Here's the First Step to Getting Rich

We spend a lot of time here helping investors select good stocks. Who doesn't want to be millionaire? Probably only those with billions already. But a story in the Wall Street Journal on Oct. 15 highlighted the need to review the first rule of accumulating wealth: Never carry a credit card balance, except in the case of a short-term emergency. Despite our ZIRPish -- Zero Interest Rate Policy -- world, the credit card issuers have actually ramped up the rates they charge clients who carry month to month balances. The near-zero rates for savers haven't kept card issuers from bumping up their lending rates. The average annual percentage rate, or APR, on credit cards like Visa and MasterCard now runs about 17%. That is pretty close to a 20-year peak, up from under 14% in 2015. Private-label credit cards, easier to get, but useful only in certain stores, bear even higher rates. The average APR on those cards reached an all-time record 27.5% in 2019. Yikes. How crazy is it to carry recurring balances on cards like these? Albert Einstein has been credited with saying that, compound interest is the eighth wonder of the world. At 17% annualized, your balance owed would double in less than four and a quarter years. Those silly enough to carry monthly balances with privately issued cards at 27.5% would see their debt levels double in just over two years and six months. If you ever get stuck paying credit card interest, due to unforeseen circumstances, think twice before buying anything you don't absolutely need. Until your cards are paid in full ... forget those Starbucks lattes, fancy dinners and expensive concert tickets. Remember, too, that keeping money in a savings or money market account, at extremely low interest rates, is far inferior to simply paying down your existing debt. It is false economy to hold savings while paying card interest. It is false economy to hold savings while paying card interest. My friend from Taiwan told me the culture there was to only spend 75% of your income, no matter how small. Spending less than you earn is a sure way to accumulate wealth. That is why Taiwan is one of the most prosperous places on earth. Money saved is the fuel that can power whole economies. Economists who advise taking money from well to do people and giving it to those who will spend it immediately, don't understand that retained capital is needed to invest and grow businesses. Once you are current on your bills, and can always pay in full each month, think about getting a cash back credit card. My USAA Bank Visa card rebates me 2.5% on every dollar I charge. The only requirement is that I send one direct deposit of over $1,000 to my fee-free checking account each month. Think about that. I'm earning 2.5% tax-free on anything I can use Visa to pay with. That's not 2.5% annualized, either. It's 2.5% immediately at the time of purchase. I can even use those rebates to help pay my bills each month. The Wall Street Journal said card interest rates had to rise to pay for all these generous perks. You can't change the world, but you can put yourselves on the good side of the ledger (getting perks), vs. the wrong side of the ledger (paying for them). I live a debt-free life: I have no mortgages, my student debts were paid off long ago, and I have no outstanding card balances beyond the current month. When I don't sleep well it's never about money worries.

Here's the First Step to Getting Rich

With this simple lifestyle fix, you can start increasing your wealth, rather than letting it slip away.

Columnist Conversation

This Weekend on Real Money

Wednesday on Real Money Pro

Pretty Incredible + Hard to Believe

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.