# How to make 35 - 40% on your money ... guaranteed!

joyfulguySeptember 28, 2006

Most of you don't have a home-based business, so most of the stuff that you buy isn't tax-deductible.

Most credit cards issued by stores charge 25 - 28% fees on account balances carried over the end of the billing period.

Since the money that we use to pay that bill is almost always after-tax money, if you are in about 25% income tax bracket, it's easy to figure your before-tax amount needed in order to have that after-tax 28% residue that you use to pay the bill.

Divide the 28 by three, which gives you slightly more than 9, then add the 9 to the 28 to get 37.

If you earn 36%, and have to pay 25% of that in tax, there goes 9%, leaving you with 27% to pay the credit card.

And some of you will be in higher than 25% income tax rate.

Not many banks that I know offer anything like that rate of interest (which, in Canada, is taxed at top rate).

Sorry, this guarantee only extends to amounts owing on store-issued credit (i.e. "debt") cards.

Regular credit ("debt") cards usually charge 15 - 18% on balances unpaid in the billing period, so the "guaranteed" rate of return on balances unpaid with them is somewhat lower - but still far above interest earned when you lend out your principal to earn interest through regular savings channels.

Just some food for thought.

ole joyful

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jannie

Joyful, I don't get it. Call me a dumb blonde. Could you give an example?

September 28, 2006 at 8:12PM
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mikie_gw

So when I charge something for say oh \$100
I take the \$100 and divide that by nine for some reason.

When the credit card bill arrives I take the total amount and divide it by nine. For some reason.

How much do I pay on the credit card bill ?

September 29, 2006 at 11:22AM
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carla35

oh, mikie, you divide it by 3 and then add 9!

Then you cut up your Visa and just use your Victoria's Secret charge to pay since, even though they will charge you more interest, they'll send you a coupon for some free panties! :-)

ole joyful, I know there's a tip in there somewhere but I think we need a better explanation. Help!

September 29, 2006 at 2:43PM
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joyfulguy

Hi all,

If you use a "credit" card issued by a store, if you check the rate of interest/fee/whatever that they charge on balances owing past the date that you must pay the account that they send you, you'll find that you're paying probably 25 - 28% annual rate of interest on that unpaid balance.

If the stuff that you bought was deductible for income tax, you'd save 25 - 28% annual rate of interest if you paid that balance off each month, rather than letting it run.

However, most of the stuff that most of us buy isn't deductible, so we must pay the store fee with after-tax money.

If you, a U.S. resident, are in the 25% income tax bracket, if you earn \$4.00, you have to pay \$1.00 (25% of that amount) to the I.R.S., if you want to stay out of their bad books.

That leaves you with \$3.00.

If your store-issued card charges 27%, you must earn \$36.00 before tax, then pay \$9.00 (a quarter of that amount) to the I.R.S., which leaves you with \$27.00 in your pocket to pay off your "credit" (really "debt") card bill of \$100.00, if you consider the annual rate of interest charge.

If you live elsewhere than in the U.S., the situation is the same - the only difference is in the name of the collector of the income tax.

If you use a regular credit card, they usually charge about 15 - 18% annual rate on unpaid balances. So if your issuer charges 18%, divide by 3, is 6%, add that to the 18%, to make 24%. You must earn \$24.00 before tax, pay \$6.00 (25% of that earned amount) to the I.R.S., which leaves \$18.00 after-tax income in your pocket to pay off your \$100.00 debt to the "credit" card company.

Haven't seen any agency that wants me to let them use my money that pays anything like that rate of interestr, have you?

And - for most of us, the interest that such an agency, for example, a bank, gives me is before I pay the tax on that income for the year.

Clear as mud?

Some say that the store makes more on credit card balances unpaid than they do profit on the merchandise.

Learning how money works - a great hobby *that pays well*!!

Have a great weekend, everyone.

ole joyful

September 29, 2006 at 8:23PM
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azzalea

Isn't the simple answer to just buy what you have the cash in your pocket for? If you don't charge anything (I don't--other than rental cars--because it's just simpler that way), then you don't have to worry WHAT the interest rate is.

September 29, 2006 at 10:19PM
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marge727

joyful you sound like a college professor I had once. He was teaching physics and made everything sound so incomprehensible & complicated I dropped the class which is a real shame because I liked the subject. I could have been a nobel prize winner if it wasn't for him! He eventually got a job writing software manuals.

October 3, 2006 at 5:19AM
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dally099

oh my, just pay cash and save the credit card for an emergancy like your car blowing up or the furnace exploding!!

October 3, 2006 at 11:34AM
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joyfulguy

dally 099,

It surely is simpler that way, but about half of the people who use "credit" (really "debt" cards) let part of the amount owing go unpaid each moonth.

The card companies charge interest and fees at high rates on those unpaid balances: regular cards about 15 - 18% annual rate, usually, and cards that the stores issue about 25 - 28% annual rate.

Since most of the stuff that most of us buy isn't tax deductible, we have to pay those fees with after-tax dollars, so the amount that we must earn to pay that after-tax is quite a bit higher.

I only have one card ... and seldom use it.

Pay cash for most stuff.

But I'm a single guy, and rather old, so, like many seniors, don't have a lot of needs.

Having been a personal financial advisor for some twenty years, though, I hate to see people letting money dribble away unnecessarily (or, without having thought about it, at least), like sand through their fingers.

Once they realize what's happening - if they are comfortable with it, fine ... that's their choice.

But they've had a chance to look at it for what it really is.

Have yourself a great week.

ole joyful

October 6, 2006 at 3:25PM
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carla35

You know, I use my credit card for everything (even just a McDonald's meal). I usually carry only a small amount of cash for parking garages, tips, etc..

I always pay my credit card off in full every month. I also get 1-3% cash back on purchases. That's a few hundred a year! So, in fact, I make money using it.

I do not feel I buy any extra things because I have it at hand. And, I feel it actually saves me some time. I don't have to go to get cash out as often, it is easier to track purchases, helps with budget, and some stores can scan and use it for returns instead of having to dig out receipts. Also, you are not responsible for charges that you don't make, whereas if cash money is lost or stolen, you're just out that amount. Additionally, if used correctly (with not too high of a limit), it can usually help build a good credit rating.

I never have understood why people are so against credit cards when they can intelligently use them to their advantage. Is it really just the fact that they may spend more and won't pay it all off every month, or am I missing something? If you have a budget, stick to it, and pay your bills every month, why not just use one?

October 6, 2006 at 6:54PM
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joyfulguy

Carla, age 35, maybe?

You are one of the 50% or so of users who pay in full every month.

The points that you make are all valid - but I'm was *not* talking to you. My message was directed entirely to the folks who don't pay in full every month - and pay dearly for that "convenience".

Much of my purpose is to help people learn how their money works. It appears that you're doing a good job of it.

Sometimes I've complained to store clerks that it takes longer to process credit card purchases than cash ones (though, recently, with those slide-through thingies, less so). By the way, I owned some shares in a company that made that kind of equipment - they were bought out and my shares forcibly redeemed.

I've asked the clerk(s) whether they'd prefer to be paid from the money that the store received from the person using a credit card, or my cash purchase. They said it didn't matter (actually, they meant that they didn't care - as long as they got paid).

I said that if they were paid from the money that the store got for the credit card purchase ...

... they'd wait a month or six weeks for their money.

And - for evey \$100.00 that the store owed them ...

... they'd get paid \$96.00 - \$98.00 (but not the full \$100.00).

Both of those issues are costs of doing business - which is included in the prices charged (or the store goes broke).

That both cash customers and "credit" card users pay for.

If you're Canadian, Carla, I hope that you have a happy Thanksgiving weekend.

Good wishes to you and yours.

ole joyful

October 7, 2006 at 4:00PM
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sleeperblues

Joyful, my situation is exactly like Carla's, but you bring up some good points that I didn't think of, like how everyone pays extra for the convenience of using credit cards. I won't give up that convenience, because I also make money on my credit cards with a rebate card and I pay the balance every month. I also like having a detailed accounting of where I spent the money, and I admit I dont keep a good checking log. It also saves me from writing checks.

October 7, 2006 at 7:45PM
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sharon_sd

Carla, if you think that you are not spending extra because of using your credit card, then I would challenge you to leave it at home for a month and see if your spending changes. I suspect it will. Money in your pocket says to you that you can spend up to this amount and no more. A credit card says you can spend up to the limit on the card.

Unless your psychological makeup is very different from most people, having easy acess to money via a credit card will tend to make the decisions to purchase much easier. ("Do I want to get a meal at McDonald's? I just have \$10 and I have to pay for parking tomorrow. I guess I will just go home and make something out of what I have in the fridge." vs "I'll just put it on the card.")

The amount you save by not using the card will quickly make that few hundred a year of your money that is returned to you, seem like pennies on the dollar. Think about why the card company gives you that cash back. It is to encourage you to use the card more so that they will make more money from your spending. If you get 1-3 cents back on every dollar you spend, you can bet that the card company is getting up to ten times that. They can't get interest from you, so they are making their money on your volume of business. Doing business for them in greater volume costs you.

October 8, 2006 at 7:23AM
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carla35

Sorry sharon, but I guess I must be odd.

First off, I hate the mall, it's about a mile away from me and I only go maybe one or twice a year usually to meet a friend for lunch. So, I don't window shop or shop for fun.

I buy a lot of my Christmas presents on line throughout the year when items go on clearance and have free shipping. If I have something to get, I go out and buy it. If I don't, I don't. I use shopping lists but if something is very cheap that is not on my list that I would be buying soon anyway I will buy it rather than paying twice as much the next week for it. I think being able to do this actually saves me money in the long run.

Almost all my McDonald type stops are planned. If not, it's because someone is in the hospital or something major has happened and I simply can't make dinner that night. Not having the charge card or cash at these times to do this, may lead me to go crazy!

The only time lately I can recall having a lot of cash on me was when I went on vacation. I think I actually ended up spending more. I let my son get a few extra souvenirs because I had the cash and the stands didn't take charge cards. I also paid twice the amt. I should have for stamps from a machine because I had the cash (This was really a mistake on my part but would not have been made if I didn't have the cash). And, I know this may sound bad to say, but I tend to give more money away if I have the cash. Just yesterday someone was collecting at the stop light. I went to find my dollars for parking--none there--so didn't give any money. And when I picked up an order at Pasta House (yes, the stop was planned), I usually give a couple dollars...couldn't easily find any (and I was mad at them for forgetting an item) so I didn't give them anything.

I'm just not thinking the cash route would save me money. I'm just not the type of person who buys things because I have the money. We have plenty in savings, but I don't dig into it just because I can. Plus, I would never think to buy a outfit I know I couldn't pay off that month. Maybe I am the odd one, or maybe I'm just a little more intelligent than most people in this matter.

And you said:
"If you get 1-3 cents back on every dollar you spend, you can bet that the card company is getting up to ten times that. They can't get interest from you, so they are making their money on your volume of business. Doing business for them in greater volume costs you".

Can you explain how I this is specifically costing "me". I just don't see it.

October 8, 2006 at 10:46AM
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sharon_sd

"I went to find my dollars for parking--none there--so didn't give any money."
"I usually give a couple dollars...couldn't easily find any (and I was mad at them for forgetting an item) so I didn't give them anything."

That is where the savings come in, you apply it to "gifts" but it can easily apply to purchases as well. You "saved" money because you didn't have the cash with you and you couldn't use credit for those things.

I don't know you personally, so I made an assumption, based on your numbers that you put about \$2,000 a month on credit. You said that you earn 1-3% on your cards and get several hundred dollars back a year. Assuming \$500 a year at 2% that is \$25,000 you spend to get that return. Would you still spend that much if you had to carry cash, or write cheques for all those purchases?

What if you carried only a \$50 dollar bill and \$20 in change? How would it change your spending habits? I know you think it wouldn't, and maybe you are right, but from what you say, you really aren't escaping the impulses that seize the rest of us in terms of spending.

If only \$501 dollars out of the \$25,000 that you spend each year are for things you could easily have done without, the card is costing you money. It is probably worth it to you but credit is seductive and we need to go into any seductive relationship with our eyes open, so that we aren't convincing ourselves that every action we take is a free and totally voluntary choice, and that the seductor is acting in our best interests.

October 9, 2006 at 8:10AM
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western_pa_luann

I use my Discover card a lot, and like carla, pay it in full each month.

I do NOT over spend... in fact, the budget is running smoothly! (NO impulse buying, NO recreational shopping....) I don't even eat fast food, yet alone put it on my credit card.

There are some of us that play the credit card game well.... (We eat out free, send free gifts... using Cashback Bonus money accumulated through Discover.)

October 9, 2006 at 1:50PM
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joyfulguy

While some of you may be exercising precisely the same discipline while using the cards as you would if you passed out currency almost always when you shop ...

... the card companies know that you are unusual (I won't say, "peculiar").

And quite a few who don't actually do that ... consider that they do. But the card companies know that many actually don't (whatever their opinion about their control of their spending).

They know that a very large percentage of the population doesn't have that discipline.

In fact, many don't even pay much attention to what rate of fees they are paying on balances unpaid monthly. Many just ask how much they are required to pay each month.

Those are the people to whom this thread was addressed: I wanted to have them understand the price that they are paying for the "convenience".

And, since most of the stuff that they buy isn't deductible, an even higher amount before-tax that they must earn in order to pay that quite high rate of interest.

I don't think that I discussed the merits of using the cards in my oiginal post.

ole joyful

October 10, 2006 at 4:56PM
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sharon_sd

I know that we spend more with the credit card than we would with cash.

We have not paid interest on a card in over 25 years. Even in months where, for business reasons, we charged over \$35k in a month, we paid it off when the bill arrived, or even before. We have no debt, no mortgage even, except for a small investment loan that could be paid off in a week if we liquidated one investment. 3 of our 4 children are college or university educated. We have managed to support a farming habit and still remain "in the black." Our spending is modest compared to most, and it is far from out of control.

But I still know that carrying the card makes it very easy to make purchases that we could well do without. It makes it easier to get more or more expensive "stuff" for ourselves or to give away. I doesn't happen every time we go into a store, but I know that the convenience of plastic money erodes at our family wealth and at the amount we have to donate.

October 11, 2006 at 7:49AM
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greg_h

I know that I spend more if I have cash on me.

I'll stop at Tim Horton's for a coffee. Stop at McDonald's for a snack. Buy a chocolate bar. All these things only cost a buck or two, and that seems like nothing to me if I have that money sitting in my pocket. But it all adds up, and I'm surprised how fast that 20 bucks that I got out of the bank machine gets spent on all those little things that I don't really need.

If I don't have cash on me, I don't spend it. And I don't tend to buy bigger things without thinking about it first, so having a credit card doesn't increase my impulse buys. I don't make any impulse buys, except for those small purchases if I have cash.

So, for me, using a credit card almost exclusively (and paying it off in full every month) and not carrying any cash around is the way I can save more.

October 20, 2006 at 10:41AM
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western_pa_luann

Yep - that's exactly how it works with me!

October 20, 2006 at 2:39PM
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joyfulguy

You guys aren't intended candidates as recipients for my original message.

You are using credit cards wisely - as many do.

Many do not.

Which keeps the credit card companies in business (despite the high cost of fraudulent uses).

Have a happy week, everyone.

Achieve some of your worthwhile objectives - and set up some new ones.

Stretch your imagination (and performance) a bit, O.K?

ole joyful

October 22, 2006 at 3:12PM
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joyfulguy

This message may be of some interest to folks who've come to this forum in recent months.

Good wishes for effective management of your money ... making it work harder for you than for the other guys.

ole joyful

August 17, 2007 at 7:42PM
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joyfulguy

Maybe some who might be affected didn't see this on the last go-round.

Good wishes for success in getting yourself out of debt, everyone who is.

ole joyful

November 15, 2007 at 7:47PM
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