CHAPTER 2: MASTER YOUR MASTERCARD

A True Story…..

I must give attribution for this story to a financial planner acquaintance of mine, Mike Kavanaugh.  Irrespective of source or trappings when retold, the moral is universal and totally 100% accurate. 

Mike was giving a presentation on financial topics to a group of 12 or so engaged couples.  Most in attendance did not know other participants.  He asked a couple of questions to gauge his audience and break the ice.

“Give me a show of hands: ‘How many of you invest in the stock market today?’”.  8 or 10 folks raised their hands.

Next question: “Show of hands again: ‘How many of you have credit card balances that you carry month-over-month?’”  Around ¾ of the crowd raised their hands, including a majority of those answering in the affirmative to Question 1.

Next question: “Looking for your answer: ‘Which of these actions has the best return – 1) paying off your credit card debt; or 2) investing in the stock market?’”.  An energetic exchange ensued, with the group self-identifying as stock market investors convincing the group that returns in the stock market were superior to the alternative presented. 

That is when Mike turned to his whiteboard.  With a grin he wrote 2 numbers on the board under a heading of “Guaranteed”: 21% and 8%.  He then asked his audience, “Which return goes to investing in the stock market?”  The score from the group ended up quite lop-sided, on the order of 4-to-1 in favor of 21%. 

Mike was pleased.  The group had made the very point he knew to be true, along with exposing a costly misunderstanding within the audience. 

Mike’s Moral

Here’s Mike’s Moral, which is two-fold:

1) Those participants carrying balances on their credit cards were paying 21% interest (mid-1990’s rates; it’s higher today) on those balances.  Eliminate the credit card balance and VOILA!  No 21% interest payment.  That is a guaranteed return of 21%. The only financial action that has a guaranteed return is the credit card interest you do not pay.

2) The correct answer for the long-term historical average return in the stock market is 8%.  And it is not guaranteed!  That average return also brings risk of loss with it.  That risk is higher if the investment is in individual company issues and lower if in mutual funds, but all stock market investments carry risk.

Mike rounded out his point with this helpful directive.  If you have credit card debt, PAY IT OFF and keep it under control.  No one – no one – should be investing in the stock market while carrying credit card debt month-over-month; that is dumb use of financial resources and will always produce sub-optimal outcomes vs paying off credit card debt first. 

Activate Mike’s Moral

So.  What to make of this anecdote?  Anyone carrying credit card balances month-over-month is not paying themselves, but rather living beyond their means.  In this circumstance, the budget process from Chapter 1 needs to be applied like a tourniquet so that spending is reduced to less than income.  Then the surplus generated must be used to eliminate the credit card debt overhang to zero. 

Prioritize Your Success

If you have credit card debt, eliminating it must be Goal #2 after establishing you budget.  Goal #2 should be completed before any other financial goal is attempted because no other endeavor will have the guaranteed return of credit card interest not paid…. 

It is also quite likely that no financial goal achieved will create the sense of satisfaction and ease of mind of eliminating credit card debt.  To reach this goal means you have critically assessed behaviors and patterns detrimental to meeting your goals and have changed yourself and taken control of your finances.  What sweet liberation!!