Q&A with a CPA: Rewards Cards, Warranties and Budgets
This week I’m tackling a couple common questions I receive from people often. Are there money topics that you wish you had an unbiased answer to? Please let me know and I’ll answer in a future article!
Q: Should I get a rewards credit card or a cash-back credit card?
KCL, CPA: First of all, if you’re planning to carry a balance: neither. Find a card with the lowest rate (you might even find one with a 0% introductory rate) and use that one until your balance is gone. If you’re thinking of using a credit card for your everyday spending then paying it off each month, then no matter what kind of rewards you tie to your account, make sure you’re not paying an annual fee. There are some cases where this rule might be overridden, but unless you’re accruing massive cash back that far outweighs the annual fee, avoid it.
Either way, I think a cash-back card is your best bet – you can always use your cash back to buy an airline ticket, but you won’t be able to convert your airline miles into a statement credit. I personally use a card that gives me cash back, but toward travel purchases. This works because it doesn’t matter what airline, hotel or car rental company I use and I travel enough between work and personal that I’m able to use my rewards.
I’ve used a points cards before where you can cash in your points for gifts or gift cards, but unless you’re going to use those gift cards to purchase something you’d need anyway, I found that I was using them for things that ended up being clutter. Or, I’d order a gift certificate then shop for things I didn’t want or need. Stick with the cash back.
Q: Does it make sense to purchase an extended warranty?
KCL, CPA: Probably not. Instead, take the money that you would spend on the warranty and tuck it away in a separate savings account. Do this for everything that you could buy a warranty toward and the money will add up. Then when making your purchase, use a credit card that has a generous warranty extension policy – just make sure you pay off the card with the cash you’ve already saved to make the purchase! If you do this for everything that you could buy a warranty for, you’ll have enough money in your savings account to pay for a repair or replacement in the rare case you need one. And the rest? It’s yours instead of the store’s. Bonus!
Q: I know I need to budget, but I just can’t find a system that works for me. How do I start?
KCL, CPA: First let’s consider why you need a budget. Is it because you want to start saving more? The easiest way to make that happen is to multiply your paycheck by .10 (ten percent) and set up an automatic transfer of that amount to a savings account on payday. Don’t touch that money. Nope, not even when you accidentally overspend on the weekend – just cut back the rest of the week. Boom, you’re saving ten percent.
Is that too much for you to stomach putting away to start? Try this: make a list of all your fixed monthly expenses (rent, phone, utilities, car, internet, student loan, etc.). Subtract it from your monthly take-home pay. That leaves you with your monthly discretionary money – what you can spend on things like food, entertainment, clothes and savings. Multiply that by .20 (twenty percent) and set up an automatic savings transfer for that amount. Same rules: don’t touch. Watch your money grow, no receipt hoarding necessary.
Help me out here. I need questions for my future columns! What do you want to know about your money? Ask me in the comments or shoot me an email.