Personal Finance, presentation, credit advantages and disadvantages prepare to get financially fit by practicing personal finance, things to consider when using credit. And when thinking about credit. Here we’re thinking about financing, which could be in the form of credit cards, or could be in the form of other types of financing, including loans, typically installment type loans. First question, do I have cash for the down payment, this would typically apply if you’re purchasing something large, such as a home, such as cars, such as a boat, and you are required to have a down payment for it, you want to make sure that you have the cash or note whether or not you have the cash for the down payment? Do I want to use my savings for this purchase?
00:41
So when you’re thinking about pulling out credit, one of the decisions you might have then is well, I have some money in the savings. Is it worthwhile to take the money out of the savings? Or should I use the credit Should I dip into the savings, or should I basically be using the credit there is of course that trade off, that will be taking place. Because if you take money out of the savings, you’re not going to be earning money on the savings. And the point that have it in there is for it to be earning money, especially when you’re thinking about retirement.
01:08
But of course, when you put the money into the credit or you take out credit for current expenses, then you’re going to be paying interest on that. Also, if you have money in the savings, you want to note whether or not it’s locked down or not. Meaning if you were to take it out, is it under the umbrella of say a retirement account or something like that, which in which case, you generally don’t want to take it out? Unless because you’re going to get penalised. Generally, if you take it out before the time period without a reason to be taken it out.
01:37
Or if it’s locked up in something like a CD, or something like that you have restrictions related to it as well. Does the purchase does the purchase fit my budget. So note that you want to be planning the long term budget and have an overall plan kind of like a mission statement type of plan for your budget team and make sure that the purchases fit within it, especially any large purchases and make sure that if you’re financing those purchases, they are in your overall goals and objectives. Could I use the credit in a better way? So when you’re thinking about credit and pulling out credit, you’re financing, you’re going to be paying interest on the financing of the money,
02:15
then the question is, well, if I’m going to get the cash, is there some other way I can be using the cash which might be a more appropriate use more in alignment with my goals and objectives, which I’ve laid out in my budget, then the current use that I’m thinking about doing? Can I postpone the purchase? If you’re purchasing something, especially if it’s going to be large, and you’re using credit for it, it may well be that it’s a legitimate purchase, and you want it at this point in time.
02:41
And it’s necessary to take out the credit in order to do that. But you might also consider since I’m financing it, is it possible to possibly postpone until the future when I might have more cash flow for it? What are the opportunity costs of postponing the purchase? When you make a decision like that any decision you’re making that basically any decision, you want to think about the opportunity costs of it?
03:04
What am I giving up both in terms of the money, which is just one factor, of course, and the other the other factors, including the use of whatever you’d be using and so on. When you’re making when you’re making these types of decisions? What are the dollar and psychological costs of using credit for the purchase? So we’re going to be the costs and benefits for it. So we have the credit advantages, what are the advantages of using credit? Remember, we’re talking about different any kind of credit meaning in essence,
03:33
financing, which could be short term credit, such as a credit card, or it could be some more established type of credit, where you’re setting up a loan, possibly an installment loan, possibly for the purchase of like a boat or a home or a car or something like that. So the current use of goods and services, that’s usually why on the personal side, we get credit because we want to be using goods and services now, and I don’t have the money now. So I want to put it on credit because I think I’ll have the money later. And I’ll pay for it later so that I can use the stuff and the services now.
04:06
So it permits purchase of even when funds are low. So even Of course, when we have low funds, that’s the point. We don’t have the money to purchase the goods and services right now. But we want the goods and services now. So we’re going to use the credit in order to do that. use us as security for financial emergencies. That means that it’s nice to have some type of credit that is available to you even if you’re not using it, but you have access to it because of course if there is an emergency, then you need those goods and services at that point, of course, and you want to make sure that you can access them in the event that there is an emergency,
04:42
maybe easier to return merchandise. So sometimes when you purchase something on credit, it might be easier in some cases to return things in that instance, convenience obviously it can be quite convenient to be purchasing things with a credit card especially online because you could purchase it easily with the Credit Card, although we’re getting more and more electronic transfer type payments, which are fairly easy as well, provides a clear record of experience of expenses. So when you make the payment with a credit card, of course, you have a credit statement.
05:14
Typically, if you’re using a credit card in this case, that would generally apply to the credit card. Although of course, if we were to make an agreement for a particular loan, that would be well documented as well. But generally thinking of a credit card in this case, obviously, the documentation of everything you purchased with that credit card is well documented.
05:34
Now, it’s a little bit tricky, though, still, it might be a little bit easier. Like for example, if you look at electronic transfers, which are becoming more and more, more more used these days, they have a good amount of transparency with the transaction as well, when you look at it on your bank statement, as the credit card, it used to be that the credit card kind of gave you more detail in terms of what you were purchasing, because it usually told you the vendor, and like the memo, and so so on when you made the purchase.
06:04
And when you did things with cash, you if you do things with cash, still, you don’t have much record on it unless you actually record the record when you spend the cash. But people don’t use cash a lot. Even if they’re not using the credit cards, you might use electronic transfers, and electronic transfers that come directly out of your bank account, still provide a pretty good trail audit trail. And when you get the information from the bank, they still generally have good information. And you can usually see who the vendor is, and that kind of stuff as well.
06:35
And also, if you transfers from the bank, then you’re kind of on a cash basis system, it might be a little bit easier for your bookkeeping records. Because if it’s a credit card, and you’re not on a cash basis system, you got to figure how you’re going to be recording, or grouping the payments that you made with the credit card even though they didn’t come out of your checking account until a later point, at which time, they’re going to come out at one time.
06:58
One payment, which makes it hard to kind of categorize all the stuff that you bought into the proper categories and so on. But we talked about that in a prior presentation. So I’ll stop there. So we have credit advances, credit advantages continued, you have one monthly payment, so it’s kind of nice to use the credit card and then just actually pay something out of your account. Meaning if you were to physically write a check for your bills, you only have to write one check, as opposed to multiple checks when you’re when you’re doing it before, if you were to be paying with cash.
07:29
But again, even that’s becoming less and less of a burden these days, given the fact that even if you’re not using a credit card, you could still pay a lot of your bills, possibly electronically, even online. And that and so that could be more and more convenient these days as well. Although I still believe it’s probably a little easier maybe to pay with the credit card, and then you make that payment at the end of the month. So a credit card can be safer than carrying lots of cash. So if you have the ability to either, you know, carry a credit card, one credit card, or a bunch of cash around cash is usually going to be more risky.
08:03
Of course, there are other options these days too, you can have a debit card, you can have other kind of options, a prefilled, debit card, and so on and so forth. But credit card is one option that generally is going to be better than carrying around cash, I still think it’s nice to have some cash to carry around. Because then you can tip people with cash, I think people still like being tipped with cash, or at least I feel like they might go a little further. But any case may be needed for Hilton hotel reservations, car rentals and shopping online.
08:32
So obviously, if you need a reservation or something like that, if you need to rent a car, then no, oftentimes, you may still need a credit card in order to do that. So you want to have that ability as well, it’s going to shop online, there may be other resources that you can do transfers, and more and more there should be in the future. But credit cards probably still the easiest way to do it may get free financing for the short term.
08:55
So notice, if you’re using the credit card and paying it off, at the end of the month, you might not be charged any penalties and interest. And you got kind of a short term loan there you made purchases for the entire month, and you didn’t and you didn’t pay any any anything, any interest on it, which is nice. So you get that short term possible financing for it if you pay it off. So may get benefits like rebates, airline miles or other benefits.
09:20
So obviously there could be benefit programs related to the credit card and can help build credit scores. So whenever you’re using credit, it actually could build the credit score, as opposed to if you’re financing without credit, then the disadvantages of credit can be easier to overspend. So obviously if you’re talking about something,
09:39
any kind of credit with a credit card, it could be easier to overspend if you’re not, you know, watching your budget team as you go forward. It can also be easy to overspend when you’re making big purchases as well, especially if you’re picking up kinds of loans that are more what they call exotic loans or creative loans. Right.
09:56
What do they have, you know, the interest rates gonna change after so long and then some thing can happen, and so on and so forth. But so it’s possible to overspend with the loans can cause long term financial problems and slow progress towards your financial goals. So obviously, when you’re taking out debt, then the some debt could be good because you want to be purchasing you want to be using stuff at this point in time.
10:21
And, and typically for most people, they go through a time where they want specially for like a home or something like that, go through the debt, and then your spending is going to go up in the future point. But obviously, when you’re paying interest on something that’s also going to slow down the the future goals and so on with the financial goals, so you want to balance those things out, restricts the use of future income. So So clearly, when you’re, when you’re taking on debt, what you’re doing is you’re over consuming, right?
10:51
We’re consuming generally more than what we have at this point in time. And therefore we’re financing our current consumption with debt. And generally, that could be okay, especially on the early side of life, when we’re saying, This is the time I want to spend possibly buying a home or something like that, and then I’m going to pay for it, you know, in the future.
11:12
But that means that what you’re doing with the debt is tying up future money that you are going to be earning in the future, which makes the future a little bit more difficult, or it kind of restricts you in the future in terms of what your options are financially from there. So credit is more costly than paid with cash. So clearly, that’s the point here. So if you’re going to over if you’re going to spend more than you have right now, if you’re going to take on credit, then that might be a good thing to do.
11:39
That might be, you know, a good decision for that point. But if you had the cash, then of course it would be cheaper, because when you’re taking on credit, you’re going you’re basically taking the purchasing power, you’re using the purchasing power, you’re borrowing the purchasing power and we’re paying back basically rent on the purchasing power interest that will be incurred on it so so that will be more expensive than if we had the cash flow at this point in time to pay with cash.