A Shocking Credit Card Offer

shocking-offer

While on an airline flight from Charlotte to Phoenix recently, the co-pilot came over the speaker and said he had an exciting offer to share with us.  To use his words, our flight had been selected to receive a very exclusive, limited-time offer.  Well…Mr. co-pilot, what could this wonderful offer be? Waiting with anxious anticipation (hey, I’d been sitting in this seat for 3+ hours at this point), I was a bit taken aback by this “offer.”  What was it?  For this flight only, we could sign up for the exclusive airline credit card and receive 40,000 bonus points after our first purchase – enough for a free flight to Hawaii!  And if we signed up in flight, we would receive an extra 500 frequent flyer miles and extra credit for the flight we were on.  To top it off, we would get priority boarding on future flights as long as we remained active members.  Wow – what an offer (insert dramatic sarcastic eye roll here)!

I don’t know about you, but that’s an elite club I don’t want to be a part of.  But I was shocked to see so many people pick up an application and start filling it out.  While there are ways to earn perks on a credit card and plenty of ways to try and game the system to earn little rewards, is it worth it?  I say NO.  Why? Let’s talk about 5 reasons this is an offer to pass up.

It’s still a credit card

Even if you get lots of free perks, you’ve still signed your name to an agreement to take on debt.  Romans 13:8 – my mantra on debt – doesn’t quite fit with that approach.

Fees

This “generous” offer was accompanied by a $99 annual fee.  Still cheaper than a flight in most cases, but why in the world would you pay $99 for the privilege to go into debt?

Backed by an Airline

If there is one industry that can compete with the government for proving it cannot handle money well, it is the airline industry.  A company that charges me to: board the plane (and pay extra for a decent seat), bring my luggage, have a snack (no free peanuts!), use the internet, watch a movie, etc., etc. is clearly a company that I need to watch my pennies around.

Rewards Rarely Get Redeemed

Studies by the credit card industry bear out that $48 billion worth of credit card rewards points go unredeemed each year. This is why the companies can be so “generous” in offering the rewards, because they know you aren’t going to use them!

Gotchas

We’ve all had it happen to us – we sign up for something, thinking it is an amazing deal only to learn later (always too late) that there was a catch. Maybe on this one it is blackout dates, maybe there is a hidden fee, maybe it is the rule that you must apply in person, have your application personally approved by the pilot, dance an Irish river dance and clean the plane upon landing…with your toothbrush. Who knows?  I stayed far enough away from that “snake on a plane” offer to find out.

 

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Money: The Ultimate Problem Solver?

money-problem-solver

Normally I try to be encouraging and uplifting (and maybe kick your butt a little) when I write, but today is not that kind of day.  Today I need to shoot down your unrealistic dreams for a moment.  Why?  Mostly because I want us to all be on the same page when I am encouraging you to do things that will lead to you becoming filthy stinkin’ rich.  Ready? Being rich won’t solve all your problems.  Despite what the latest rappers want to tell us, having money isn’t all there is to solving your problems.  Let’s consider the issue for a moment. Read the rest of this entry »

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Common Sense Taxes: Buying Something to Use as a Write-Off

common-sense-taxes-buy-to-writeoff

The Question

Today will be a short post, but an important one.  I get asked all the time in various forms about buying something for tax purposes, so let me give you a few examples of the questions I’m asked and my answer:

  • Should I buy that hybrid so I can get the tax credit?
  • Should I remodel my house?  The government is offering tax incentives for ___.
  • If I buy before ____, the government will give me a tax deduction for that new computer.  Should I do it?

You get the idea.  The root question is this: “should I buy __ to get the tax write-off?”

My answer

If you’re spending extra money just to get a tax write-off, that’s not a smart move.  If you NEED a replacement vehicle, be smart and get the best deal.  If you want a hybrid and your budget allows it, GREAT – the tax write-off will be a perk.  But don’t let that be the reason you buy any type of vehicle.  Buy a vehicle based on your family’s needs and your budget.

Same goes for a remodel or other home improvement project.  If you NEED to take on a project and your budget allows, go for it.  But don’t remodel your house just to get some tax deductions.  The math doesn’t work in your favor.

Same also goes for computers, phones, etc., etc., etc.  The government subsidizes (gives you a tax credit or deduction) because enough people aren’t doing what they want and so they incentivize (give you an incentive) to try to get you to follow their plans.

My last thought on this topic is this: if you are planning to take on a project or make a major purchase that just so happens to have some tax benefit, please be smart enough to take the full benefit of it.  I don’t want you to misunderstand my advice and avoid anything that will get you a tax credit or deduction, I just don’t want you to do anything for that reason alone.  Clear enough?

 

Permanent link to this article: http://www.debtortobetter.com/buying-something-for-tax-write-off/

Invest or Pay Off Debt: Part Two

A few days ago, I started the discussion on whether you should use extra money to invest or focus on paying down your mortgage.  The argument thus far for investing extra money has been that investing is smarter because you will earn more in investment returns than what you’re spending in mortgage interest.  To take this argument deeper, I want to be fair to those who sit on that side of the fence.  Their claim is valid, but let’s talk about why I still disagree.

The crux of the financial advisor’s position when he encourages you to invest in lieu of paying off a mortgage is that you can outpace your interest costs on a mortgage with good investment returns.  If he can’t convince you, he may suggest you put money you planned to use to pay down your mortgage into investments, let it grow to a balance greater than that of your mortgage, then use those funds to pay off your mortgage. He says doing it this way gives you the best of both worlds – I say he’s wrong.  Here’s why.

When you convert dollars owed vs. dollars invested the math isn’t always easy.  For instance, if you owe $100,000 on your mortgage and at 6% interest, you’re paying roughly $500 per month in interest (1/2% of $100k).  You’re invested amount would have to make more than that in interest for it to win out.  While it may do so as a percentage, think of it in dollar amounts.  Unless you had $100k invested somewhere earning at least that much interest (or $50k earning twice that, or $25k earning four times that, etc.), you won’t win out using this approach.  You also would have to pay taxes on your investment gain, diluting the earnings by as much as 30% or more. Pause for a minute to “take a breath before we dive deeper.”

Reality is that there is a point at which your investment’s interest earnings will outpace your mortgage interest savings as the investment grows and the debt shrinks, but where that falls is dependent on your mortgage amount and interest rate (two knowns) vs. the BIG UNKNOWN of what you would earn in interest on your investments (both as a percentage and dollar amount).

There are no guarantees with general investments like stocks, bonds and mutual funds.  Statistics show you will make money in the long run, but you have no way to calculate how much you will make (or lose) over any given length of time.  Investing has its risks and you’re taking them with every penny you invest.

Let’s boil it all down. I would never invest money with the purpose of later using it to pay off a specific debt.  I would ALWAYS pay off that debt and invest whenever the debt is paid off.  Taking my advice will pretty much guarantee you pay off your mortgage (at the risk of losing some investment earnings).  Taking the financial advisor’s advice means you won’t pay off your mortgage earlier unless your investments do really well.  Which risk do you want to take?

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Invest or Pay Off Debt: Part One

A while back I wrote a post on Retirement Savings vs. Debt Reduction and it prompted some of you to ask me about when it made sense to choose investing (retirement or otherwise) over paying off your mortgage early.  Most people agree that getting out of credit card and other “dangerous” types of debt is a good plan, but the mortgage is viewed as a different animal altogether.  Why?  I believe it is because most people live with the idea that you can never pay off your house and that it is a “safe” type of debt anyway, usually with a low interest rate.  Let’s tear into this idea and see where it takes us.

The Argument

The question that made me really want to bring this up in a post was from a reader who wrote me and said, “I asked our financial advisor about paying down our house and he advised us…that directing that money into our investments would do much more for us.”

My Response

I think your financial advisor is giving you bad advice.  In the perfect world, if you were able to direct every penny of money you would be using to pay off your mortgage into investments that provided a good return (KEY), your financial advisor would be correct.  However, debt equals risk and there is no exception to that equation.  Let’s assume life happens (and it does every day).  What about the possibility of a job loss, disability, death of a loved one, etc. that would change your income to a point that it would make it difficult to pay your mortgage payment?

Then there’s the discipline required to use every penny of income that would go to a mortgage payoff to instead invest.  Yes, there’s no tax deduction when you don’t have a mortgage and yes, you’re missing out on the opportunity to invest, but how much more could you invest if you had NO HOUSE PAYMENT!?  

In our situation, we paid off our house just before Stacy turned 30 and being debt free, we are now able to put back enough for retirement that at our current pace (and we’re not really stressing ourselves toward it), I could retire at age 45.  I don’t plan on retiring at that age but being completely debt free gives us total control of how we spend our money.  I would ALWAYS counsel someone to pay off their house before paying lots and lots extra toward retirement.  

That being said, I don’t think you should avoid paying into your retirement/long-term investing altogether for the sake of paying off your mortgage early.  I believe and teach that before you pay extra on your mortgage, you need to be paying 10-15% of your income into retirement savings so as to ensure you don’t get behind on the retirement savings goal.  Once you’ve done that, you can put everything else extra toward the debts to free yourself from them.  This is exactly how Stacy and I did it and it has (so far) worked out even better than expected.

Within the next few days, I’ll address a deeper aspect of the financial advisor’s argument and hopefully help settle this discussion for you (if I haven’t already).

What says you?  Should you put every extra penny onto your retirement, your mortgage, or somewhere in between?

 

 

Permanent link to this article: http://www.debtortobetter.com/invest-or-pay-off-debt-part-one/

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