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Use the $20 Rule to Break Your Credit Card Addiction

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Credit Cards

If you’re trying to break your credit card addiction, try this simple rule of thumb: Anytime your purchase is less than $20, pay cash, not credit.

This simple technique helped save more than 6,000 people over $100 on their credit card bills, according to a joint study by the Urban Institute, Arizona Federal Credit Union and the Doorways to Dreams Fund, a nonprofit financial services organization.

Carrying credit card debt can be one of the most harmful financial habits out there, yet 41.7 percent of Americans carry balances from month to month, according to the American Bankers Association. When you carry a balance from month to month, not only are you stuck paying additional interest charges but it can also be harmful to your credit score.

These groups sought to figure out if people were less likely to carry a balance if they tried one of two strategies: Either they were reminded not to use credit for any purchases under $20, or they received alerts warning them that carrying a balance can add an additional 20% to their purchases with interest.

For the study participants, the researchers chose over 14,000 consumers who carried a balance for at least two months within a six month period. Then they split them into three test groups: one group used the $20 rule; one group received the warnings about accruing interest on debt; and the last group did nothing differently.

The second strategy (warnings about revolving debt consequences) wasn’t as successful, creating no significant changes in spending behavior.

But the first strategy — the $20 rule — made a real impact.

Over 6,100 people used the $20 rule for six months. Over that time, they reduced their balance by an average of $104.20.

The trick to why the $20 rule worked is that it helped people change their spending behavior, said study author Brett Theodos, a lead researcher at Urban Institute. The point of the rule, he added, was to reduce frivolous spending among consumers, rather than focusing on encouraging them to make monthly payments.

It’s those spending patterns — using credit for everything from a pack of gum to a flight to L.A. — that result in high revolving credit balances over time.

“The [$20 rule] was more actionable. It was a very clear target,”  Theodos said.

Both rules worked better with consumers under age 40 and for consumers who used their credit card most often (10 or more times a month). Theodos said it’s possible that the groups were “more tech-engaged and took more advantage of the emails and web banners in particular.”

The under-40 consumers who tried the $20 rule reduced their revolving debt by $173 on average over six months. Overall, they reduced their debt by up to 5%, according to the study. When using the second strategy (those frequent alerts and notifications) they shaved $160 off their average revolving debt. Study participants in the 40 to 60 age range didn’t see a significant change in balance reduction, however those over 60 did cut back debt by roughly 3 percent.

The key takeaway: Using action-oriented strategies may be a smart way to work your way out of credit debt. It’s certainly worked successfully for savings. For example, the $5 savings method involves on a similar strategy. The idea is to begin saving every $5 bill that you receive. It helped one woman save thousands of dollars over several years.

“Rules, tips reminders, nudges, are really the wave of the future,” Theodos said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
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Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

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How to Raise a Kid You Won’t Have to Cut Off in 20 Years

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Today’s young people are more likely than previous generations to live with their parents, according to a 2017 analysis from the Pew Research Center. In 2016, 15 percent of 25- to 35-year-olds lived in their parents’ home, compared to 10 percent of Gen Xers in 2000.

Even when kids move out, it’s not uncommon for them to receive financial support from their parents. In fact, 62 percent of Americans age 50 and older gave a relative money in the last five years, with the largest sums often going to adult children, according to a 2017 Merrill Lynch retirement study.

Parents may not find those statistics encouraging, but the good news is there are ways to teach kids how to be financially responsible, and it involves raising the bar by asking kids to do more in the way of financial responsibilities. Studies have shown that when more is expected of a child (or anyone), they actually perform to that level of expectation. The same can be said of how they deal with money.

Don Roork, a Certified Financial Planner at AssetDynamics Wealth Management, has noticed a pattern with kids, adults and money. “Kids learn good money habits from just watching and being around their parents,” says Roork.

Roork also points out that money lessons aren’t always explicit verbal lectures on finance. “Kids watch mom and dad making good financial decisions, and voilà — the kids’ money behavior matches their parents’,” says Roork.

So when it comes to raising financially independent adults, it becomes clear that it’s important to start when they are kids. Here are some ways personal finance experts recommend easing your children — gently and kindly — into financial adulthood by weaning them from the family wallet.

Set expectations

As soon as your child begins asking for things like toys, restaurant meals or trips to the movie theater, they are ready to learn about the money it takes to support these wants. When a child expresses a desire for something beyond the basics, start the conversation then and there about how they’ll soon be responsible for these “luxury items.”

Of course, you don’t have to start charging them rent (not a bad idea, though), but you will want to follow up your expectations with actions.

For example, if your family goes out to eat, your child can pay for their meal or contribute to a portion of the bill. These expenses can be age appropriate and should increase over time as your child earns more money. They can start with things like snacks at the movies and move up to cellphone bills and car insurance.

Financial adviser Jamie Pomeroy of Financial Gusto says this should all start with communication: “Sitting down with your child and having a clear and frank conversation about who’s paying for what, can pay huge dividends.”

Another good exercise would be to show them prices on things they’ll need as adults, like a home or a car. Molding their expectations around what it takes to live will only help them down the road.

To drive this point home, Pomeroy suggests laying out a real plan designed to increase financial responsibility. “Make sure that you and your child are on the same page about what expenses they are responsible for, what you’ll continue to pay for (for now), and then introduce them to a budget to help them manage those expenses,” he says.

Create a reward system

Get-out-of-debt guru Dave Ramsey warns against giving kids an allowance and instead recommends that money given to a child should be tied to actions, like completing chores or other household projects. The idea is to get kids ready for the real world by emulating it with a system of compensation tied to work.

CFP Jeff Rose of Good Financial Cents says, “One of the first steps in teaching your kids financial independence is giving them responsibilities around the home that are both paid and unpaid.”

Ramsey is also a proponent of giving children the opportunity to earn more money in “commissions” when they find extra things to do or take initiative in solving problems around the house.

Teach them personal finance

Many kids are shocked when they get into the real world and finally begin grasping the finite nature of money. Mom and Dad spring for everything, so why would money ever run out?

Clint Haynes, CFP of NextGen Wealth, says there’s a fix for this. “Make it a point to sit down with your kids and show them what your budget looks like, how it works, and why it truly is the foundation to personal finance,” he says.

When your child asks for candy at the store, don’t deflect them with, “We don’t have the money.” Instead, let them know that the money you have available isn’t earmarked for candy, showing them how a budget works in real life.

Other lessons you can teach early on include those around saving, compound interest and even giving.

Brian Hanks, a CFP out of Idaho, has an experiment he urges his clients to conduct with their children once they are high school seniors. He suggests parents hand over their checkbook and have their kid cover all the family’s expenses for the entire school year.

“Paying a family’s bills is eye-opening, and your teen starts to develop new money habits,” Hanks says.

Let them earn real money

You can start by giving your kids an allowance that is tied to performance: completing chores, excelling in school, and having a good attitude can factor into their “compensation.” Be sure to enforce the association between what they do and how they are compensated. Once they can work legally, you can taper off their allowance.

Ed Snyder, CFP at Oaktree Financial Advisors, says children who have jobs will be more thoughtful about their spending and better with money in general. “Working will help them think through their spending and hopefully be more responsible,” he says.

Keep in mind kids don’t always have to wait until they are 16 to get a job. They can start a business or participate in gigs that allow kids under 16 to work with a permit, like modeling or acting.

Challenge them

Not only should your kids be responsible for expenses and make their own money, Eric Jansen of AspenCross Wealth Management says kids should be challenged in their money habits.

“Set up 90-day savings and spending challenges as a fun way to help them better understand and manage the trade-offs between spending money on what they want and what they need,” Jansen says.

No-spend or savings challenges are great ways to teach lessons about money while showing your child what they are capable of if they focus on their goals.

You can even create competitions among siblings, like seeing who can save the most money.

Trust the process

Sound like a lot of work? It is! Financial independence doesn’t happen overnight.

“Some of these [money] lessons may click sooner in some kids than in others — even within the same family,” says Snyder. “Don’t give up hope. … Just keep showing them good examples and teaching them good old-fashioned financial lessons.”

Be patient, be kind, and be confident that the lessons you are teaching them will serve them well into adulthood.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Aja McClanahan
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Aja McClanahan is a writer at MagnifyMoney. You can email Aja here

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6 Bad Money Habits That Could Wreck Your Finances — and How to Break Them

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Bad spending habits — everyone has at least one of them. Maybe for you it’s adding “just one more thing” to your shopping cart, or repeatedly getting slapped with overdraft or late payment fees.

These bad habits may seem innocuous at first but could easily turn into financial self-sabotage.

“Breaking a habit like these can be really difficult because these habits have developed over the years, and they provide us with psychological comfort and safety,” says Thomas Oberlechner, founder and Chief Science Officer at FinPsy, a San Francisco-based consulting firm that integrates behavioral expertise into financial services and products.

Oberlechner says the key to overcoming a bad money habit lies in knowing when you’re using the impulsive, right side of your brain — as opposed to the focused, concentrated left side — in financial decision-making.

“It’s really about psychological experience. It’s about behavior. If we understand the role of emotion, then we have a chance to fix it,” Oberlechner says.

Once you understand yourself and can identify your bad habit, Oberlechner adds, then you can create a plan “that turns your impulsive or unconscious behavior into the healthy financial behavior that [you] actually want.”

Of course, breaking any bad habit is easier said than done.

MagnifyMoney spoke to financial professionals to hear how they and their clients broke their bad habit. See if any of their hacks could help you break yours.

Bad money habit #1: Spending money as soon as you get it

The solution: Automation

If you’re constantly feeling broke just a few days after you receive a paycheck, you may be guilty of this bad money habit. One way to make sure you hold onto some of your cash is to use what the behavioral finance community calls a “commitment device” to lock you into a course of action you wouldn’t choose on your own, like saving your money.

In this case, the device is automation. Automating your savings won’t help you stop siphoning money from your checking account the same day your direct deposit clears, but it can make sure you save what you need to first. Check with your bank or the human resources department at work to have a portion of your paycheck automatically sent to a savings account instead of putting the entire sum in your checking account.

You should automate your bills and credit card payments for the pay period, too. Once your obligations are automated, “you can be impulsive with your play money,” says Oberlechner.

Bad money habit #2: Reaching for your credit card all the time

The solution: A cash diet

Paying for everything you buy with a credit card can be good practice if you pay off your card every month. If you’re chronically swiping your credit card for things you can’t afford to pay off by the next billing cycle, leave your card at home and use cash instead.

When you don’t pay off your card each billing cycle, you rack up interest charges on everyday purchases, and that may cost you a lot more money in the long run. If you’re using more than 30 percent of your total credit limit each month, you may also be harming your credit score.

To break your habit, leave your credit card at home and use cash or a debit card for your purchases.

“Take a certain amount of cash and say ‘I can spend no more than that,’” says Vicki Bogan, an associate professor at Cornell University in Ithaca, N.Y., who researches behavioral finance. “If you have a huge [spending] problem, try to limit yourself so that you only have access to a certain amount of money.”

If you really want to challenge yourself, you can try going on what’s called a spending freeze, where you stop spending any money on non-essentials for a period of time. On top of helping you save money, the freeze can help you notice how much money you may be wasting simply because you’re always pulling out your credit card. After your freeze ends, you may be less inclined to swipe your credit card.

Another rule that could help you break your swiping habit is the $20 rule. The financial rule of thumb is simple: Anytime your purchase is less than $20, pay in cash, not credit. The $20 rule forces you to think about whether or not a purchase is worth swiping your card for. Chances are, if what you’re buying costs less than $20, it’s not something you’d be OK paying interest on.

Bad money habit #3: Spending beyond your means

Solution: Budgeting

If you chronically spend beyond your means each pay period, you are likely digging yourself into debt. Get a handle on this habit by understanding how much money you have coming in and how much you can afford to spend on a monthly basis. You can use budgeting apps like Mint or YNAB to make that part easier. These tools can also help you identify the spending categories that are costing you more than you might realize.

Oak Brook, Ill.-based certified financial planner Elizabeth Buffardi tells MagnifyMoney that after examining one of her client’s expenses she found the client was spending a lot of money at drugstores picking up snacks and little things after work. So the client gave herself a budget of $10 per drugstore visit to save money.

“We’ve been seeing her spending at drugstores go down steadily over the last few months,” says Buffardi.

Buffardi had two other clients who struggled with overspending because they loved to shop online. They both created boundaries for themselves when it came time to pay for the items in their online shopping carts. One client decided to buy a certain amount of gift cards that she could use on a given site.

“If she spent all the gift cards in the first day, then she was done until the next paycheck. If she wanted something that was more expensive than the amount she had on the gift cards, she had to hold off on other purchases in order to purchase the more expensive item,” says Buffardi.

The other client simply removed her credit card number from her payment profiles so it would be more difficult to make thoughtless purchases. Her theory, Buffardi tells MagnifyMoney, was that if she was forced to stop and pull out her credit card before she could make the purchase, it might slow her down and give her time to think about the purchase she is about to make and — maybe — stop some purchases from happening.

Bad money habit #4: Always buying lunch from a restaurant

The solution: Plan your lunches a week in advance

If you’re losing $10-$15 a day to the local deli during the workweek, remember this: You don’t have to buy lunch if you bring it to work with you. However, organizing your day so that you actually have time to prepare and pack your lunch may be where you struggle.

Leave room in your busy schedule to pack your lunch in the mornings, or during the evening when you may have more time to yourself.

Melville, N.Y.- based certified financial planner David Frisch says he packs his lunches in the evening because he knows he runs late in the morning. He puts together everything but the dressings and sauces he plans to eat while making dinner, so lunch is already 90% done, then he adds the last 10 percent in the morning.

Frisch suggests setting a budget for how much you’d like to spend on food per pay period, then tracking how much money you typically spend on the convenience of frequently going out to lunch. Again, a budgeting app can be handy here to easily identify places where you spend the most.

Compare that amount to how much you spend on food for entertainment purposes, like going out to dinner with friends over the weekend and for your necessities, like eating lunch to fuel your workday.

“If you are spending so much money on convenience, you have that much less money to spend on everything else,” says Frisch. If you’re spending money from your food budget for convenience purposes, you may be more reluctant to go out on Saturday night for dinner.

If you’re already packing your lunch, but purchase a second lunch because you’re still hungry or you no longer want to eat what you packed, try packing a larger meal or having leftovers for a second lunch.

Bad money habit #5: Ordering out for dinner because you’re too tired to cook

The solution(s): Prep when you have time/energy; try meal delivery services

It’s easy to spend more than $50 getting dinner delivered three to four days out of the week, or buying groceries that go to waste because you’re too tired to cook. Oberlechner suggests doing some of the “work” of making dinner when you know you have more energy.

“If you’re too tired to cook in the evening, replace the spontaneous behavior by preparing dinner in the morning. So in the evening you don’t have the work of preparing anything,” he tells MagnifyMoney.

Another hack Oberlechner suggests is making a little extra dinner for the days you know will be especially long, when you won’t want to cook dinner. For example, if you know Tuesday is a really long day but Monday is not, cook a little extra on Monday and have those leftovers for dinner on Tuesday.

If cooking dinner simply isn’t a habit for you, you can try a meal kit service like Blue Apron, Plated, or HelloFresh to get interested in cooking, suggests Brooklyn, N.Y.- based certified financial planner Pamela Capalad. She tells MagnifyMoney she’s advised many of her clients to sign up for a meal kit service, then transition into grocery shopping and cooking at home regularly.

Generally, the services cost about $10 to $15 per serving and can serve up to four people.

Bad money habit #6: Letting your kids throw extra things in your shopping cart

The solution(s): Shop solo or lay ground rules early

Frisch says he and his wife solved this problem with their now 15-year-old triplets when they were four years old.

“Up until they were four we couldn’t bring them to a supermarket because it was impossible for my wife and I to watch three kids at the same time,” says Frisch. The easiest recommendation, he says, is to have somebody watch them at home while you go do the shopping. You may spend some money on a sitter, but you are also saving money without an eager child sneaking candy and toys into your shopping cart as well.

If an extra set of hands at home isn’t available, then try to set ground rules before you go to the store. For Frisch, that meant allowing the triplets to get one — just one — extra item at the store.

When a child wanted to add something “extra” to the cart, Frisch or his wife would say, “If you want this now, then you have to put the other one back.”

“Ultimately what happened was they kind of had to make a decision as to which one they would really get,” says Frisch.

The triplets quickly realized they could all benefit from working together.

“They actually started to communicate and say ‘if you get this and I get this, we can share,’” Frisch told MagnifyMoney. “They just figured out that if they all got one thing and shared, they ultimately all got more than they would have.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]

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