Also, what does your credit card statement look like this month?
Is it a brush fire? Or the explosion of Vesuvius which threatens to take away Pompeii?
It is normal to have more expenses during the summer. But with the day camps, the outings, the terraces and the various purchases, I have the impression that September has become a bit like the new January. The moment you wake up with a hangover of credit card debt.
My stance on credit cards is simple: if you need one, you shouldn’t have one, and if you don’t need one, you should have more than one.
A reader who wishes to remain anonymous, and whom I will call Lucie*, has just experienced an overdose of credit card use. A few months ago, she was over $30,000 in debt on those little plastic rectangles.
“It was causing me tremendous stress,” she wrote to me. Insomnia, physical pain, fatigue, permanent annoyance… It was a vicious circle, stress prevented me from seeing reality. »
Lucie got in touch with the Cooperative Family Economics Association (ACEF) in her area. “That was my lifeline. I regained confidence, I was listened to without feeling judged. The different options were presented to me and I made the decision to make a consumer proposal. I’m paying off my debts, I’m on a budget, and I’m back to sleep. »
It is an extreme experience that shows the strength of his character. In fact, Lucie learned the hard way essentially the only rule one should follow when using a credit card: completely ignore the absurd concept of “minimum payment”, and pay the full balance every month without exception. .
Unfortunately, one in three people carry a balance on their credit card from month to month, my colleague Marie-Eve Fournier reported this summer.
Even the most prominent people in society are not immune to the destructive power of debt. Investor Guy Spier recently recalled a conversation he had about debt with billionaire Warren Buffett over dinner several years ago.
“[Buffett] told me that he would never like to go into debt because he was afraid to find out how he was able to behave [with debt]. The idea that even someone of Warren Buffett’s stature and ethos could be fearful of themselves in the face of debt shows just how dangerous getting into debt can be. »
Of course, life is unpredictable. You can have a big expense that you didn’t see coming, or you can actually see your income disappear in a job loss.
That is why our first task in life after breathing, eating and reading this column should be to build up an emergency fund.
Building an emergency fund is like having a superpower that allows us to instantly reduce any unexpected credit card balance to zero. Once you’ve tried it, you can’t do without it.
How much should an emergency fund be? It should cover between three and six months of our usual expenses. If you need suggestions for optimizing your spending and building your emergency fund, I’ve already covered how to save $10,000 in a year.
And no, a line of credit is not an emergency fund. A line of credit is simply money from the bank presented to us as if it were our money.
Is it possible to invest your emergency fund so that it earns us income?
This is what Sébastien does, who writes me the following (and I hope you are sitting well):
“I’m saving money for my next car, to pay for it before I buy it, in three or four years. In the meantime, I put that money into the CASH ETF, which earns me 4.4% per year. »
You read that right: Sebastian is saving money to buy his next car and he’s getting paid to do it. He chooses this option instead of acquiring the car first and unnecessarily enriching the bank afterwards by paying interest on the loan.
He says he is also saving money to redo his roof and buy a new washer in a few years.
“It’s not that easy to set up, but once it is, it pays off tremendously. I hardly ever pay interest. »
By the way, the CASH ETF that Sébastien is talking about is offered by the firm Horizon, and is traded on the Toronto Stock Exchange. Its assets are placed in high-interest savings accounts of large Canadian institutions, and the rate offered will fluctuate with interest rates. Interest is paid each month into our brokerage account, and is taxable if the investments are not held in a registered account such as an RRSP, TFSA or TFSAAPP.
I wrote above that people who don’t need a credit card (people who pay off their entire balance every month) should have several, especially to accumulate points.
I am far from an expert in the field. But the Quebec site Milesopedia is a good starting point to learn more. A couple of friends of mine accumulate the equivalent of $5,000 to $6,000 a year in travel points from offers from credit card companies without increasing their lifestyle.
A credit card is like fire: it can warm us and improve our lives, just as it can destroy everything we own.
It is up to us to choose the adventure that interests us.