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3 Money Questions from a Client on Savings, Points and Credit Cards

One of my Money-Smart Students program graduates reached out with some great questions. I thought I’d share my responses with you since I’ve had several people ask me variations of these questions.

Here’s what the Money-Smart Student wrote:

Hi Doris!

Hope you are doing well. I thought of a few questions I wanted to ask you (of course I think of them after the Q&A😅).

Me and my friend are planning to go on a trip next year (if possible) and I was wondering what would be the best way to save for that.

I’m going to start paying my own phone bill once I get a credit card. A family member of mine said that paying too fast can also harm your credit score so that I shouldn’t be paying as soon as possible. Is this true?

I created an account to collect optimum points since I shop enough to justify collecting the points. I was thinking of saving them up so that one day when I have a big purchase I’ll be able to get it for mostly free. My mom on the other had says it would be better to spend the points as I go because it will take me a long time to rack up the points and with inflation they will be worth less and less. What do you think the best course of action would be?

I think that’s all the questions I have for now but knowing me I’ll probably think of some more after I send this email😅.

Thank you in advance!

E. L.C. 🙂

Thanks E for the questions! Here are my answers.

 

Best way to save

It’s not clear to me here if E wants to know how to find savings in her current finances or if she wants some tips on what to do with the cash once she’s pulled it out of monthly circulation. So I’m going to cover both.

If you’re looking to save for a fun goal like a trip – and let’s face it, after nearly two years of travel restrictions, who isn’t looking to escape to a cool destination 🛫 – the first step is to remove cash from your regular, day-to-day chequing account.

It’s important to get it out of there because you’re human. If the $ are sitting there in the account, they will probably disappear like sand in a crack.

Why take that chance?

Open a High Interest Savings Account if you don’t already have one – I recommend EQ Bank in this article for these reasons. Don’t let the money earn squat in your chequing account. Sure, it won’t earn a ton in a HISA these days, but 1.25% (current rate at EQ Bank) is better than 0% in your chequing account.

 

Automation

Next step is to automate a transfer of funds from your chequing account to your HISA. You typically set that up from your savings account, authorizing your external chequing account to send the funds to your savings account.

Make sure that the funds get transferred either at the beginning of the month or within a day of your paycheque landing in your account. This way, you won’t even notice it and you won’t be tempted to spend it.

How much should you save every month? Depends on how much money you’ll need for your trip and when you’ll need it. Write out a list of the amounts needed and the dates you have to pay for stuff (e.g. plane tickets, hotel rooms/Air Bnb/whatever). Then work backwards to sort out how much you need to save every month between now and then.

Want to wring out more savings from your current spending? Use the Round Up feature in a Tangerine chequing account or the RoundUp feature in a KOHO account. This is a clever automation in which you choose to have your spending rounded up to the nearest $1, $5, or $10 and the difference gets shuttled either to your savings account (with Tangerine) or “removed” visually from your spendable amount (with KOHO).

Here’s how it works: Say you drop by a coffee shop with a girlfriend and grab a cup of coffee. You pay $2.85. If you’ve set up a rule to round up to the nearest dollar, it would mark the spend as $3.00 with $0.15 going to savings.

If you’ve set up a rule to take it to the nearest $5.00, you would spend $2.85 for the coffee and save $2.15, for a total of $5.00. It’s surprising how saving money this way can add up quickly, without much pain! 👍

 

More savings ideas

If you want more ideas on how to save money, check out my series on savings:

1. How to Save More Money: Where to start, even when you think it’s impossible

 

2. How to Save More Money: Why paying less for purchases doesn’t count

 

3. How to Save More Money: Where to find the money

 

Does paying your credit card bill too soon harm your credit score?

We need to clarify what she means by “too soon” here.

Presumably, the people who warned E about this purported risk are talking about paying off the card before the billing date.

Here’s an example of that. You head out to do some shopping. The next day, you pay off that amount on your credit card.

Will that hurt your score?

Definitely not. You will not get dinged any points for paying “too soon”.

Some people actually use this strategy to try to improve their score. The idea is that they want as little money showing on the balance when the credit reporting agencies check the account. The goal is to keep their credit utilization ratios as low as possible.

Your credit utilization ratio is a measure of how much you’re using of your available credit. The higher the ratio, the more you’re using, and the greater the negative impact on your score.

So people think that by paying off purchases as soon as they incur them on their credit cards, that will help increase their score.

In my time as a financial repair specialist, I found that that actually was counter-productive.

You need to let the credit reporting agencies capture the purchases and the subsequent on-time repayments in order to be of benefit to your score.

To loop back to E’s question, the bottom line is that paying off your balance early won’t hurt, but it may not help her either.

My recommendation: let the credit card company issue the bill, then pay it off well before the due date.

Another tip would be to automate your credit card payments. This will ensure that you’re never late, because you’ll never forget!

 

Is it better to spend points as you go or save them up for larger purchases?

I’m with E’s mom on this one –  in some instances.

Points don’t accrue interest, which means that their value is static over time, unless they’re devalued by the company issuing the points – which does happen from time to time.

The bottom line is that their value doesn’t go up.

Inflation, on the other hand, is constantly eroding the purchasing power of your dollars. Since points convert to dollars, that means that they are constantly being devalued, too.

In E’s case, if she wants to save up a heap of points to buy a larger item, that would work well if the price of the item doesn’t go up in that time. If inflation causes the price to go up, now she’ll need more points, which means a reduction in the buying power of the original batch of points.

There’s a risk to waiting it out.

This is true for points systems where the relative value of the points doesn’t change regardless of how many you accumulate.

For example, in the PC Optimum system, 10,000 points gets you $10 of purchasing power; 50,000 points gets you $50 of purchasing power; and so on. It doesn’t matter how many points you accumulate, each batch of 10,000 points gets you $10 of value.

Therefore, there is no benefit to waiting it out or saving up the points to buy a larger item. E would be better off putting money into a high interest savings account every month, where she’ll at least earn some interest and offset the loss of purchasing power due to inflation.

Here’s where things get trickier though.

What if E is accumulating points inside a system where there is greater value as you accumulate points? What then?

The Indigo Plum Rewards program is a good example of this. 

In this program, for every dollar you spend, you earn 100 points. 

When you redeem the points, though, the more points you have, the lower the cost for each dollar of value.

For example, currently, when you redeem 2,500 points, you get a $5 reward. That means that every $1 cost 500 points.

To get a $10 reward, you would expect to redeem 5,000 points if all points were equal, but they’re not.

In this system, you only need 4,500 points for the $10 reward, which means that every dollar cost 450 points.

And so on up to a $100 reward, where each dollar of value costs 350 points.

When the cost of each point goes down as you accumulate points, you have to assess the risk of waiting it out.

Is the price of the item or service likely to go up between now and when you think you’ll have enough points? If so, the money you save is offset by the increase in price.

It’s a game of math to figure out which option would have been better. A crystal ball would help, too!

The only thing you can do with points systems where there is an increase in value for points as you go up the ladder is to know that there is a risk that inflation (i.e. higher prices) will take a bite out of the rewards.

Over to you: What would you do in this case? 🤔

Drop me a line in the comments down below.

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