Whether you believe that money can buy happiness, that it makes the world go round, or that it’s simply nice to have, at the end of the day, we all need it.
To that end: we all have our own ways of increasing our bank balances. Whether we pick up some extra shifts at work, offer to work nights, or make investments in commodities such as stocks or cryptocurrency, there are numerous methods we can exploit, although some are much riskier (and more profitable) than others.
Enter: the following counterintuitive piece of financial advice currently doing the rounds on TikTok. Posted by account TheMotivationalSchool the advice claims to be seriously beneficial for those willing to take the risk. And we must stress, his method of earning himself money is most definitely a risk.
@themotivationalschoolthoughts on this? #success #motivational #credit #debit #wealth♬ original sound – themotivationalschool
Claiming he has “never owned a debit card”, nor has he ever allowed “my three sons to possess one” and claiming it to be “the worst financial tool ever given to the American consumer”, the man says he instead uses the “safest form of payment to exist on planet earth, the credit card.”
Adding that owning a credit card removes “99.9% of my liability”, he insists owning a credit card is the only way to go.
His reasoning? “I don’t spend my money, I spend their money. My money sits in a money market account where it earns interest. If I pay the bill in full or part of the bill, my credit score goes up. So I’m building credit while I’m using that credit card.”
But for him, the most beneficial reason to own a credit card is that it removes virtually all liability. “If tomorrow, someone gets my card number and charges $1 million on my credit card, by federal law, my liability is zero.” This means he will be able to get that money back into his account without any detrimental effect to him.
It sounds like the best financial advice you’ll likely ever hear, and theoretically, it makes complete sense. But if it were that easy, why would more of us not be doing it? According to a 2020 Statista report, there are 2.35 billion Visa debit cards used worldwide and just under 1.5 billion MasterCard debit cards.
Compare that to there being just 2.8 billion credit cards estimated to be in circulation worldwide – and remember, some people have more than one – and it’s clear debit is still the favoured payment option.
To find out the pros and cons of switching to a credit card-only lifestyle, DMARGE spoke exclusively with Devan King, Founder and Financial Advisor at Sydney-based Ikigai Wealth.
Speaking of the TikTok vide, Devan said, “theoretically, the strategy provided could be accurate. However, realistically, it is unlikely to have the desired effect on wealth creation because it does not address the psychological side of money.”
“Money is not just about mathematics. We have an emotional connection to how we spend. We all experience it, that moment where you stop and pause before a significant purchase. Where your stomach turns because you’ve spent that money, it’s gone, and that can be painful.”
“The emotional and physical discomfort of spending is normal. It’s our brain’s natural defence mechanism that helps us understand the value of money. In fact, this phenomenon is described as coupling. It is the reason behind many advocating for the use of cash when trying to stick to a budget.”
“What research has found is if we decouple the payment from the purchase by using things credit cards, we put a time buffer between the time of purchase and payment. This mutes our emotions, and we tend to focus on the immediate gratification and not the loss of funds.”
“According to one study, people using a credit card spend up to 100% more than people using cash for exactly the same purchases.”
“This can quickly lead to overspending or debits spiralling out of control. We all know the key to building wealth is to spend less than you bring in. As such, this strategy would put that concept at risk, as you nullify the emotions that help you keep your expenditure under control.”
So, what of the idea that you solely use a credit card for all purchases and use money invested elsewhere to pay it off? Is it one you should follow?
Devan says once again, there are risks.
“Research has shown that we spend more money when we use a credit card. If we spend more, we rob our future the self of being able to invest more.”
“And, this is before we consider what happens in a negative market, when your investment assets decline in value and cannot be used to offset your credit card bill. The market does’t just go up indefinitely. There is a significant amount of volatility – just look at what happened to the markets when Covid hit.”
“Investments are a long-term strategy and, as such, shouldn’t really be considered a tool to be used to address month-to-month spending.”
Going on the idea that the rich get richer and the poor get poorer, we asked Devan if the strategy put forward is something only those with extremely comfortable bank accounts can practice, because someone who earns minimum wage may not have the funds or the financial know-how to make the right investments.
“No matter the size of your bank account, we’re all still human, and it’s easy as easy for someone comfortable to overspend with a credit card”, Devan relates. “You have to be seriously disciplined in your spending habits to use this method and keep track of every cent spent on credit.”
“If you are looking to invest as much as possible, using a credit card is more likely to reduce the amount you can save or invest that increase your wealth.”
If you’re convinced by the strategy put forward in the video and want to move to a credit-only lifestyle, we asked Devan if he had any tips for those wishing to make the switch.
“Theoretically yes, one can get themselves into a position where they only use a credit card. But what I’d say is, do you want to take that risk with your money?”
“The chances of it going wrong are high, and the implications of overspending can be severe.”
“Rather than following a TikTok fad, it’s much better to follow what I call the ‘Boring Method’. It’s a tried and tested method to help get you on top of your finances and maximise the amount of money you can save and invest.”
“Many people set up budgets and use an app to track their expenditure and where their money is going. The budget cycle le usually covers an entire month or from payday to payday.”
“However, what well-intentioned people often find is that even with the budget and tracking apps, they will overspend at the start of the month and dipping into savings towards the end of the month. That is because there is a gap between setting a budget and measuring your success, and that is managing your cash flow.”
“There are some simple steps you can take to plug this gap:
- “Set up different accounts to manage your spending and cash flow. This means an account for bills, discretionary spending, savings and even for the pub. At Ikigai Wealth, we set up accounts based on what you value in life to live a life better aligned with your values.”
- “Automate your budget so that when your income hits your account, you have direct debits set up to automatically move your money into different accounts. This improves your chances of sticking to a budget.”
- “Budget weekly. A month is a long time for you to keep on top of your discretionary spending, and it’s easy to get distracted or lose focus. To reduce the risk of overspending, budget weekly. While most bills come out monthly, it is your day to day spending that can quickly rack up over the course of a month. To keep spending under control, give yourself a weekly budget and set up an automatic direct debit from your main account into a spending account. This way you’ll reduce the risk of dipping into your savings come the end of the month.”
“Following these three simple steps will likely help you save or invest much more than trying to play the system with a credit card. If you want help setting up this process, speak to a financial advisor, and they can help you align your money to what you value in life.”
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.
Devan King, of Ikigai Wealth, is an Authorised Representative of Synchron AFS Licence No 243313