Traditional wisdom says credit cards can undermine your budgeting and savings goals. The use of credit obfuscates your actual spending, experts say, which can limit your financial restraint and force you into debt over time.
While that may be true for some, plenty of people rock a budget and use credit cards for their daily expenses. Some people even rely on credit cards as a handy budgeting tool, which leaves others wondering how, and more importantly, why this works.
Why Budget with a Credit Card?
Before we get into how this works, let's talk about why anyone would want to use credit in the first place. While it's true sticking to a cash budget is one way to stay on track, credit cards offer perks and a type of convenience you just can't achieve with a thick wad of cash or envelope of bills in your wallet.
First and foremost, credit cards let you track your expenses with almost no effort on your part. Most cards offer online account management as a cardholder perk, and logging in is all it takes to see all of your expenses – and purchases – in black and white. Tracking cash purchases, on the other hand, requires the collection and logging of physical receipts. This process can be tedious for even the most organized shopper or homemaker.
Credit cards also help manage cash flow by offering at least 30 days to pay your purchases in full – and interest-free to boot. If you're starting the month with a certain dollar figure to spend in each category of your budget, but won't get paid until the end of the month, credit cards make it easy to pay your monthly expenses and manage your cash flow until you reach payday.
Even better, credit cards – and particularly rewards cards – offer a slew of perks you just can't get if you use cash or debit. This list of benefits can include anything from price protection to extended warranties, and of course, travel or cash back rewards.
Another area where credit cards beat out cash is safety. Where losing a wad of cash leaves you with no recourse, losing a credit card is simple to fix; all one must do is call their credit card company for a replacement. Better yet, most credit cards offer zero fraud liability, meaning you're not on the hook for a single cent if a fraudulent charge appears on your account.
How to Budget with a Credit Card
Once you decide to give budgeting with a credit card a whirl, it's important to set yourself up for success. Here are the steps you can take to score all of the benefits of credit – and stick to your budget:
- Step 1. List all of your monthly expenses for the next month – When you plan to use credit as a complement to your budget, it's essential to make sure you have the money to cover your bills. List all of your expenses for the upcoming month and compare the total to your anticipated income. If you plan to spend more than you bring in, you should not use credit at all. Instead, look for a way to cut your expenses.
- Step 2. Make sure your credit card balance is down to zero – If your planned expenses are less than your income, you're in good shape to get started. But first, you'll want to make sure your credit card debt is down to zero. You don't want to use credit for monthly expenses if you're still in debt and paying interest on your purchases.
- Step 3. Put the new month's expenses on your credit card – Once you owe nada, you can start using credit for all of your monthly purchases. Use your card to pay bills and make usual purchases – pay for groceries, gas, and utility bills as normal. As you pay bill bills throughout the month, you should check them off on your monthly budget so you know they're paid. Meanwhile, you'll want to avoid using credit as an excuse to overspend.
- Step 4. Check in on your account at least once per week to stay on track – If you're worried credit will cause you to overspend, the best thing you can do is log in to your account every few days to see "where you're at." Online account management is one of the biggest benefits that come with using credit; just log in and you can see exactly how much you spent, and where.
- Step 5. Pay off your account as often as needed – If you have a set amount of money to spend in each budget category every month, it's smart to pay your card down as the weeks go by. After all, the goal is ending the month with zero debt and all of your bills paid, right? If you want to avoid a situation where you owe more money than you set aside, it's smart to pay your card off several times per month in order to stay on track.
- Step 6. End the month with a zero balance and start fresh – By the time the month wraps, you should be left with a zero balance on your card and all bills paid. Now it's time to do it all again. Break out your pen and paper and create an estimate of the next month's bills and expenses. Use credit to pay your bills as the month ticks by, taking advantage of the perks of credit but ultimately paying your balance down to zero by the end of the month.
While credit cards and budgets may seem like an unlikely pair, the two money tools can work together rather well if you have a plan. Better yet, using credit allows you to take advantage of a slew of perks and protections you just can't get anywhere else.
The key to budgeting with a credit card is keeping track of it all – a task made easy by online account management tools that let you see what you owe at any time. If you're able to balance your desire for credit card perks with a desire to stay on budget, you can score plenty of goodies while also reaching your financial goals.
Do you think budgeting and credit cards mix? Why or why not?