Wednesday, June 15, 2016

Y$10K - How to Live Without Credit Cards

As I mentioned awhile back, I have been living and operating my businesses on debit cards/cash for more than eight years. In that time I have put only about $5,000 on credit cards (and paid it off). It might have been a bit above that, but it certainly wasn't $10,000.

As with most things in life and business, people tend not to challenge common wisdom. One very dangerous piece of common wisdom is that you have to use credit. Another is that you have to give credit to your clients. Neither of these is true.

By "credit" I mean loans or terms of any kind. This includes a business line of credit, credit cards, car loans, home loans, etc.
In all of these cases, two things happen:

1) You spend money you don't have

2) You pay it back with interest (You pay back more than you borrowed.)

In other words, it's a losing proposition.

Most people would argue that you need to have a home loan, so they exclude that from their equations. And most also give themselves a pass on a car loan.

In a perfect world, you would only pay interest on money if you are investing in something that goes UP in value. So investing in your home would be allowed, but buying a car would not. Again, many people give themselves an exception for the car because it's such a large purchase.

I buy a car every ten years and make payments for less than half that time. The reason I do this is that I can grow $15,000 or $20,000 in investments faster than the 3.5% rate I'm paying to borrow that money. So while I could pay cash for my car, I'd rather make payments and keep that money growing at 5-10% per year. That's just me. If you can't guarantee that you can do this, I recommend you buy your car with cash.

The Big Disadvantage with Credit Cards

. . . is that most people are tempted to use these to support their bad cash flow habits. In other words, they're a bit short on cash, so they put an expense on a credit card. Then they pay off MOST of it - but not all of it. This happens over and over. As a result, they are slowly digging themselves (painlessly) into debt.

And most people in this position don't have nice credit cards at 12%. No, they have 25% or event 35% credit cards. Put five thousand on that and you'll probably never pay it off! Unless you do something even more dangerous: Take out a mortgage on your house and use that to pay the credit cards. Now you don't own as much of your house, you've turned monthly debt into 30 year debt, and you probably haven't learned that you can't keep doing this. So you start over with those nice zero-balance credit cards again.

The Advantages of Paying Cash (No Credit)

Now let's look at the alternative: Only pay with debit cards. There are lots of advantages here. The biggest one: You can't buy anything you can't afford. In this case, "afford" means you have the money. Period.

You want to buy new furniture for the office? Fine. You wait until you have the money. You delay gratification. You set aside money. You keep track of your progress. You cut in other places. You decide whether this is more important than that. You plan ahead and align your spending with your priorities.

Those are all great skills that will serve you well in your personal life as well as business.

But perhaps the greatest advantage of paying cash is that you will learn to master cash flow. Cash flow is exactly what it sounds like: The flow of money into and out of your company. Here's a super simple cash flow report you can run for the next two payrolls:

Cash in bank = $__________
Minus bills to pay in the next five days: $__________
Plus payments you know you'll receive: $__________
= Money available for payroll One: $__________
Minus Payroll One: $__________
= Sub total after payroll: $__________

Plus payments you know you'll receive:

Minus bills to pay in the 15 days after Payroll One: $__________
= Money available for payroll Two: $__________
Minus Payroll Two: $__________
= Total available after payroll Two: $__________

For another example, see my blog post on the weekly cash flow procedure.

I look at cash flow almost every day. I don't write checks or put things on the debit card unless the money is actually in the bank. When I screw up, the bank charges me an overdraft fee. That's not a good thing, so I do whatever it takes to make sure it doesn't happen.

When you get good at this, you will always have a cushion in place. My preference is always to have enough money to pay all bills and the next payroll. I want that amount in the bank at all times - even if I just paid payroll.

Let's say your bills plus payroll come out to $25,000 every two weeks, more or less. Your first goal is to make sure your bank account is never below zero. The next goal is to have that $25,000 available in case you need it. It doesn't have to live in your checking account at zero percent interest. You can put it into an investment account with checking privileges. But it should only be in super-safe investments because you might actually need that money.

Whatever your number is ($10,000 or $25K or $100K), don't freak out about setting that money aside. The truth is, you are somehow coming up with that money every month right now. But if you're in the "scratching to get by" category, you're probably coming up with it at the last minute. Turn that around with good habits. It's an amazing feeling to have that money available and to worry about keeping that balance available instead of worrying about being above zero.

Back in March I wrote about cash flow and said "If your business needs periodic influxes of cash, you have a bad business model." Read that article if you haven't already. The main point is that you have to stop creating more debt! Only then can you turn it around and start saving more money.

How Do You Get to the Point Where You Live Off Cash?

This is surprisingly simple. That doesn't mean it's easy - but it is simple.

First, Put your credit cards in a filing cabinet and don't keep them in your wallet.

Second, start paying attention to cash flow.

Third, pay for things when you have the money. Note: This might mean making some late payments and having some difficult discussions. There will be some pain.

In my opinion, payroll is the highest priority. I use a payroll service, so I need to come up with payments for checks plus payments for taxes. If you can't afford the taxes, do not run payroll! Anyway, since that's first priority, everything else comes after that. This is important because it gives you perspective.

Rent is second. The electrical bill is second. Gas and phones and internet connectivity are second. Everything is second to payroll.

When you start looking at cash flow this way, you begin to make some difficult decisions. You can't pay rent unless you have enough cash for payroll plus rent. The same is true with all those other expenses. You begin to make choices about what you'll pay and when.

As I mentioned above, you've been juggling these and paying them every month already. So the move to paying based on actual cash in the bank is a short-term project. It will probably take you one or two months before you are able to pay everything on time with cash from your bank account. Maybe three.

You will also find it very easy to say No to new furniture if it cripples your ability to pay the electric bill and Internet. Suddenly it makes sense to stick with the old furniture for another month.

Check out the last Y$10K post on entering your scheduled monthly payments in Quickbooks (MAXFocus, JungleDisk, Intermedia, etc.).

Eventually, you'll get used to having money in the bank for travel expenses, food, office supplies, etc. The debit card has a VISA or MasterCard symbol, so it's taken everywhere.

The transition won't be painless - but it's not supposed to be. But it will be healthy. When you only pay for what you can really afford (with cash), you'll buy a little less and spend a little more strategically. You'll learn to delay gratification.

And more than anything else, you'll think about your money more. So when it starts to grow, you'll notice it!



  1. Karl - totally agree with you on not carrying any debt (personally or in your business); however, if you have the discipline (and cash flow) to pay off your credit cards in full every month, the benefits can be worth it. I put everything I can on credit cards with great point/mileage programs and pay them off in full every month. Never pay any interest. You'd be surprised at how quickly the points add up and what you can buy with them.

  2. Very very true - IF you have the process and habit of paying them off.

    If your daily business expenses can get you 1,000 frequent flyer miles (or whatever), that's great.

    But if you do not have the discipline to pay off the credit card every month and just fool yourself that you can do it, you will end up paying hundreds of dollars in late fees. At the end of the year you may find that those late fees could have bought you several flights.

  3. My businesses are cash flow financed since 1996. No loans, no credit card balance, no debt.


Feedback Welcome

Please note, however, that spam will be deleted, as will abusive posts.

Disagreements welcome!