Take Mark Cuban’s Advice on Credit Cards

Debt makes us feel rich until it doesn’t

I like Mark Cuban. He gives incredibly simple and ridiculously smart advice.

I don’t think it matters that he’s a billionaire. His advice matters because it has more to do with Cuban’s common sense than how much money he has. I don’t often quote, let alone subscribe to guidance from rich people. But Cuban’s words resonate with me.

He makes personal finance personal.

Cuban understands the psychology of personal finance. He realizes that each piece of advice fits into a larger strategy and, most importantly, a mindset that governs how we manage our individual personal finance. To be good with money, you can’t haphazardly cherry-pick components of a strategy; being good with money requires consistency.

Cuban’s personal finance advice is really about habits and the process.

Let’s consider his three main tenets, starting with the credit card advice:

“From my dad: Don’t use credit cards.”

The personal finance psychology of not using credit cards

Rare breeds of credit card-using humans “pay off the balance each month” and “only use credit cards for the rewards.” And I’d venture a guess that of this rare breed, a sizable chunk lie, or at least fib when they say they don’t carry a balance and only use credit cards for the supposed perks.

In discussions over credit cards and general money matters, it’s the socially acceptable answer. We want to come off as responsible. As financially sound, smart, and savvy. So we say what we think the other person wants to hear.

It’s a natural psychological response to rationalize credit card use. Even if you start by paying the balance each month, it’s easy to slip up. Things get a bit tight in a given month. You charged too much. To ensure you have enough of a cash cushion, you pay less than the full balance. You’ll only do it this month. You’ll catch back up next month. Let the vicious cycle begin.

We can’t isolate credit card spending from the larger personal financial equation. Because it absolutely is part of the all-encompassing puzzle. How you choose to deal with credit says a lot about your money mindset and how you might act in other areas of your personal finance.

The personal finance psychology of a 12-month emergency fund

Cuban also advocates a 12-month emergency fund, going beyond the more standard recommendation of 3-to-6 months. Not to speak for a billionaire, but I think he realizes 12 months isn’t feasible or even necessary for many people. It’s more about the spirit of the guidance than the hard number.

And it ties into the credit card advice.

Let’s say I have a year’s worth of expenses saved in cash—$ 30,000. But I have $15,000 in credit card debt at 19.99% interest. This doesn’t make for a sane and logical personal finance thought trajectory. It’s like saying I’m in a committed relationship, but I have sex with other people on the side. The thoughts and practices don’t align. It’s probably not possible to be in an ethically non-monogamous personal financial relationship with yourself.

But this is how my brain works. I can’t just do cocaine on the weekends. (For the record, I have never done cocaine any day of the week). How can you be healthy all week then get wrecked on the weekend? I mean, you can. Loads of people do it. It just doesn’t fit my personality or way. I’m not opposed to finding a way to get wrecked — or just have fun. I guess I’m opposed to the idea that you can somehow isolate two extremes from each another. It’s tough enough to keep them six feet apart.

I believe in process and strategy alongside logical (at least in my mind) and somewhat methodical execution. In life, I think I’m good at holding competing thoughts in my head and effectively reconciling them. I just don’t think this works in personal finance. There’s too much overlap, as is the case in the cash on hand versus carrying credit card debit scenario.

The personal finance psychology of investing last

Let’s say you’re investing at the same time as carrying credit card debt and a feeble emergency fund. You run the risk of self-sabotaging your investment portfolio. I reckon this is why Cuban stresses clearing debt, building an emergency fund, and only investing after you have done these two things.

It all comes down to cash security.

If you’re cash insecure — which is often the case when you’re in debt and lack ample cash on hand — it’s a tough psychological move to keep money in a seemingly faraway land. While you can sell stock, withdraw money, and have it hit your bank account in as little as a couple to a few business days with most online brokers, money in stocks doesn’t feel quite as liquid. Because it isn’t.

Picture this — you bought 50 shares of Apple. It cost you $5,700. But Apple stock dropped so your original investment has shrunk to $5,000. If you were in it for the long-term, this isn’t a big deal. You might buy more shares on the dip. You’re happy you’re collecting Apple’s increasing dividend and reinvesting it. However, you have that credit card debt and a less-than-convincing cash cushion.

Shit happens. You run over nails in a parking lot, puncturing two tires. You had a slow month so cash flow is down a bit. You watch your credit card balance increase. You experience a moment of personal financial panic. You look at a juicy $5,000 sitting in your stock account. You view that as money you could use — that you need — now. So you sell your Apple shares for a loss.

You collect $5,000. You put it in your savings account. You intend to keep it there. You don’t. Instead, you use $1,000 of it to cover this month’s budget shortfall. You use $600 of it to replace your tires (This is what the rainy day fund you don’t have is for). You pay more than the minimum on your credit card with $400. You’re down to $3,000. You’re going to keep it in savings for security — until you find a way to rationalize spending it. You look at Apple — had you held, your original investment would now be worth $6,200. FML.

I have been in some variation of this exact scenario more times than I care to count. I know it all too well (if you caught or catch the Taylor Swift reference, I love you). My cheeks turn red as I talk about this. It’s embarrassing. Because we don’t like to reveal our money mistakes. It’s not socially acceptable.

And I think this is what Cuban gets at with his advice, whether he’s consciously trying to or not. He’s focusing in on areas of personal finance, people tell tall tales about.

Socially acceptable: I pay my credit card off each month!

Truth: I have like $7,000 in credit card debt (but it might be higher actually).

Socially acceptable: I only use my credit card for the travel rewards. (I’m like so wanderlust!).

Truth: I use a credit card because it permits me to stay in hotels I couldn’t pay for free and clear. I fall for the marketing of the myth of the financially prudent rewards seeker!

Socially acceptable: I’ve got cash in the bank.

Truth: I can barely cover this meal with what’s in my checking account. (Maybe I’ll put it on my rewards card!).

Otherwise intelligent people rationalizing themselves into financial impotency.

Can’t afford the meal. I shouldn’t charge it. But, wait, if I charge it, I get rewards. For the vacation that’s going to cost me $3,000. The one I’m going to charge on the credit card. So I get the rewards.

Real life, on-the-ground, uncomfortable, messy and dirty personal finance.

That’s what we do here. We don’t try to tell anybody what to do, because personal finance absolutely is personal. Plenty of people probably do a ton of cocaine on the weekends, yet maintain a pristine and healthy lifestyle otherwise. They probably rack up the points, never carry a balance, and have enough money to cover a decade of unemployment and oodles of wanderlust. And they bought Apple before Steve Jobs even conceived iPod. They’ve got their stuff together.

Then, there’s the rest of us.

For the rest of us, it makes sense to immerse yourself in personal finance. With information from all angles. From billionaires like Mark Cuban. From everyday hacks like me. To everybody else in between. This is how you create effective personal finance and investing strategies that stand the best chance of working for you.

You narrow the field of advice, taking from it not only what resonates, but what’s realistic. You know what you’re capable of. You know your limitations. Set yourself up for success. Don’t make yourself in somebody else’s image.

There’s probably only one steadfast rule: Avoid rationalizations that lead to potentially destructive inconsistencies. This portends living beyond your means. Which tends to lead to debt. Debt makes us feel rich until it catches up with us and doesn’t.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.