My good pal ThriftyRachel wrote a great article about the perils and pitfalls of credit card use. The driving point of her article is 100% true and pretty frightening: When we use a credit card for a purchase, we are willing to spend more. And we’ll even spend money that we don’t have. Rachel concluded that the Credit Card Rewards weren’t rewards at all when you consider the fact that you’ll overspend when you use a credit card. Luckily, there’s a variable here that she hasn’t considered: Human willpower and ingenuity!
With this in mind, I take a much different approach to credit cards than the average person. I use coupons because I can’t imagine paying more when I could be paying less. I use credit cards for the same reason. The first trick is devising a system so that you don’t overspend. The second trick is having the willpower to never deviate from this system. If you can do both of those things you can match or even double your coupon savings each year with a 1%, 2%, or 3% cash back credit card. Here’s my system..
I am a strict budgeter. Every penny that comes in and goes out of my home is accounted for on a spreadsheet. You can download a blank version of my free budget spreadsheet.
Rather than get into a wildly complex lecture on budgeting, I’m only going to share the credit card side of my budgeting strategy (I’ll save the full lecture for another day).
If you Dave Ramsey, you probably use envelopes for your budget. I love this idea, but since my money doesn’t earn any interest in envelopes I like to keep the cash in my savings account. There it’s nice and safe, earns like .00000000001% interest every 250 years (free money is free money), can be accessed online to pay bills and is also far out of reach of my grubby little fingers when the McDonald’s cravings set in.
Times for my family are particularly lean so our household item/food budget is a mere $250 each month and our gas budget is at $90. Of all of our bills, these are the only ones that we can pay with a credit card. Each month I take the exact amount I’ve budgeted and transfer it to my savings account.
My savings account holds personal money, business money, emergency money and what I call Credit Card Money. Using my savings account with my detailed spreadsheet is my trick to keeping track of my credit card payments. Each time I spend money with a credit card, I transfer the money from my checking into my savings. Then I add the item into the savings column of my budget spreadsheet with a note as to which card the item must be paid to. When the time comes to pay the card each month I total the amounts for each different card with my handy spreadsheet, transfer the funds to my checking account and pay online. Because I’m so used to this system it takes literally no time.
When it comes to budgeted items such as food, I move the entire amount I’ve budgeted into my savings (instead of an envelope). Then, each time I make a food purchase I keep track of how much I’ve spent. When I reach my threshold ($250 in this case) the credit card is done for the month. Of course I could overspend, but this whole system is reliant on self control.
Using credit cards for every purchase for business and personal use, budgeting and carefully tracking our expenditures has paid off in big ways for my family. We’ve literally received $2,000+ in cash credit card rewards by using our credit cards as much as possible. Not only that, but all this method has helped tremendously to build my wife’s credit in preparation for a future home purchase (hopefully!).
The moral of the story? There’s free money out there! If you can invest the time and apply the proper willpower it can be yours. Just don’t fall into the trap of overspending or all will be for naught!
Save wisely and live happy!