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able to satisfy the floor amount. Any amounts above that point wind-up
effectively being partially subsidized by Uncle Sam. For sure I will
renew all my prescriptions by December 31 -- not only for tax benefit
purposes but also to take advantage of having satisfied the deductible
portion of my medical insurance. My health insurance premium is due
in January, so I'll accelerate that payment into 1997, too. Moreover, I
need new eyeglasses and some dental work and have been thinking
about getting a few other things attended to. Even if my dentist or
optometrist cannot book my appointments until after January 1, if I pay
in advance, then I can deduct those amounts in this year. Those guys
take plastic, so I can make arrangements to get a reasonable estimate
of their charges and finance their services on a bank credit card
(Master Card or VISA). By the time the bill arrives and the grace period
expires, I've already gotten my teeth fixed and am wearing the new pair
of specs. CAVEAT: THE ADVANTAGES OF THIS SCENARIO ARE
SUBSTANTIALLY NEGATED IF YOU DO NOT PAY YOUR CREDIT
CARD BALANCE IN FULL WHEN DUE.
USE YOUR CREDIT CARDS WISELY, OR NOT AT ALL
I charge almost everything on credit cards. At the end of the tax
year my monthly credit card statements provide me with a
comprehensive, categorized listing of my purchases and other
transactions. I rotate six or seven cards, each with no annual fee, and
each with a different closing date (spaced 3-5 days between cards). To
keep track, I have written the closing dates on the back of each card. I
use each card only during the few days immediately after its closing
date. The result is that I am maximizing the amount of interest-free
borrowing built into each credit agreement ("float"), while also
maximizing the amount time and money available for investing.
Almost always I pay-off each card, in full, every month. If I make a
purchase that I do not intend to pay-off immediately, and especially if
this purchase is for business purposes, then no additional purchases
go on that card until the balance is paid in full. Why? First, because
business interest is tax deductible, and accounting for the deductible
interest becomes much easier if I do not mix it in with personal interest.
The other reason has to do with the interest cost.
Many credit cards agreements (the small print) provide for a so
called grace period of about 25 days between the time your statement
period closes and your payment is due, except when there is a balance
running on the account. Carrying a balance on your account
effectively cancels the grace period because interest is computed on
the average daily balance, which increases with each purchase. Credit
card interest rates average around 18% these days (compared to
money market and savings account rates of about 5%) -- which means
that someone is making easy money here, and it's not you. Do you
want these profit-driven credit card companies to do well at YOUR
OWN expense? Instead, take advantage of an absolutely risk-free,
guaranteed rate-of-return investment opportunity: PAY OFF YOUR
CREDIT CARDS!
Credit cards can be a boon or a curse, and the power is yours to
decide. If you cannot trust yourself to use credit cards responsibly,
then don't use them at all except in dire emergencies.
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