Share on ThriftyFunThis guide contains the following solutions. Have something to add? Please share your solution!
One trap that many of us fall into is thinking about spending money and using credit as different, when both affect our monthly budget. We may buy something on credit that we would never consider paying cash for. We might even buy things using a debit card, essentially the same as using cash, that we would think twice before we handed over actual bills.
I've been using Quicken to keep track of my budget for the last several months, and one of the first things that struck me was how it categorizes every dollar I spend as an expense, whether it was paid for using cash, check, my debit card, or a credit card. If I spend $50 at the grocery store, it is reflected in my food budget no matter which card I used.
A credit card is a great tool to have in an emergency. If you have a flat tire, you need to get it fixed and don't want to worry about whether you are going to bounce a check or not. Using a credit card allows you to pay off this unexpected expense over a couple months. Credit cards can also be useful for online purchases since they provide more protections than a debit card. But, many of us use our credit cards far more routinely. Any time an expense which doesn't fit right into our budget comes up we charge it. Sometimes we do this because something is on sale and we want to lock in the price. It is very easy to run up a balance on the card, and then we are wasting money on interest payments rather than on things we actually need.
When you go to pay for something with a credit card, ask yourself if you would buy the same thing with cash? Since you will probably end up paying interest on your purchase, ask yourself if you would pay half again as much in cash? Stop thinking of the credit card as a way to avoid paying for things out of your monthly budget.
Try to get into the habit of paying off your credit cards in full every month. You can have the peace of mind knowing that you can take care of your family in an emergency without impacting your budget with the expense of interest every month.
About The Author: Fletcher Sandbeck is one of the founders of ThriftyFun. You can usually find him feverishly typing code to make the site more responsive and stable. He is crazy for Legos, has a degree in mathematics, and is always trying to be more frugal.
Do you have any tips on how to think about credit and spending? Let us know in the discussion.
What a great way to put it! I like the idea of thinking of credit as cash.
Another way to go about using credit is to actually make money off your credit card. My fiance was fortunate to have the good credit to be offered a rewards card and make enough money to pay it off monthly. As a result, we often pay for groceries, take out, gas, whatever with it as long as we stay within a certain monthly budget. At the end of the month he pays it off and we rack up the rewards points! After we rack up a certain dollar amount in points, we spend it on some big thing we've been drooling over patiently. So in the end, we actually make money off the credit card company! Obviously this won't work for everyone, but if you're able, take advantage.
Whenever you make a purchase using the card, deduct that amount from your checkbook register just as if you had used a check. When the credit card bill arrives, pay in full. Treat your credit card like real money!
I thought that I was the only one who did this. Everyone always says to only use cash and save your charge cards for emergencies, but I've found that if you are able to be disciplined, you can get the best of both worlds.
I charge everything--utility payments, groceries, Wal-Mart necessities, drug store items--everything. I subtract it from my checking ledger when I make the purchases, so I always know how much money I have in my account, to the penny. If my balance is low, I know not to spend for any reason. I pay off my card in full each month. I use a card that gives me cash back, so it's like a free refund on money that I would have had to spend anyway. And I even get to save on postage by combining payments or paying over the net -- 1 charge vs several smaller bills.
But again, you must be disciplined and not spend more than you have, or you can get into trouble really easy this way, since it's so easy to pull out the plastic.