The COVID-19 pandemic is the greatest wake-up call in our lifetime to get our finances in order. Most of us have endured unsolicited financial advice from our friends and family. So I thought it might be wise to listen to what a few billionaires think — specifically on the topic of credit cards.
Did you know?
The most frequently used financial product in America is the credit card. As a result, nearly 60% of consumers (170 million) possess at least one card. By the end of 2018, total credit card balances were around $900 billion, according to the Consumer Financial Protection Bureau.
Although my wife and I stopped using credit cards years ago, I still carry a Discover Card. Pre-pandemic, credit card interest rates had reached their highest points ever averaging in the 20% to 30% range. This is astonishing and represents exactly how difficult it is to dig out of debt.
Approximately 66 million Americans have no money saved and 73% have less than $1,000 in the bank. Skyrocketing unemployment resulting from the pandemic has only exacerbated the situation. This is a big problem – especially when you consider that nearly 80% of Americans are living paycheck to paycheck. Without an emergency fund most of us are forced to fall back on credit with the mindset being, “It’s OK. I have these five credit cards with a total line of credit of $50,000 I can use in an emergency.” But guess what’s happening? As a result of the pandemic many credit card companies are arbitrarily slashing their customers’ credit lines to protect their own risks. Your card with a $20,000 limit might be getting reduced to $5,000 or $10,000. Suddenly, your emergency money has shrunk, which leads me to sharing what a few billionaires think about credit cards.
The Oracle Speaks
Legendary investor Warren Buffett (affectionately referred to as the “Oracle of Omaha”) recently hosted his annual Berkshire Hathaway Shareholders Meeting. He offered some sage, yet logical, advice for the millions of Americans with credit card debt.
“I think people should avoid using credit cards as a piggy bank to be raided.”
Warren Buffett
During the meeting, Buffett shared a story about a woman who had sought his advice regarding how to invest some extra money she received. He asked her what she owed on her credit card and what interest she was paying on it. She told him the current balance and that it carried an 18% interest rate. Buffett explained to her that he didn’t know how to make 18% and that if he owed any money on 18% the first thing he would do with any extra money he had would be to pay off that debt. Paying the credit card off was a much better “investment” idea than any Buffett could provide. He articulated, “It just doesn’t make sense — you can’t go through life on money at those rates and be better off.”
A Shark Named Cuban
Known for his appearances on ABC’s “Shark Tank,” Mark Cuban is a self-made billionaire who comes from a humble beginning. He knows what it’s like to eat mustard and ketchup sandwiches and sleep on the floor of a three-bedroom apartment that he shared with five of his friends. Cuban published a blog titled How to Get Rich back in 2008 and discussed his thoughts on saving, debt, and the use of credit cards. He says:
Save your money. Save as much money as you possibly can. Every penny you can. Instead of coffee, drink water. Instead of going to McDonald’s, eat Mac and Cheese. Cut up your credit cards. If you use a credit card, you don’t want to be rich. The first step to getting rich, requires discipline. If you really want to be rich, you need to find the discipline, can you?
If you can, you will quickly find that the greatest rate of return you will earn is on your own personal spending. Being a smart shopper is the first step to getting rich. Yeah, you have to give things up and that doesn’t work for everyone, particularly if you have a family. That is reality. But whatever you can save, save it. As much as you possibly can.
The first step to getting rich is having cash available. You aren’t saving for retirement. You are saving for the moment you need cash. Cash is king for those wanting to get rich.
Cuban’s hardline stance against credit cards is refreshing. The use of credit cards is a common debate. Many people will justify the use by citing all the benefits (points, cash back, discounts). However, most are not “disciplined” enough to wisely manage their card spending.
Final Thoughts
First, always be wary of who you are taking financial advice from. I’m going to assume billionaires have made wise financial decisions in an effort to accumulate their wealth. Second, the COVID-19 pandemic has spotlighted the need of building an emergency fund and not relying on credit cards. Experts like Dave Ramsey recommend immediately saving $1,000 as an emergency fund to jumpstart the process of becoming financially fit. However, further research shows that closer to $2,500 is a much safer goal to strive for. Once you achieved that benchmark you can move on to having three-to-six months of living expenses saved. Your emergency fund should serve as insurance against debt while avoiding being crushed with 20% to 30% interest rates upon repayment.
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.