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It builds a cash buffer you can use later in life. Regular contributions to a savings account are an excellent way to build a nest egg. You can then use the money to deal with emergencies, buy a home, or spend during retirement.

To develop a saving habit, make the process as painless as possible. Automating is a great way to do that: Try opening a high-interest savings account at an online bank like the ones listed on The Right Bank for You. Then set up automatic transfers into this account, either directly from your paycheck or from your regular bank account. That way you get used to not having that money stay in your checking account; eventually, you'll hardly notice it's missing. (Even better, deposit your entire paycheck to your savings account and only transfer what you need to checking.)

How much should you put into savings when paying yourself first? Financial gurus say you should save at least 10% of your income. That's a great goal, though it can be tough to find that much at first. But almost everyone can save at least 1% of their income. Start there, and then increase that percentage as quickly as you can. Another tactic to try: Plan to set aside a part of your next raise for saving. As you make more money, save more so you don't end up on the hedonic treadmill (Caught Up in the Rat Race).

For more tips on paying yourself first, visit The Digerati Life: http://tinyurl.com/TDL-pyf.

Chapter 8. Using Credit Wisely

"Credit cards are great for convenience, but terrible for borrowing. Either cut them up, if you can't pay on time; or—if you can pay on time—make your credit cards pay you."

—Andrew Tobias

You already know that using credit cards carelessly can lead to debt. But did you know that people tend to spend more when they pay with credit? (See the box on Choosing a Card.) That's one of the many reasons it's so important to think before you whip out the plastic.

Credit cards aren't evil, but they can be dangerous. Just as you'd treat a chainsaw with respect, you need to be careful with credit to avoid hurting yourself. And if you use them wisely, credit cards can actually give you a financial edge.

This chapter will show you how to choose a credit card and use it without getting burned. You'll also learn how to manage your credit report and find out what your credit score is—and how to boost it.

Credit Cards

First, the basics: When you buy something with a credit card, you're taking out a small loan from the card issuer—Bank of America, Capital One, or your local credit union—and you owe the issuer that amount. If you pay your balance in full every month, the card basically gives you an interest-free, short-term loan. But if you carry a balance from one month to the next, you'll end up paying high interest rates and fees on top of the cost of Stuff you buy.

Note

There's a difference between a credit card company and a card issuer. The card issuer is the bank that you're borrowing money from; credit card companies—like Visa and MasterCard—are the go-betweens that take care of handling most of the paperwork. Some credit card companies, like American Express, are also card issuers, but Visa and MasterCard are not.

How many Americans carry balances and how much does the average cardholder owe? There's a lot of conflicting info out there, but one reliable source is the Federal Reserve, the organization whose policies influence the short-term interest rates banks charge to lend money to each other (which, in turn, influence the interest rates you pay for loans and credit cards).

Every three years, the Fed publishes its Survey of Consumer Finances (http://tinyurl.com/fed-SCF), which paints a picture of the average American's financial habits. The latest study, from 2007, found that 73% of American families have at least one credit card. Of those families, about 60% carry a balance, which means about 44% of Americans have credit card debt. And of those who carry a balance, the median amount owed is $3,000.