How to Be a Baller on Any Budget
Financial Literacy Tips They Don't Teach in School
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I recently shared on Instagram a bit about how I use credit cards to both build my overall credit score and support my travel hacking habits, and I got a huge response asking me a lot of questions - so I thought I’d share all my financial literacy and credit card tips here on Substack.
This first post will be about general financial literacy, and a follow up post will discuss how to leverage credit cards to cover travel expenses.
In the past, I’ve shared my experiences buying houses - navigating mortgage rates, evaluating renovation needs, and assessing overall property and resale value to make smart, profitable decisions in a crazy market.
These topics are all fairly basic ideas that I believe most adults should understand - but many of us are never taught how to think about financial issues or how to participate in the economy in a way that empowers us to be successful. And, for much of the population, money is tied to fear.
Financial Mindset Matters
When I first met my husband almost 20 years ago, he was strongly anti-credit cards. He thankfully didn’t have any debt because he’d managed to get a full ride scholarship to college, but he had pretty poor financial literacy otherwise. At jobs where he got paid biweekly (every other week), he would budget for two monthly paychecks and then use the “extra” 2 paychecks a year for fun money. Which mostly meant blowing it all on vintage records and an annual Punk Rock Bowling Festival in Las Vegas.
We both grew up watching family members struggle with credit card debt. My response, thanks to my constant hypervigilance, was to learn everything I could and game the financial system so that would never happen to me.
His response was to never get a credit card.
When we got together, I made it clear early on that I wasn't going to be with or marry someone who was financially irresponsible or illiterate. I simply could not accept the risk for myself and my future children. I encouraged him to get a credit card and learn how to use it - and when I showed him how we both could sign up for an American Airlines card and get a sign up bonus of 60,000 miles each that we could use to fly to Europe for free (he’d never left the country) - he was all in.
That was in 2009, and we’ve been using credit card points and miles ever since.
So that's the story of our oldest credit card. And now we battle for the higher credit card score and it's usually him which is very annoying because we pool a lot of expenses on his card to consolidate the miles, so his credit score is usually 5-10 points higher than mine.
Tenets of Financial Literacy
The next post discusses how to hack credit cards to game travel and other rewards, but since that’s sort of an intermediate level to financial literacy, I wanted to first go over the basics.
Here are the things that I believe everyone should know about being financially responsible (and what we should all be teaching our children):
Budgeting
Living within your means is the most important thing to understand to remain financially solvent. It’s pretty simple - don’t spend more than you have. Understand your income versus your expenses. Track your spending habits in a spreadsheet to understand the percentage of your monthly and annual budget spent on necessities like housing, food, and transportation. This will allow you to see how much you have left over for discretionary expenses, like entertainment and travel. A general rule of thumb is that 50% of your budget should be spent on necessities, with 30% on discretionary costs, and 20% going to savings.
Saving
The typical rule of thumb is that 20% of your income should go into savings so that you can cover future needs and build an emergency fund for unexpected expenses. Ideally, you want to build up your savings so that it can cover at least 6 months of living expenses. If you have health issues, and are able to bring in income and build savings, I strongly recommend that your rainy day fund have at least 12 months of living expenses, just in case.
Pro-tip: High Yield Savings Accounts (HYSA) - I strongly recommend keeping your emergency funds in a HYSA, which is a savings account that accrues interest at a higher rate than a typical savings account. Because it’s a savings account, your money is liquid and accessible at any time. These rates are down a bit now, but in recent years have been around 5%. Which means that if you have $20,000 in savings, a HYSA with a 5% annual rate of return would earn you an extra $1,000 a year (though this interest is taxable).
Credit and Debt Management
Understanding how your credit score is calculated is critical to managing, maintaining, and improving your overall credit - that is, the amount of money a bank will lend you. Having a good credit score reduces the interest rates offered to you, for example mortgage and car loan rates, gets you better loan terms, and reduces the overall amount of your borrowing costs over time. Responsible and regular use of credit cards and loans will increase your credit score, and is further discussed in the next post, Credit Cards & Travel Hacking.
Investing
Once you understand your budget and have built up savings, investing is an important way to make your money earn more money. The HYSA discussed above is an easy and low-risk way to begin understanding how investing works. Investments are a way to put your savings to work long-term to support things like your retirement and your children’s college fund. Compound interest - that is, the interest you make on your interest over the years - can make long term gains very lucrative. There are different levels of risks vs. rewards with various investment instruments like stocks, bonds, and mutual funds. Over the last 20 years, the S&P 500 (mutual funds) has seen an annual rate of return of nearly 10% (this is including major downturns like the global financial crisis of 2008). Using the Rule of 72 - this would double your money invested in mutual funds in 7-8 years (though if you factor in inflation it’s more like 10 years - still a great return). Of course, it depends on which mutual funds you are invested in, and there are difficult to predict economic downturns that can influence your balance right at the moment that you are hoping to retire, as many people hoping to retire currently are seeing now. But, if you aren’t close to retiring - this isn’t a current concern, and investing when the market is low, versus when it is high, increases the chances of a bounce back with higher rates of returns in the future.
Pro-tip: Retirement and Employer Matching - Understanding 401ks, both traditional and Roth IRAs, and other retirement accounts is important for long-term retirement planning. If your company offers matching contributions to a retirement account like a 401k, you should always max out your own contribution needed to get the employer match. This is essentially free money for you and is considered a part of your total pay package.
Consumer Awareness
This is maybe the most important tip on this list: Don’t get scammed. There are certainly many ways to make money through the financial system, but pay close attention and be wary of things that seem “too good to be true.” Don’t buy things you don’t need. Don’t waste money on things of low value. Don’t waste your money on a budgeting tool - learn how to use Excel, or Google Sheets, for free. Read contracts carefully. Understand the fine print and terms of your financial agreements - fees, interest rates, penalties, conditions. Don’t enter into predatory lending situations. Don’t invest in a business if you can’t afford to lose that money (start small). Understand the tax implications of your decisions. If you are opening a business, learn to write everything off - the business use of your home, car, office supplies, necessary meals and travel expenses. Don’t buy a multi-thousand dollar health package from a wellness scammer.
And with that - you are now ready to open a credit card and start gaming the system to your advantage.
Stay tuned for my next financial literacy post on Credit Cards & Travel Hacking.