The Real Path to Saving Money!
Image sourced by Frugal Flyer @frugalflyer
We haven’t talked about it yet but one of my credit cards is the American Express Hilton Credit Card. This Amex card works great for me because I earn free nights at Hilton Hotels, which reduces the cost of my vacations.
We’ll discuss rewards credit cards in another Budget and Grow Rich® blog post, but one of the American Express Hilton Card benefits is a certificate for a free night once you charge $15,000 in a year.
Crazy enough, it’s not all that difficult to reach the $15,000 when you use your credit card to pay your business expenses and personal expenses.
But, I don’t pay credit card interest because I pay off my credit card statement balance in full every month!
I’ve had the Amex Hilton credit card for several years now, but early on I thought that charging my quarterly property and casualty insurance premiums would give me a good start on reaching the $15,000.
My quarterly insurance coverage includes automobile insurance, homeowner’s insurance and umbrella liability insurance.
After a quarter or two, I was reviewing my credit card statement and it Hit Me that Chubb, my insurance carrier, was charging me a surcharge for paying with a credit card instead of paying by check or online payment via ACH (Automated Clearing House).
The surcharge was 3%.
In other words, Chubb added 3% to my quarterly premium in order to cover their cost related to accepting payment by credit card.
Let’s say my quarterly payment (insurance premium) was $1,498.75.
The surcharge equaled $46.35.
That’s a Lot of Money!
Especially considering that I pay insurance premiums Every Quarter.
Every Year then, because I was paying with my credit card, I was paying an extra $185.41 for the privilege of using my credit card to pay my insurance premiums.
Sometimes, we get into habits.
And other times, we get busy and forget to check under the hood and take a look at our income and expenses.
That doesn’t mean that it’s a great idea to stick your head in the sand, if you want to save money and build wealth.
And paying an invoice or a bill becomes rote, routine, standard operating procedure.
Break the habit and monitor your spending, the services you use, the cost and analyze whether you really use and want the service or products.
And if you’re paying with a credit card and IF there’s a surcharge whether the extra cost is worthwhile.
◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊
Looking to save money hand over fist?
Grab the Time-Tested Roadmap to saving boatloads of money.
Click here!
◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊
The Math Behind the Surcharge:
To calculate the surcharge at a rate of 3%, we have to divide the net amount (which is the premium) by 0.97.
97% or 0.97 equals 100% minus 3%.
Next, divide the premium amount of $1,498.75 by 97% or 0.97.
That equals a gross payment to Chubb of $1,545.10.
To calculate the surcharge: $1,545.10 minus $1,498.75 equals $46.35.
By the way, we have to go through this involved calculation rather than merely multiplying the premium of $1,498.75 by the 3% surcharge.
Because Chubb wants to collect $1,498.75 net of the credit card processing fee.
The 3% fee is charged ON the total payment amount, which includes the surcharge.
Three percent (3%) of $1,498.75 equals only $44.96, which is Less Than the $46.35 credit card processing fee in this example.
And if we estimate the cost of a free night at a typical Hilton, it’s roughly $200.
In effect, the annual surcharges of $185.40 ($46.35 quarterly surcharge multiplied by four quarters in a year) Wipe Out the benefit of the free night.
Once I realized the error in my ways, I logged on to Chubb’s portal and added my checking account to my account and set up payment by check – really ACH (automated clearing house).
Going forward, while I won’t get the Hilton Rewards® points on my insurance premiums going forward, I will save at least $185.40 every year by avoiding the surcharge for using the my credit card.
I say “at least” because typically insurance premiums tend to rise over time. So a three percent (3%) surcharge on a bigger number results in a larger amount.
The Risk and the Tradeoff:
Once you set up autopay by check, the vendor – in this case my insurance carrier Chubb – will pull (withdraw) my quarterly premium from my checking account ON the Payment Due Date!
This means that you have to have enough money in your checking account to make the payment!
If you don’t, typically insurance companies give you a grace period of 30 days to pay your insurance premium.
If you pay late, they may charge you a late fee.
If you don’t pay by the end of the grace period, they cancel your insurance coverage.
Be sure to check out your insurance premiums and other vendors’ / merchants’ rules.
So while paying with your credit card that has a grace period gives you some financial flexibility – approximately 25 days – to pay the credit card company the insurance premium, you’ll incur the surcharge.
And if you carry a balance on your credit card, you forfeit the ~25-day grace period and will owe interest expense on your outstanding balance.
If you do set up automatic payment by ACH (automated clearing house) and you’re running short on cash, call your insurance company. They might “lend” you the premium in exchange for paying interest expense. Then, at least your coverage will remain in force.
Contact your bank to discuss getting a line of credit – Overdraft Protection – where the bank lends you money when your payments exceed your checking account balance.
And if you have to, you could suspend or cancel the automatic payment by ACH and pay by credit card.
The question is: “What’s the least expensive option?”
The Reward: Grab these 12 ways to save money on your everyday spending:
Don’t get complacent. Every so often, look at your invoices and bills and analyze the charges and the components.
Create or update your personal budget.
Monitor your credit card balances and your checking account balance closely.
Break the habit and monitor your spending, the services you use, the cost and whether you really use and want the service or products. And whether you’re getting your money’s worth.
Reconcile your “checkbook” (checking account) at least once a month so you gain a solid handle on your spending and cash flow.
Defer nonessential spending and discretionary spending until another day when you have more cash in your checking account and in your pocket.
Be on the lookout for surcharges for paying with your credit card.
Calculate the breakeven amount – for example whether and when paying the credit card surcharge is beneficial.
If you’re facing a cash shortfall or cash crunch or expect to face a cash shortfall, Reduce your discretionary spending so you have enough money on hand to pay your insurance premiums (and other expenses) on time.
Consider paying with cash instead of using your credit card when a vendor or merchant charges you a surcharge for using your credit card.
Consider linking your savings account to your checking account and set up your accounts so when your spending exceeds your checking account balance, the bank automatically transfers money from your saving account to your checking account to cover the shortfall. THEN replenish your savings account.
Consider applying for a line of credit in the form of “Overdraft Protection” where your bank lends you money when your payments exceed your checking account balance.
In general, I’m Wary of taking out a line of credit because they interest rates can range from 10% to 25% per year.
Potentially, you could link a credit card to your checking account to cover the cash shortfall, but this too is expensive money.
Keep your eyes open and analyze your spending habits and payment methods periodically – at least once a quarter.
Arthur VanDam, CPA MBA
Save Money Hand Over Fist Right Now – Click here.
Budget and Grow Rich® – ISSN: 2992-9296 – USA International Standard Serial Number (ISSN)
Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax, accounting or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors! In addition, note that companies change their offers and terms and conditions periodically so the savings presented in this article / blog post may be outdated when you are reading it.
10 Easy Ways to Accumulate $1,000,000 Now!
The Often Overlooked Secrets to Building Wealth
Commonsense how-to delivers a frank conversation with a rich uncle – a step-by-step wealth-building system that will help you build wealth like clockwork.
How to Succeed and Achieve Your Dreams!
Tired of the rat race?
To Succeed even bigger, greater and stronger, 10X your success – click here.
Budget and Grow Rich® is the original e-book guide to easy budgeting and wealth-building. Gain financial freedom and pour money into your pockets today and for years to come.
Finally, the proven roadmap to building wealth – how to make a personal budget that really works. Explained in plain English – easy to follow, practical steps. Since 1974, personal finance expert and author Arthur VanDam has used this system to organize his finances, manage his money and amass wealth. Now you can too. This straightforward guide tells all! Handy spending plan worksheet includes 14 categories that does it all. Practical tips and ways on how to create a financial plan and put your financial plan on auto pilot. Budgeting At Your Finger Tips will help You save more money, build more wealth, gain peace of mind and enjoy financial freedom.
Take your Business, Career & Life to a New Level with this Experiential, Immersive Live Event FREE!
How to Make Money in your Spare Time Writing Letters.