How I Use My Credit Card to Budget
Over many years of managing my money, I've tried it all. Early in my career, when I was living in New York City on an assistant's salary, I used the envelope method; every payday, I dutifully filled my budget categories in a spreadsheet and gave myself a cash allowance in a literal envelope. Then, I got wise to the 50-30-20 budgeting method (thanks Sen. Elizabeth Warren!) and the availability of online budgeting software, and I used that for a while.
No matter how hard I tried, though, I seemed to always lose track or blow my budget in at least one category. Often, this would throw off my calculations so much that I'd end up at the end of the month with a costly overdraft. It was basically impossible to plan exactly how much I'd need to spend each month—because of how often life throws little surprises at you: a surprise vet bill one month, Christmas presents the next. It was frustrating to be putting in so much work, and still not feel in control.
Everything changed for me once I just gave up and started putting everything (outside of rent, utilities, and car payment) on my credit card. Counterintuitive? Yes. Controversial? A little. But it works for me. Here's why—and how to put this into practice yourself.
It allows me to focus on one big number.
Using my credit card makes budgeting simple. Instead of worrying about spending categories and keeping detailed records in a spreadsheet, I just keep an eye on my balance. I have a number in my head about how much I can spend in a given month, on whatever I want. As long as I don't go past that number, I'm golden.
It also still helps me stay aware of what I'm spending. "For people who can pay it off every month, this is a great way to do it," says Misty Lynch, CFP, at Beck Bode and a financial life coach. "For one, it keeps you aware, which is a good thing. With a credit card, you have to look at it every month. You can see the statement and what those purchases were."
There are so many benefits to using your card.
Credit card companies today offer many enticing rewards, from cash back to travel points. I prefer the cash-back type (especially right now, when traveling is difficult) so I can basically just get a discount on everything I buy. The typical discount for a credit card cash-back scheme is around 1 percent or 3 percent, though—so it's hard to see the benefits unless you're putting all your spending on the card. If you do that, though, it really can add up!
Another benefit: You get more protection when you shop online. "The credit card companies are a lot easier to deal with if something happens," Lynch says. "It's easier to get rid of fraudulent charges with a credit card. With a debit card it can be a real mess."
How to (safely) put this into practice.
The major downside of using a credit card, of course, is interest fees. "It doesn't work out if you're not paying the balance in full," Lynch says. If you do end up overspending—especially if you overspend multiple months in a row—you can get trapped in a vicious cycle and end up in debt. "The interest rates for credit cards are typically very high. It's usually over 10 percent, even if your credit score is very good," Lynch says. Some cards can charge upwards of 25 percent interest.
So you do want to be careful—and be serious about paying it off every month.
When I first started this approach, I made the number in my head very conservative. I'd tell myself I had a few hundred dollars less to spend each month than I really did. This way, if I did overdo it a bit, I was still OK to pay it off. This allowed me to actually start saving more. When I did hit the target, I moved that money into savings.
Nowadays, I have a "floor" for my checking account, meaning I keep a certain amount of savings in my checking account at all times. For me, that number is equal to my rent—because rent is my biggest expense. At the end of the month, I pay my rent and my credit card bills. Then, whatever I have left in my account above my "floor," I move to another savings account.
This way, I always have a buffer in my checking account and I have larger emergency savings that I've built over time using this approach. When those surprise vet bills strike? It's OK. I know I can handle it. I feel a lot of flexibility in what I can spend my money on during the month—both for things I need (like groceries) and things I want (like takeout). The best part: I haven't overdrafted in years.