12 comments

Meet the Realist

Whoa, did you read that opinionated garbage yesterday?

Who is this Mr. Money Mustache? The guy thinks he’s got it all figured out. And is he trying to offer financial advice, or just financial scorn to those less fortunate than himself? Sure, maybe you can retire early if you are born to a frugal family, get a good education and never make any mistakes. But what about the rest of us? Is there any hope at all?

My name is The Realist. I’m contributing to this blog to add some perspective to the hard-edged idealism of this “Mr. Money Mustache” (who needs a fake catchy name like that anyway?).

So, life is hard in the modern world. Rapid changes in the business environment mean frequent layoffs and difficulty in holding a steady job. Health care inflation means we waste more of our small paychecks on medical costs each year. Gas prices are higher than they used to be, and so are other costs like food, child care, and education.

Yet some people manage to get by while others go bankrupt. Is it all just luck, or is there something we can do to beat the odds ourselves? As the Realist, I’ll step in to present small but powerful steps to help you get ahead. There is a sometimes a fine line between financial solvency and bankruptcy.

How fine? How about $5 a month?

Here’s your lesson for the day: say you are breaking even – paying all your bills, buying $500 monthly of necessities on a credit card which gets paid off IN FULL each month with no interest, but not able to save a cent.

Then a McDonald’s opens up next to the office where you work and you start buying lunch once a month instead of brown-bagging it. All of a sudden, you can’t quite pay the credit card bill each month so a small balance starts to accrue.

  • Month #1: there’s a $505 balance and you pay $500
  • Month #2: you are charged interest on the full $505 from the first month at 17% ($7.15) plus the extra shortfall ($5) – you’re $12.17 short
  • Month #3: interest on $512.17 ($7.26) plus this month’s shortfall ($5) – you are now $24 short

Ahh, one burger a month, 24 bucks after 3 months. That’s not so bad, is it? YES IT IS.

After 10 years, you’ll have a credit card debt of $4,282.69. If you couldn’t pay it off when it was $505, things are looking much tougher now.

And that is $5 per month. Imagine someone so free spending that they went to McDonald’s once per DAY?

That person would be $50,707 in debt after ten years.

Wow, that is truly extreme. So the lessons for the day are:

– never EVER let a credit card go even one month without paying the balance in full – because they trick you by charging you interest on all your purchases for the whole month even if you only underpay by a few bucks.

– there is a surprisingly fine line between staying afloat and sinking, even over a short period like a ten years. Understand this and then all those stories about people going bankrupt start to make sense. But there also a fine line between staying afloat and rising up quickly to become very wealthy! What if the person breaking even above found a way to save $10 a day instead of spending $5 more than she made each month?

  • Acorn May 25, 2011, 10:13 am

    Wouldn’t you only pay the interest on the $5. and not the first $500. since you are paying that part off each month?

    Reply
    • MMM May 25, 2011, 9:03 pm

      Well, that’s how it SHOULD work, if credit cards weren’t super Evil. But as it turns out, if you ever don’t pay your balance in FULL, they instantly go into super-shaft mode and apply back interest to every purchase you made that month, since the day you made it.

      At least, that is what I have read in the get-out-of-debt guides I sometimes review for entertainment. I’ve never not paid a credit card balance in full. If I’m wrong on this, someone can feel free to step in and educate me.

      Reply
  • Bakari Kafele May 31, 2011, 8:57 pm

    Its true, but with one distinction: you have to pay the statement balance by the due date, not the current total balance. The statement balance will be stuff you bought last month. You don’t need to pay the things you purchased between the time your last payment posted and the day you are paying, until the next statement comes out.

    I learned that this makes a difference because if you always pay in full, your credit statements always read zero, and that looks bad on your credit report for some stupid reason. As long as you pay the statement balance, you should pay no interest (but don’t take my word for it, check the fine print on your card disclaimers)

    If you are financially independent, maybe you don’t care about your credit score, but it could mean a lower interest rate if you ever decide to buy a house with a loan.

    Reply
  • jDeppen June 2, 2011, 9:56 pm

    I’m new here and I like what I’ve read so far (also a Facebook fan).

    This reminds me of something Dave Ramsey said, “If you play with snakes, you get bitten”.

    Why do we need credit cards at all? What’s your position?

    Reply
    • MMM June 2, 2011, 10:40 pm

      Thanks jDeppen!

      Well, we definitely don’t need credit cards. If I had a choice of everybody being allowed to use them, or nobody being allowed, I’d pick nobody, to protect the people who are destroyed by them every day.

      But as long as they are going to be out there anyway, disciplined people can use them as a free one-month-interest-free-loan / budget tracking / cash-back tool. I get about $1000 back every year in free plane tickets/hotels/car rentals due to a unique situation we have with a Travelocity American Express card. So a good portion of my family’s oversized travel budget is free because of credit card use!

      But no, I’ve never been ‘bitten’ by a credit card, because it’s set to automatically pay the statement balance in full from my bank account each month.

      Reply
    • Scott January 28, 2013, 7:10 pm

      “Why do we need credit cards at all?”

      Because you need self-discipline to be mustachian anyway, and a 1-2% discount on everything you buy is worth it.

      Reply
      • Lesayle April 18, 2013, 10:37 am

        At 27, I just signed up for my very first credit card. Fidelity’s AMEX which gives me 2% into a brokerage account for all spending. I did so because I know I won’t abuse it and even at my low spending rate I should get back $100 a year that I wouldn’t have otherwise. Not much, but it’s something.

        Reply
  • Sarah December 11, 2012, 5:59 am

    How do you go from just breaking even, where $5 a month will tilt you downhill, to being able to save $10 a day? Is the author assuming a large(r) income and a large debt mountain?

    Reply
    • Kimberly V January 6, 2013, 9:51 pm

      I don’t know about saving $10/day when things are that tight, but I have learned with recent belt tightening that if we look around there are often things we think of as necessities that can really go, like the $80/mo cable bill, or the exterminator/gardener who cuts your lawn, meal planning with the grocery ads to get the most out of your food dollar. It all ads up to give you a little breathing room/ the possibility to save.

      Reply
      • DebtBaby May 24, 2013, 2:45 pm

        I agree with you about the cable bill. That has come up in recent discussion in our household as whether or not to cut. It is definitely not a necessity.

        Reply
  • Ivan July 4, 2013, 9:53 am

    Wow, this is an eye-opener. I always thought not paying your credit card in full each month was bad. But I didn’t know it was THIS bad. Now it makes sense how someone can spiral into credit card debt so quickly.

    Discipline helps when it comes to staying on the “right” side of the fine line between staying float and sinking fast. A better strategy would be to automate your credit card payment. That way, the credit card gets paid on time, every time without worry. And you still get the perks.

    Reply
  • Matt March 11, 2014, 10:28 am

    Holy CRAP!!! A friend just pointed me to this website a few weeks ago, and I’ve been trying to grow a moustache. I thought I was reasonably savvy about this stuff, but NEVER realized this. This just made my debt emergency feel a whole lot more intense.

    Reply

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