The Debit Card Credit Card Debate

In a recent article by Chris Lingebach entitled 4 Places to never use a debit cardChris outlines a few points that seem to make sense on the surface, but unfortunately, they’re practices that assume an already existing breakdown in personal financial management if analyzed from a conservative point of view.  He also makes a few statements that just don’t make sense.

“..debit cards are popular because people got in over their heads spending money they didn’t have on credit cards.”

Actually, debit cards are popular simply because they offer convenience.  It has nothing to do with credit cards.  Mechanically, it works just like a credit card, except for the separation of processing networks.  Cards processed as credit are handled through a specific network that has specific terms and conditions to protect the consumer, and cards processed as debit flow through a different mechanism.  Both are electronic, and both offer relatively the same level of convenience.

“…debit cards, in theory, allow you to spend only what you have.”

Right.  That’s the point.  If you don’t have money, don’t spend money you don’t have.  If you run a charge on your debit card that exceeds your balance, you will pay the price, but you’d also pay the price if you exceeded your credit card limit.  So credit cards allow you to spend only what you have as well.

He then continues to explain that if someone hacks your debit card, your money could be gone, and…

“Then you have no money to pay your mortgage, your car loan or to buy gas or food, among other things. Your checks start bouncing and, depending on your bank or credit union, the institution may not cover the bounced check charges that result from debit card fraud.”

Anyone who manages their money wisely retains a separate savings account that’s non-interest bearing containing funds enough to cover expenses for about 6 months.  This buffer, which is not tied to your debit card in any way except that it may be at the same institution, acts as your emergency fund to handle situations that are considered emergencies.  If you have this, which most do not, sadly, then you have plenty of funds to carry you through the inconvenience posed by an act of theft on your primary checking account.  There’s simply no excuse for this.  Not having an emergency fund is not a good enough reason to argue that credit cards are better than debit cards.

According to Chris, there are 4 places that you should not use a debit card.

  • Independent ATM’s.

    I disagree.  I say, no ATM’s.  Good financial planning includes a monthly cash withdrawal of a planned amount allocated for a specific spending category.  This is the envelope system.  At the beginning of the month, “X” amount of dollars are withdrawn one time, at the teller, without any ATM fees, and without the risk of being skimmed.  The amount of cash you carry, or have at home, will be far less than the amount that someone might attempt to steal from you, and it will keep you from needing to visit the ATM, which is often an unplanned event that over-extends your spending.  Eliminate using ATM’s completely.

  • Pay at the pump.

    There’s absolutely nothing wrong with paying at the pump with your debit card, AS LONG AS YOU DO NOT CHOOSE DEBIT.  ALWAYS, choose credit when using a debit card at any terminals where you swipe your card.  The last thing you need is to disclose your PIN to someone who might be watching from a distance.  Likewise, if you process any transaction through debit, it is treated differently and is not covered by the same protections that the credit card networks offer.  Use CREDIT and any attempted theft will simply be an inconvenience and not a complete nightmare (assuming again that you have an emergency fund.)

  • When you’re buying online.

    Again, you are protected by the same policies whether your use debit or credit online.  The only difference is that it takes a bit longer to get your money back into your account.  There’s no reason to go into debt over a perceived fear.

  • At a restaurant.

    Neither debit nor credit is a viable tool for long term successful planning when it comes to spending categories that can be managed with cash.  When you use cash at a restaurant, you save time, and you save confusion when you have large parties.  You also save money, because you’ve already taken “X” amount out at the beginning of the month to handle your food/groceries.

Let’s be clear about what it means to “use a debit card.”  If we say we’re “using a debit card”, it is assumed that we’re keying in a PIN when we complete our transaction, in which case, in order to adopt the same level of protection we get with credit cards, we should never use the PIN pad and always choose credit.

So, use the debit card for non-discretionary monthly purchases that cannot be handled with cash, but always make sure you’re treating it like a credit card when you use it, and make sure you have your emergency fund in place in the event that someone screws you over by attempting to steal your money.

 

A Few Critical Money Tips for Real Estate Agents

When you’re self employed, YOU are responsible for more than you think.  As an employee, which you may have been familiar with up until the point you decided to become self employed, your employer handled your taxes and social security for you.

Now that you’re self employed, you MUST have a simple roadmap to account for what you’ll owe the government simply for doing business.

Tip #1: Taxes and Crap Like That

When you get your first commission check, or your next commission check, for those of you who have not planned well, you will apply the following formula to the check.  As an example, I’ll use a $100,000 sale with a co-broke of 3%, you being the buyer’s representative, without the broker’s cut considered in the calculations to make round numbers.

On that $100,000 home, you earn a 3% co-broke, which is $3000.00.  You dance your way to the bank, deposit the $3000.00 and have a jolly old time at happy hour with your clients and friends.

Did you really make $3000.00?  No.  You didn’t, because you MUST set aside a portion of that money for self employment tax and income tax.  So, a basic rule of thumb for a new agent who isn’t sure what their tax bracket will be would be to put 30% of the gross income in a separate basic, plain jane savings account.  So, on your $3000.00 check, you put $900.00 away for the piper…whom you’ll pay…quarterly.  Isn’t that fun?  Look, self employment tax is 15.3% as it is, and that’s on TOP of your tax bracket.  So do yourself a favor.  Plan according to what you think you’ll make.  It’s nearly impossible to calculate exactly what you will owe, but you can get good at estimating, over time.

Tip #2:  Plan for your annual dues on a monthly basis.

You have annual fees that you pay.  You need to determine how much that annual fee costs you monthly.  Add the sum of the monthly calculation of all of your annual dues together to determine what it costs you per month to have all of the business privileges you have.  If you can be billed monthly on anything, it’s easier to manage your monthly cash flow if you switch.  If you cannot, you need to know what an annual fee looks like monthly.  For example, Scottsdale Association of Realtors bills annually, but it can be expressed monthly.  Figure out that number.

Then, using your business checking account, set up an online transfer that happens monthly for the amount you need.  In the case of a single annual expense of $440.00, you would need to transfer roughly $37.00 per month from your business checking account (account used for business purchases) into a plain jane, separate account designated solely for annual dues expenses.  When the bill comes for the annual expense, you will no longer feel like you’re being raped by the system because you will already have grown accustomed to 1/12th of the amount every month being moved into a designated account just for this purpose…and nothing more.  You cannot borrow from your own account to pay for other crap.  This money is considered spent already.

Every year when I get an annual bill, the money is already there because I move it there in little chunks so it doesn’t seem so bad (that includes things like my annual accountant fee for doing taxes.)  And, every quarter, when I estimate that nasty tax bill, I have the money to cover it and if I’m short, it’s not by very much.

Be smart as an agent and a self-employed person and put money that you earn away or they’ll come get it from you, and that will suck.

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