Moneywise24 Personal Finance

Without doubt, since the world’s first credit card, issued by Diners Club, credit cards have become an integral part of our lives. Some people swear to have only one credit card, whereas others are committed to having different credit cards for different purposes and needs. Nevertheless, using credit cards unwisely can potentially lead to great money losses, increasing debt, reduced credit rating, up to complete insolvency.

Credit cards exist with many different features and terms and conditions, but they have one thing in common: they will usually cost money in one way or the other. Either credit cards come at an annual fee, or you will pay charges or interest on monthly installments, ATM withdrawal fees, or foreign exchange fees when abroad. For this reason, credit cards should be handled with great care, always aiming at holding a grip on one’s own personal finance.

The best way to manage credit cards is to simply have only one credit card. Credit cards are a necessary feature in many situations, such as when renting a car or conducting online purchases. However, when you have only one credit card at your disposal, it is much easier to overlook the associated expenses. Firstly, many banking institutions issue credit cards free of charge, usually provided specific conditions are met. You will need to do some research, but on the long run this might save you some cash annually; why pay for an annual fee for a credit card if you might not even use it during a given year? Additionally, the terms and conditions may vary greatly for each issuer. This includes ATM withdrawal fees, foreign exchange fees, or fees when you lost your credit card or when it becomes stolen.

One of the biggest dangers of credit cards is the temptation to spend more on items, and to pay back the money using installments. Banks will usually always ask some form of late payment fees, for which yearly interest rates are far from moderate. On average, people will spend 25% more money on items bought with a credit card than they would have otherwise when using regular cash. Additionally, since the money is not immediately debited from the bank account, individuals tend to lose their reality for the spent money. At the latest next month, when the bill arrives, people see the real consequence of their spending. This causes a new problem: due to the mindless spending, people may need to pay items with a credit card again, since otherwise they would not have the required money on their bank accounts.

This spending pattern may result in a mean and vicious circle, causing people to slide into debt even deeper. In such an event, it is not uncommon, that people start applying for additional credit cards in order to create an imaginary spending freedom; the realization that unpaid debt is accumulated is suppressed, and people start living off debt in stead of equity.

Credit cards can offer some necessary freedom, but they can also be quite dangerous for those with poor personal finance capabilities. Therefore:

• Commit yourself to owning only one personal credit card, and stick to it. Do you research as to the pricing and terms and conditions, in order to pay the least possible fees.
• Track all your credit card expenses. Credit cards tempt to mindless spending, but the money will be debited in one way or the other.
• Always pay your bills online. Paying late or using installments creates additional, unnecessary interest, making it harder to pay off debt. In the end, you purchased an item or service, so you will need to pay for it.
• When you are about to purchase an item with a credit card, think about your motivations. If using the credit card is the only possible way to pay for the service (think about car rental services or online shopping), then go ahead. But if your sole motivation is because you do not have the necessary cash to purchase the item otherwise, what makes you think that you will have the financial means next month? Or the month after that?
• Think about your motivation about shopping general. Do you shop because you truly need specific items, or do you shop because it makes you happy and feel good? In the latter, it may be well possible that you are simply burning your cash on items you do not really need. In this case, you may think about thinking over your motivations to go shopping, or in extreme cases think about counseling.

This article is also available on The Man Experience.

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It is not that I don’t like marketing; on the contrary, I studied marketing myself, and I believe it is a great tool for presenting new and innovative products to the crowd.  But the principles of marketing go much further than simply informing the crowd of a product. One of the goals of marketing campaigns is to motivate people to buy the product, to compete with the competition, and basically to get the consumer wanting the product badly.

But we have to be honest to ourselves: how can a marketeer, or a campaign, make consumers want to buy a product? Is it not our own decision to buy or not to buy a product based on our own evaluations and intelligence? Yes, we do make the decision ourselves, but what is our decision based upon? Is it based upon our true, unbiased objective observation, or is it based on what others make us believe is an objective, unbiased observation?

Marketing has many ways of promoting products to consumers in one way or the other. Below, I have listed a few of these methods. The list may not be exhaustive, and I would welcome comments and suggestions on how to expand the list further in detail.

Creating the need for an emotional state of mind

How often do you happy families, women, men, children, laughing and enjoying themselves in commercials? Depending on the product, marketeers aim at associating a special feeling or situation with the product; on a subconscious level, it means that buying that product would lead to that special feeling. The people in commercials are overly good-looking, confident, smiling, and consumers believe they will get all that when they buy the product. Creating that feeling involves the images, but also the colors used, the music and the sounds, the setting and surrounding… nothing is left out.

This association of a state of mind, or emotion, with a particular product might not lead to everyone running to the supermarket and buying the product. However, having seen that commercial 25 times, what is likely to happen when you accidentally see the product somewhere in the store? Exactly, you immediately associate the product with that feeling, and in a sense your unconscious mind has been conditioned to do so; you are likely to buy that product, even if there is a better and less expensive alternative standing right next to it.

Professional recommendations

“This product has been recommended by…”
“Thousands of people have tried this product, and they say…”

Recommendations from specialists, institutions, or simply people on the streets are a powerful tool to creating the illusion that the product must be good and worth buying, since so many people are using it. Personal skepticism is less likely to occur, since we tend to trust recommendations from others.

Making the product scarce

If a product is scarce, it usually implies that it is either extremely valuable or highly wanted. Many commercials and advertisements create a situation, in which the product is characterized as being scarce. Think about the following statement:

“Buy now, only 2,000 samples left!”

Games with wording

Our own language is often used against us. Marketeers have the fine ability to play with words in such a way, that we give a meaning to it that benefits us most. A great example of this is the expression “saving money”, which could  mean any of the below:

• setting money aside for the purpose of not spending it (and usually gaining interest on it)
• spending less money than planned

The first meaning usually earns you money, while the second meaning still means spending money. In a commercial I saw in Germany, the following statement was made:

“Having saved 10 Euros means having earned 10 Euros!”

This is, of course, an illusion, since you could impossibly earn money while you are spending it. Still, hundreds of people line up at major discount events, buying loads of items they probably don’t even need. They feel good, since they believe they have actually saved a lot of money on computers, televisions, or high quality branded clothing. But what they forget, is that they have still spend hundreds of Dollars, which they might have otherwise not spent at all.

Doing the maths

Consumers are very price sensitive, and therefore companies try to make their products as financially beneficial as possible. When it comes to debt, some companies stated monthly interest rate, making them appear extremely low. Other companies promote a very low monthly fee for a service, which comes only with an annual membership and annual payment possibilities. Some stores might increase the price of their products a few weeks before they start promoting major discounts… sometimes the discount price is higher than the original price.

These are only a few examples of how marketing works, and the methods that companies and corporations utilize in order to make their products wanted. As I mentioned before, marketing is a great tool for the purpose of bringing products to the masses. However, we as a consumer need to be conscious of the fact that many marketing campaigns are manipulative in one way or the other, and that only we can make the right decision, that benefits our needs.

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Being in debt has become quite normal in today’s world: people buy real estate and take a mortgage, a loan is taken in order to buy a car, a television or the newest Playstation is quickly bought with the credit card, and this month’s phone bill seemed to bit slightly higher than usual. Actually, debt does not have to be all that bad… if it planned and under control.

And this is where problems arise. Often, debt is not under control. It seems to increase, a second credit card is being applied for, and it seems like a never ending story, until at a certain point the debtors want their money back, and then…

uh-oh.

The worst that can happen is when the complete existence of a person is about to collapse completely; real estate is confiscated by the bank, credit cards are being blocked, in many countries debtors have a certain right to claim a part of the net salary of the individual directly from the employer, and the story goes on. The worst that can happen is to file for a personal bankruptcy. However, if you have not yet reached that stage, perhaps there is still something that can be done.

A few simple things might help to reduce debt. Reducing debt is never fun, but it is the price to pay.

Track your income and expenses

The very first thing you need to do is to track your income and expenses by the cent; it will make your cash-flow visible, and it will allow you to plan and make a budget. Assuming that you have money to spend, the easiest way to keep book is by using Excel, or another spreadsheet program. For each transaction, you will need to need to make an entry in your ledger, so that by the end of the week or month you can it all up. You can then compare the totals of your expenses with your income, and also with the budget you created.

Save where ever you can

Rigorous expense reduction is the next step. Here, you need to know the exact difference between needs and wants, and it is absolutely essential that you concentrate on what you really need for a living, and how you can make substituations in order to live more cheaply. For example, you may want to investigate how Skype could help you as an alternative to stay in touch with friends, you may want to use public transportation more often, or you may need to give up your daily visit to Starbucks.

Hire a debt consultant

In many countries, there are debt consultant who are either subsidized or fully paid by the government. Find out if this is the case, and hire someone who can help to get you out of debt. Firstly, this person will give you a very precise picture of your current situation. But more importantly, he is also an independent consultant, who is able to engage in negotiations with debtors if applicable. By hiring a debt consultant, debtors will see that you are willing to do everything to reduce and pay off your debt, and thus they are more likely to engage into an agreement.

Do not create new debt

Don’t overdraw your bank account, don’t take any new loans, and destroy your credit cards. The last thing you need is a new loan of any kind.

Assess your income

If being unemployed or having a very low income is one of the reasons for being in debt, you may want to assess your current position; what do you have to do in order to get a job, or a better paid job? Do you need education? More experience? Or perhaps there are already some opportunities for the taking. Pursue your career if you can. Browste the job postings, and build on your network.

Reducing debt is not an easy task, especially in a world where money seems to play such an important role, and where companies want to motivate us to spend more of it via sophisticated marketing strategies. However, being debt free is something to look forward to, and in the end: there are any more important things than money alone.

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I wanted to write this short post as a reaction to a phenomenon I saw yesterday at a discount store: hundreds of people were running around in a discount store, which sold many items at extremely low prices. People were virtually falling over each other, just in order to get the cheapest item available. I got curious, and went in.

As soon as I saw the type of products being sold, I was seriously wondering: what is the benefit of buying a low-priced product, if you can throw it away after a month or two? I know, personal finance encourages to cut down expenses where possible, but does it make sense to buy 12 low-qulity items for 7 USD durig  year, or only one high-quality item for 25 USD, which will probably hold for more than a year.

Up to which extent does the low price of an item compensate for its quality? Think about it next time when you go shopping.

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The fashion industry is a very fast-paced environment, continuously searching for new trends and endeavouring to anticipate what will, or should, be ‘in’ next season. Usually designers, manufacturers and retail are already looking at the next season before this season is over.

Personally, I am always being faced with the same problem: I can never get the winter clothing I need when it’s mid-winter, and I can never purchase the summer clothing I need in mid-summer. However, this hides a very good opportunity: As soon as retail shops are starting to exchange their collections, they will sell the existing collection often at a much lower price. In the end, they will not be able to sell the old collection otherwise, and they also can not keep it for next year.

I have had already many opportunities, where I save a lot of money: last summer, I bought a Diesel jacket for 120 Euros in stead of 220 Euros, I bought a G-Star jeans for 69 Euros in stead of 100 or so. And in some rare cases, you may find the finest shoes on the upper pricing scale, sold for only 50% of the original price.

From my experience, I have adopted the following rules for buying fashion, to which I usually stick:

• I will continuously compare products and prices, even if I do not need them. This keeps me informed all the time, and I always know where I can get what product at which price. As soon as there is a sale, I will take a closer look at it.
• I will wait with my purchase until I really need it. If I do not need an item, and it is unlikely I will need it in near future, I will not buy it, also not when there is a sale. If I do need an item or I might need it in near future, I will look at discounts first.
• I will never buy something I do not like, simply becuase it’s cheap. I will not buy something of poor quality, simply becuase it’s cheap.
• If I am not sure whether or not to buy a specific item, I will leave the shop and return back later, perhaps with a friend.

The above examples are based mainly on the European market, and sales might take place differently in other parts of the world. I would very much welcome your comments, experiences and tips.

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