Of Credit Cards and Spring Break

The University of Missouri is just finishing up our Spring Break.  As I visited with students last week about their plans for the break I heard everything from “My Spring Break will be in the library studying” to trips to locations all of the United States and even overseas trips (most of the locations involved a warmer climate than was predicted for here in Columbia, though!).

 

The question of how students pay for these trips is always an interesting one – some consider it part of their “education expenses” and use student loans, some student’s parent’s help out with a portion or all of the trip, a few save up for it, and some use a credit card.

 

In this article I would like to address the last two strategies – paying for it with a credit card and saving up for it.

 

CREDIT CARDS

 

I pulled up some statistics recently about credit and credit card[1] usage. Here are a few highlights:

·         75% of families carry credit cards

·         58% of those who have a credit card carry a balance

·         Americans carry $796.5 Billion in revolving debt – 98% of that is credit card debt

·         The average balance per household with credit card debt is $14,750

·         The average number of credit cards a person holds is 3.5

·         The average APR on new cards is 14.73%; of those that carry a balance the average is 13.67%

·         39% of freshman start college with a credit card already in hand

·         84% of students carry a credit card

·         50% of students carry 4 or more credit cards

·         The average undergraduate graduates with a $2200 balance on their credit cards

Let’s say that a student is going on Spring Break and they figure that with plane tickets, hotel, food and entertainment they are going to spend $1000. They have their shiny new card with a 14.73% interest rate and charge the whole trip on there.

 

Using the Credit Card Repayment Calculator[2] on the Federal Reserve Website if the student pays the minimum balance it will take them 7 years to pay that $1000 off and they will pay $560 in interest! They add more than 50% to the cost of their trip with interest.

 

There is a better way – let’s visit it here:

 

SAVING

 

I know this is a theme that is revisited over and over – but saving up and paying cash is almost always going to be the best option – especially for something like a Spring Break trip. One of my favorite budgeting tools is something I call Revolving Savings. Basically you sit down and map out the next 12 months and put everything in there that you might spend over the next year that is known, but irregular. Here is an example:

 

January   Birthday $20	February	March Spring Break $1000	April
May	June	July Car Registration $90	August
September	October	November	December Christmas $200

Obviously this example is simplified and you are likely to have more expenses than listed here, but it gives us a good guideline. Include everything you can think of that you know is coming up, but isn’t on your regular monthly budget.

 

Add all the numbers up and you get a grand total of $1310. Divide that by 12 and you get $110, which becomes a line item on your budget. If $110 seems high you need to visit each line again. Do you really need to spend $1000 on Spring Break? Maybe not – you can probably find some lower cost destinations, and you can usually save money by buying things like plane tickets ahead of time. Once you come up with a final number transfer that amount to savings each month, then as expenses come up simply transfer the needed amount to checking.

 

My wife and I sit down every December and map out the next year. We look at what we spent the previous year and we try to anticipate what may come up the next year and how much we want to spend on it. This budgeting tool can help you save interest on an item that you should be paying cash for.

 

For those of you just getting back from Spring Break that charged it on their credit cards – I encourage you to look at how you can get your trip paid off as quickly as possible. Memories from a trip are wonderful – the bills that come later – not quite as much fun.

 

[1] http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php

[1] http://www.federalreserve.gov/creditcardcalculator/

 

Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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[1] http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php

[2] http://www.federalreserve.gov/creditcardcalculator/

Students! Get Organized!

We are sure that many of you are so organized that you never lose your class notes, your homework, or your umbrella.  If you are one of these students, then you need to do the same with your financial papers.  If you are not one of these students, then you may a larger barrier to cross but now, when you are young, is the best time to treat yourself to the beginning of an organized financial life. 

 

The National Endowment for Financial Education (NEFE) suggests organizing your financial files with folders and, yes, manila folders work.  In 2011, some of these may be best kept on the computer – assuming you back-up your files.  The main thing is to get organized and you may wish to consider having a locking file box or a locked drawer or closet for your financial papers.  The following organizational structure is suggested as a starting point.  They are, in alphabetical order:

 

Banking – Collect your bank statements and copies of checks in a folder or, perhaps, a three-ring binder.  Many banks have electronic services where records may be kept on their servers.   Remember to print them out, if you change banks and the records are less than three years old.

 

Bill to be paid – This is a good one to keep handy.  Making timely payments to your creditors, utility company, cell-phone provider, cable television supplier, and other vendors is crucial to establishing and maintaining your credit rating.

 

College – It is a good idea to maintain your own records about your courses, grade reports and credits earned should questions arise.  This is increasingly important when you complete your education and have a job that requires continuing education credits.

 

Financial Aid – Keep copies of your financial aid and scholarship applications, essays you’ve written, award letters, and notes about telephone conversations.

 

Insurance – Have a file for your automobile, medical and renter’s insurance policies.  Before you put the file away, read over the main points of the policies and double-check to assure that you are adequately insured.

 

Loan and Credit Records – File each of your loan agreements with your payment records for student loans, credit card loans, auto loans, home loans, or whatever loan you may have.  Keep the paperwork here.  Think hard, however, before you take out any consumer or student-loan debt.  When it is time to pay the loan, the payments will always be less fun than the spending.  While you are a student, your number one job is to earn your degree – not work excessively so you can make payments on your loans.

 

Receipts and Warranties – Have a file for receipts for major purchases, such as computers or electronic equipment.

Savings and Investments – This is the file you want to see grow.  Keep statements with respect to each savings account and investment account.  A separate file for each account is considered best.

 

Taxes – Each January, start a new file for anything that has, or you think could have, anything to do with your tax returns here.  This includes the obvious such as W2 forms, pay stubs, receipts for charitable contributions, 1099 forms, as well as receipts for medical expenses and investment expenses that might be deductible, should you be able to itemize your deduction.  (Until you purchase a home and have a mortgage, you are not likely to itemize.)  If you are not sure if an item needs to be kept for taxes, keep it.  It can always be thrown away later but it can be an aggravation to replace it.

 

Records can be very special to you.  Some are difficult to replace; such as your birth certificate, Social Security card, marriage license, military discharge papers, wills, trust documents, power of attorney documents and et cetera.  Items such as this should be stored in a safety deposit box in your bank or, if not, a fire-resistant box or vault in your home.  This can include some unlikely belongings, such as the George Brett rookie baseball card a friend of mine gave me to pay for my son’s college education.  It did not.

 

In closing, the best thing about record keeping and being financially organized is that you begin the disciplined practice of doing your part to assure that you have the best chance of reaching financial success.  George Brett had a lifetime batting average of .305 – or three hits for each ten times he appeared at the plate.  Your chance of financial success is less than this, if you are not organized and aware of your financial life.