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Most-Common Money Mistakes: Carrying Steep Credit Card Debt With a Fat Bank Balance

By Motley Fool Staff - Sep 27, 2019 at 10:28AM

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It's smart to have some cash on hand, but don't let your desire for liquidity -- or the pain of writing a big check -- trip you up.

You don't need to be told that managing your personal finances can be tough. Virtually anyone reading this will be able to say truthfully that money is tight in their household. Too many things need to be done, and there's not quite enough income to cover everything. So we all make choices. We prioritize. We postpone. 
And, with embarrassing frequency, we also blunder.

In this Motley Fool Answers podcast, co-hosts Robert Brokamp and Alison Southwick have invited certified financial planner Josh Strange, the founder of Good Life Financial Advisors of Northern Virginia, to discuss the five most common money mistakes he sees his clients make, and how we can avoid them.

In this segment, he talks about how a quirk of psychology can impede our financial progress: Even if you have money in the bank to pay down a large credit card balance, it feels unpleasant to watch your savings account evaporate to retire that debt. So many people push off those payments, and wind up paying far more in interest than they need to.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 3, 2019.

Robert Brokamp: Let's move on to mistake No. 4 -- having large cash balances while carrying balances on credit cards.

Joshua Strange: Yes, this one is a real shocker to me. I never thought people really just kept a lot of money in the bank because from the time I was young, when money gets to a certain level, it gets invested. But I see it all the time. Typically it's because people are too busy to really think about it, or know what to do, or who to do something with as far as helping them decide what to do with it. There's a lot of fear and indecision.

Money will just kind of accumulate because we're busy and we'll say, "Oh, I'll get to that one day." I call it the "the old around to it." I'll get to it when I get around to it. But people will also be overspending on their credit cards and emotionally it doesn't feel good to make a big payment to somebody. So if you're carrying $20,000 on a credit card because maybe you've gotten some vacations or maybe done some work around the house, it doesn't feel good to write that check or transfer that money to the credit card, so you don't do it.

So people will hold these cash balances because they don't want to not have money. Then they have this balance on a credit card. I saw the average interest rate on a credit card, according to U.S. News & World Report, is around 17%, so they're holding a balance on the credit card of 17% so they can keep money in the bank at less than 1%. Even if you could get a decent return on that money you're probably not going to find something that's going to pay 17%. So rip the Band-Aid off, pay off the credit card and if you need money or if an emergency happens, you can always go back to the credit card if you don't have the cash in the bank. At least you're not paying that interest and just holding cash.

Brokamp: What about other types of lower-returning investments like bonds, for example? Would you feel the same way if someone came to your office and they had $20,000 in credit card debt and they also had bonds in their portfolio? Would you have them sell the bonds to pay off the credit cards?

Strange: In 99 out of 100 cases I would say yes, unless there was some extenuating circumstances. Also a caveat is we're assuming that these bonds are in a non-qualified account. If they're in a non-qualified account and you're getting 3-4% on a bond, why would you want to have something that's paying you 3-4% when you're having to pay 17% over here? So it's a way, in my view, to almost generate a risk-free return of a net of like 14% without taking any of the risk of bonds.

Brokamp: One of the reasons why someone might have credit card debt is basically they're just not managing their finances well. They're spending more than they're taking in. As a financial advisor do you find that pretty frequently and do you actually help people with their budgeting?

Strange: Yes, absolutely. When it comes to cash flow, I think back. I grew up in Southern Illinois. Outdoor sports is a big thing. I remember one time my dad and I were going fishing together. I'm backing the boat onto the ramp. He starts flailing his arms going, "Stop! Stop! Stop!" What's going on here? He forgot to put the plug in. So the boat's filling up with water. What does it have to do with money? Absolutely nothing. I just wanted to embarrass my dad. Hi, dad! But in all seriousness, when you have a hole in the boat, the first thing you need to do before you start bailing is identify where that hole is.

So I encourage people to go back and look at what they're spending money on. And then if you're spending more than you're bringing in and you're starting to accumulate credit card debt, you really need to think about what you're willing to give up. It comes back to that infinite wants and limited means. You're going to have to give something up if there's not enough money coming in, or you're going to have to make more money. You have to make a decision and prioritize, but that's absolutely something I help with.

We have a tool through LPL (Financial) called WealthVision. You can actually aggregate your credit card information and your banking information so we can see where the money goes. Clients can share that with me and then I can work with them to say, "OK, here's what your spending history is. Let's see where the problem is if there is a problem."

I really hate the idea of budgeting. It's like when I decided I'm going to start working out again. Oh, I'm going to hit the gym four days a week. Well, I'm not hitting the gym four days a week. If I get there twice it's a good week. So you can make these goals that set yourself up for failure. Like if you're spending $1,000 a month going out to eat, you're probably not taking that down to nothing. You could maybe take it down to $750, but you're not going to completely change your behavior. So it's important to understand what your actual past behavior has been.

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