Now that the holiday season is in full swing, it might be a good time to reflect once again on the ways and means of the millionaire next door. This came to mind after I observed a woman who was trying her best to pay for a down vest at a recreational equipment emporium. First she attempted to pay for it all on one credit card. When that card was rejected, she pulled out a second card, but it was also rejected. However, this woman was a consumption commando! She had a multitude of cards remaining in her wallet; so she requested that the clerk put $20 on this card, $30 on that one and the balance on a third.
I was reminded of Dr. North, whom I interviewed for The Millionaire Next Door. In fact, I am in the process now of reconnecting with many of the respondents who have been profiled in my books as a base for my next one. As you might recall, Dr. North’s household net worth was in the high seven figures with an annual income in the high six figures. Yet, Dr. North and his wife use only one credit card for all personal consumption.
Their planning, budgeting and consuming are coordinated events. Their purchases are listed on one single statement each month. Each month they determine how much remains to be allocated for each consumption category.
By documenting and tabulating their consumption each month, they are deterred from overspending. Unlike the woman mentioned above, there are no surprises for the Norths when it is time to purchase an item. Too often consumers delude themselves in terms of underestimating how much they really owe by distributing purchases over a variety of cards. What if the woman in question had just one credit card, even one with a high dollar limit? One $5,000 or $10,000 balance will have a much greater dampening effect on consumption than the same amount spread over 10 or 20 credit cards.
Reading this article reminded me why I don’t use credit cards. I personally believe that if I can’t afford it, then I shouldn’t have it. I get stressed out when I even have the smallest debt outstanding.
Looking forward to your next book.
Thanks Thomas! This is a great reminder. I just finished two of your books and loved them both! Must read for anyone trying take control of their financial life!
I witnessed just such a purchase happening in front of me last month. I wanted to say “Stop!”, but I kept my mouth shut and thanked God, that at least I don’t have that problem.
In today’s age, that couple does not and should not be borrowing any money: if they are truly a 7 figure household, they will do just fine with a debit card. If they are not, then they definitely should not be borrowing…..they should be budgetting to save.
If you think I’m wrong, ask Dave Ramsey.
if you plan about your spending, credit cards can be a great way to build mileage, points, and other extra perks that you might not normally have. Also this helps the deficit spending model to be applied to the household: when you spend 1000 dollars on a credit card, you have a month interest free to pay it back. During that month you can have your 1000 real dollars in a savings accruing interest. This might not seem like much at first, but as mentioned in this article, a 6 figure income family will save, or rather make money by spending it wisely. And for those who forget to make payments or feel they’ll over spend, you can utilize autopay. autopay for the credit card bills, and have things like utilities and other must pay items be autopayed from the credit card. This way you dont even have to touch your credit card, and all your bills will be taken care of.
I’m not comfortable with just a debit card, and I’m certainly not going to walk around with hundreds or thousands of dollars in cash on me. I have had one VISA card since 1974, have paid the balance each month in full, have never averaged more than $30K a year in income, and am still worth $850K at the age of 59.5 – Dave Ramsey is not needed in my household – I was saving money while he was going bankrupt to the tune of $2M. I’ll keep my ONE credit card.
The problem with debit cards, at least in the US, is that when (not if) you get some fraud charges, it is a much bigger hassle. It is easier to deal with fraud when it is your credit (on a temporary basis) that you lost rather than your actual money (on a temporary basis).
Rae Kim’s comment, while mathematically correct, is a very dangerous game to play. Last year, credit card companies profited up to $1.07 billion. I wonder how many people playing the “save my interest” game are calculated in that profit number.
To each his own. Credit cards are no more evil than anything else. It’s how they are handled. If you cannot handle your spending, don’t use credit cards. Personally, I have 2 debit cards. They are no more hassle than credit cards when it comes to getting your money back. When people say that “that when (not if) you get some fraud charges, it is a much bigger hassle”, then they don’t know what they’re talking about. I’ve gone through it more than once. The money is put back in immediately and the bank investigates. The bank can see by my spending whether or not I’m a risk to take the money and run. Also, studies have shown definitively that people spend more with a credit card. Also, millions of miles every year expire from non-use.