microsoft Excel or Google Spreadsheets. If you don’t know what to do, make a list of your monthly spending, divide them up into obvious categories, and use this as a framework.

Make electronic transfers work for you.
For years, I kept trying to save money, but it was irregular and I would, within a month or two, keep finding reasons not to take it back. I kept thinking of the savings as part of my disposable income when I should have been locking it away somewhere safe.

One method of killing this mentality is to get an account at a new bank and start automatically transferring money from your primary account into that new account. This method essentially forces you to save a little each week (or month) because you’re putting it somewhere where it is inconvenient to gain access to it and the transfer happens without your effort, requiring you to plan as though that money really is gone.

Action Plan: Set up a regular automatic transfer, even a small one, into a high interest savings account like the one at ING or HSBC (you can read my appraisal of these two options as well as a review of the money you can make in interest at each). Keep an eye on it if you wish, but don’t touch it; instead, enjoy watching the money build up and start to earn money for itself.

Utilize the “ten second rule”
The ten second rule basically says that every time you go to spend money, you take ten seconds to consider whether that purchase is necessary or not. It is a powerful tool for determining which purchases are really important to you and which ones are not, especially when plastic makes it so easy and quick to make a purchase that you really don’t need to make.

Action Plan: Utilize the ten second rule with every purchase that you make today, or this week, or this month.

Make balance transfers your friend
If you have a high interest credit card balance because of your spending habits, you have a lot of options for reducing that interest very quickly and vastly reducing or eliminating your finance charges. The easiest method is the balance transfer; look for a card that offers a low (preferably 0.0%) rate for balance transfers with low or nonexistent fees. If you’ve been paying your bills on time but not making much progress with them, you’ll likely be able to find such an offer pretty quickly by checking with various credit card offers.

If you have little or no credit card debt, balance transfers can still help you because they amount to interest-free loans from credit card providers. You can easily transform this loan into profit by investing it, then repaying the loan amount at the end of the period. Of course, this is not without risks.

Action Plan: See whether or not there are strong balance transfer plans available to you by keeping an eye on your credit card offers.

Find a good bonus program
If your credit card is not earning at least 1.5% back in your bonus program, you should be considering another card (provided of course that you keep your balance paid off… if you don’t you should be looking for the lowest APR available to you). I earn about 2-3% in the bonus programs I’m involved with and it’s basically free money as I keep my cards paid off completely.

One very strong general entrant in the credit card wars is the Citi Driver’s Edge Platinum Select. If you have any daily commute at all, this card can easily break the 3% mark in terms of cash back rewards.

Action Plan: Consider carefully whether the bonuses offered by your card are useful to you. If you keep your balance paid off each month, a quality bonus program can actually make money for you.

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One thought on “Personal Finance in a Plastic Economy

  1. Pingback: Generation X Finance » Thanksgiving Friday Five

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