My #1 Strategy For Surviving The High Cost Of Living
I don’t have to tell you that the Cost of Living is skyrocketing. The Consumer Price Index shows that the cost of most items that we purchase on a regular basis has increased by over 10% in just two years. But, as you know, that’s only part of it. Some food items are up over 30%, while the price of gasoline looks set to rise soon due to the conflict in the Middle East.
I was recently asked what my number one recommendation for surviving this economic storm would be. Here’s the strategy I’ve adopted for the Reavill household and one I suggest for you.
My first recommendation is that we all approach our finances in a professional, dispassionate manner. In times like this, it’s easy to get emotional when we look at the monthly bills. Lately, our expenses may be greater than our income, and that’s likely to cause panic.
Don’t.
I’ve been the financial officer/treasurer of three firms and one not-for-profit. More than once, I’ve seen these organizations nearly bankrupt. And that can cause more than one sleepless night. But you should know this: absolutely no one, including your banker, wants to see you bankrupt. It might seem like everyone is against you, but the reality is that if you fail, so do they. Your lenders do NOT want to see you fail.
So here is today’s reality: interest rates have risen dramatically over the past couple of years. The nation’s central bank, the Federal Reserve, has raised interest rates by about 5 1/2% (the Fed Funds Rate). Unfortunately, you and I can’t borrow at those rates; that’s reserved for Fed Member Banks. As consumers, we will borrow at a much greater rate, and choosing just which rate is our task.
Of course, as interest rates have risen, the very best option is to have no debt. Pay off all your credit, and it doesn’t matter where interest rates go. Unfortunately, for most of us, zero debt isn’t an option.
So, our number one priority is finding the cheapest form of debt.
Generally, the cheapest debt is secured by collateral because those loans have the least amount of risk for the lender. For instance, a first mortgage on your home generally has a lower interest rate because the lender can always foreclose on your property if you fail to pay.
So, the first place we will look for a loan is asset-based loans, like a mortgage, a home equity line of credit (HELOC), or another secured loan. The caveat is that we need to be doubly sure we can meet those future loan payments; otherwise, we might lose our home.
However, many of us don’t have access to a loan on our property, so we need to look at a personal loan — a loan that is not secured by some asset. From the banker’s point of view, these loans are more risky and so come with a higher interest charge. The most common type of this loan is a credit card.
Credit Cars are not secured by collateral. Instead, the lender relies on your ability to earn income to pay off the credit card loan.
Here’s where we come to some real anomalies in the Credit Card market that you can take advantage of. A couple of years ago, finding a credit card that charged only 13–18% was typical. Back then, interest rates were low, and US consumers were meeting all their debt payments. (This was due to good jobs and Government Stimulus Payments.) So, credit card interest rates were some of the lowest ever.
In the past two years, most credit cards have raised their interest rates by an average of 5%. But here’s the catch: there is a vast difference in the kind of credit card you get. A person with very good credit, with a standard no-frills card, was charged 13% in Q1 2022; today, they’re charged 18% on the same card. It’s not great, but as we’ll see, it’s so much better than other cards.
The worst kind of cards as a category are Store Cards. They’ve gone from 25% interest on average to 30% currently. No one can afford to pay 30% interest. I know it may be painful, but pay down or get rid of Store Cards.
The same is true for those “bonus” cards, the cards that give you a reward for your purchases. They’re charging nearly the same as Store Cards. Recently, I got rid of my Amazon Card. Although it gave me a 5% credit on purchases, it still charged me 28%. I can’t afford that either. The 5% credit is a one-time bonus, while the 28% interest is compounded monthly.
“Compound Interest” is the natural killer here, and you need to avoid high-rate cards like the plague. Currently, the greatest interest charge is the Master Card by First Premier Bank. They charge 35.99%, a rate that is no doubt matched by some of the store cards we talked about.
Credit cards charge compound interest, which is interest on your interest. If you don’t pay off your credit card this month, you get charged interest. Next month, assuming you still don’t pay off the card, you are charged interest on the card’s new balance, which includes last month’s interest: you are paying interest on last month’s interest charge!
That might not seem like a big deal, but let’s see how it works. Assume that you borrow $1,000, make no further purchases, and make no payments. In five years, you will owe $5,891 on that $1,000 you borrowed, nearly 6X what you borrowed through the “magic” of compounding interest. It’s the fast lane to the poorhouse.
Let’s look at an alternative; it will be a low-interest rate card with no frills. There are still cards out there that charge as little as 15%. Making the same assumptions with this new low-interest card, again borrow $1,000 and make no purchases. In five years, you will now owe $2,107. That’s a savings of $3,784 (72%) — a saving that could make all the difference in your lifestyle.
These low-interest rate cards aren’t hard to find. Here’s a couple of places to begin your local search. Credit Unions are my number one candidate. If they offer credit cards, they’re often very low rates. As I mentioned, I just closed out my Amazon Card and moved over to a low-interest Credit Union Card at less than 15% interest.
Corporate Cards and Affinity Cards are other good candidates. You may work for a company that offers cards for its employees, often at excellent interest rates. You may be a member of a club or organization, such as the Automobile Club, the AARP, or another Retirement Group, or a service organization like the Kiwanis or Elks. Check to see if any of these offer low-interest cards.
Finally, a strategy that many banks are utilizing now is to offer low rates on balance transfers. These usually include an up-front fee, but that’s often well below any interest rate charge. Citibank offered an interest-free balance transfer, good for two years, with an up-front fee. Doing a little math showed it was a desirable loan.
So here’s my number one strategy for making it through today’s high-interest rate environment: Avoid Store Cards, bonus cards, or any special gimmick card. Look instead for the lowest pure interest rate loan or card.
It’s no time to get fancy.
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