Credit Card to the Rescue?

18 Apr
Eiko and her credit card

Image by eikootje via Flickr

It sounded so easy.  When the Queen of Everything Money explained the envelope budget method I thought, no problem.  Who knew that a bunch of envelopes could create such a swirl  of emotions.  

I guess the purpose of this  method is to make the concept of money more concrete.  In our credit card, debit card world it is easy to forget that funds are not limitless.   There really is something about actually handing over cold hard cash for all your purchases that changes the way you think of money.  There is also something about seeing on a piece of paper exactly what your money bought you that changes the way you view your stewardship of your resources.  What is more amazing is the number of emotions this little accounting exercise reveals.  Now I understand why money, or more accurately how money is spent, is often at the root of marital problems that can lead to divorce.

 The fact is, even if you have plenty of money and do not have an immediate need to find a way to make your money go farther,  this exercise can help you to refocus your spending in a way that will improve your life.

However, after seeing that cash is the way to go, it seems that there is a place for credit cards if used in the proper way. This next technique that the Queen of Everything shared is definitely not for everyone.  It involves the use of credit cards to save money so if you do not have the funds or the discipline to pay off the entire balance every month, on time, this strategy is not for you.

There are a few credit cards that offer cash back on all purchases, for example 1% cash back on everything you purchase. There are also credit cards that offer cash back on a specific type of purchase, for example 5% cash back on all gas purchases.  Discover card comes to mind, but there are several cards now offering cash back, so do your homework.

When you go to the grocery store to buy groceries you use your credit card that offers cash back to pay for your groceries.  When you buy gas, you use the credit card with the highest cash back offer to pay.  Even when you pay your utilities bills, you use a credit card with a cash back offer to pay .  At the end of the month you pay the entire balance on all your credit cards.  You have just reduced the bulk your monthly costs by more than 1%.

Of course if you are not able to pay the entire balance each month then you have in effect increased your costs by an average of probably 12% or more. And if you continue to carry a balance on those purchases then it becomes more difficult to know exactly how much more you will pay for those goods because of the nature of compound interest.    This is how many people find themselves in trouble, so please, use this with caution.

Picture taken by Fu.

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