In the world of personal finance, it’s not very often that you hear “credit card” and “budget” used in the same sentence. Still, I have to be honest here. As a credit card rewards enthusiast and zero-sum budget expert, people are constantly asking me how I reconcile those two opposite areas of interest.
My answer? I think credit cards and budgeting go hand in hand.
In fact, I wholeheartedly believe that credit cards can increase your wealth and help you stay on budget — if used properly. They key is, making them work for you instead of against you.
Sometimes that’s the hardest part, but that doesn’t mean it’s impossible. Quite the contrary, really. And with so much to gain, it makes sense to explore whether you can make a credit card budget work.
Why Use Credit Cards in the First Place?
Cash Flow and Expense Tracking
At the most basic level, credit cards have two valuable uses for budgeting:
- Help you manage cash flow by granting you 30 days to pay, interest-free.
- Track every expense you make – very helpful for budgeting.
The cash flow advantage helps you smooth out your income and spending needs throughout the month so you don’t get caught with a big expense on the 10th when your paycheck doesn’t arrive until the 15th.
Tracking your expenses helps you understand where you spend all of your money on a month-to-month basis. Some credit cards even come with helpful online tools that help you categorize and chart your expenses.
Rewards and Perks
The obvious reason I use credit cards for all of my bills and spending is to optimize the amount of rewards I earn. Simply put, the more regular spending you can put on cards — that is, payments and purchases you’d be making anyway — the easier it is to rack up airline miles, hotel loyalty points, and cash back.
These rewards cards also come with several free perks — fraud protection, for example, can cover you if you’re overcharged for an item or someone steals your account number. Meanwhile, free extended warranties can reimburse you when something you bought breaks outside of the manufacturer warranty period.
And it’s always a good idea to use credit when booking a hotel room or paying for rental cars. As I wrote a few weeks ago, some credit cards offer free travel insurance that can cover mishaps like trip cancellations or trip interruption. One of the credit cards I use even offers free primary rental car coverage — meaning that if I got into an accident while under a rental agreement, I wouldn’t even have to go through my own car insurance policy.
Another reason to use credit cards: simplicity and safety. If you don’t like carrying a lot of cash around, or prefer the simplicity or carrying one card for all of your expenses, a credit card is a convenient option.
How to Build a Budget with a Credit Card
In order to use a credit card as part of your budgeting strategy, you need to have a workable budget in hand. There are several types of budgets you can work with.
Popular Budgeting Systems
Zero-Sum Budgeting: This type of budgeting involves using last month’s income to fund this month’s needs. By allocating every dollar you earn on paper — whether for bills, groceries, savings, or investments — zero-sum budgeting forces you to optimize your spending and “pay yourself first.”
The Spreadsheet Budget: These budgets require a spreadsheet with two columns you must fill in each month – a column for expected expenses and another for your actual expenses. Reconciling the two at the end of the month helps you find your problem areas, while estimating your expenses helps you “get real” with where your money is actually going. If you don’t want to haggle with computer software, you can also make a simple spreadsheet budget with pen and paper.
Online Budgeting: Several businesses offer online budgeting software, most notably YNAB.com (You Need a Budget). In most cases, these software programs will have you input your earnings and expenditures in order to create the perfect spend/save mix for your unique situation.
Whatever budgeting system you choose, it might be helpful to sign up for an online service that tracks your spending and credit purchases for free. A good example is a site like Personal Capital, which offers free spending and net worth analysis as well as free tools that can help you optimize your investments.
Another option is Mint.com. After you input all of your information into Mint and link your financial accounts, you’ll gain a brand new perspective on how your income stacks up to your expenses, as well as any problem areas you may have.
Build a Budget with a Credit Card in Five Steps
Once you’ve decided on a budgeting strategy, these five steps can help get you on your way:
Step 1: List all of your expenses
When you’re creating a budget for the first time, the first thing you need to do is get in touch with your actual monthly expenses. Start by listing everything you pay for on a monthly basis – your mortgage or rent, car payments, food spending, insurance, utilities, etc. List all of the essentials, in addition to non-essentials, if you want your budget to work.
Here’s where your credit card statement comes in handy — it does a lot of this work for you. Make sure to include the little purchases you might have forgotten about.
Step 2: Add them up and compare the total to your income
Once all of your expenses are listed, it is crucial that you compare the final total to your actual income. Is it more? Is it less? Chances are, you already know the answer.
If your monthly spending is higher than your income, you’re probably deep in debt- or at least headed that way. Likewise, if your income is a lot higher than your monthly expenses, you should theoretically have extra money left over each month. Do you?
By importing your credit card accounts into a service like Mint.com or Personal Capital, this is automatically done for you. You’ll know how much net income you’re generating each month, and you can start to see where you might be overspending.
Step 3: Look for places to cut
Whether you’ve got money left over each month or not, it’s always wise for look for additional ways to save. That’s the reason you’re budgeting in the first place, right?
This is where free online services like Personal Capital and Mint can come in handy. With either service, you can log in and see your actual spending in all of your usual categories.
Then you can actually set up budgets for spending categories and see how you’re doing in real time. So, if you decide you only want to spend $150 a month “eating out,” you can set up a budget with that constraint, and you’ll see when you’re approaching your limit.
If you don’t use either of these services, you can still find out how much you’re spending by going through the last few month’s bank and credit card statements. Just tally your expenses up in relevant categories – food, utilities, entertainment, exercise, restaurants, etc. – to see where you stand. Once you find out what your problem areas are, you’ll be in a much better place to make meaningful change.
Step 4: Create realistic budget categories for next month
Once you’ve come face to face with the truth about your spending, it’s time to create new budget limits that you can live with. So get to work. One way to start whittling things down is to take your average spending in each unfixed category and cut it down by 20% next month.
For example, if you spent $900 on groceries last month, you could limit yourself to $720 from now on. If you find that works well, cut it down another 10% or 20% next month, and so on. You want your budget categories to be realistic, but it’s okay to feel a little squeeze.
Step 5: Start the new month with fresh budget expectations – and a credit card
Once your new budget is ready to go, start the new month with brand new budget expectations. This is also where your credit card comes in. Instead of using cash or debit, you’ll start putting all of your purchases on your credit card.
Then, at least once per week, you can log in to see where you stand with your new budget. How much have you spent on groceries so far? How much have you spent on entertainment? And more importantly, how much do you have left?
Pay your balance in full at least once or twice per month to stay on track and avoid paying interest. If you find yourself regularly cheating on your budget, one option that can keep you honest is to ask your card issuer to lower your credit limit to the amount you intend to charge each month. So if you’ve budgeted $1,200 for food, gas, entertainment, Internet, and cell phone — all expenses you can charge — lowering your credit limit to $1,200 can force you to stay within your budget.
How I Use Credit Cards to Stay on Budget
When it comes to my family, I definitely believe that credit cards help us stay on budget. As I mentioned before, my family uses a zero-sum budget. This budgeting strategy involves creating monthly spending categories at the beginning of each month using last month’s income.
So, for example, I typically know what many of our bills will cost each month – our mortgage, various types of insurance, daycare, health insurance, etc. But for the variable stuff, I make estimates. Here’s where credit cards come in handy.
Some of our biggest variable and ongoing expenses are in our grocery and miscellaneous categories. Currently, we budget $600 and $200 for those items respectively. Here’s how I use credit cards to stay on track – and why it works so well:
- I check in once or twice per week. Since we start the beginning of each month with $600 to spend on groceries and $200 to spend on miscellaneous, it’s important that I check in to see “where we are” at least once per week. Because I can access each of our credit card accounts online, this part is easy. I simply log in to our accounts and see how much we’ve spent and how much we have left for the month.
- I know instantly when my husband makes a purchase (and vice versa). With two card users in the house, it might be difficult to keep track of our spending categories if it weren’t for online account access. Since we use credit, each of us knows when the other makes a purchase in a given category, and we can adjust our spending accordingly.
- We don’t have to keep receipts: Another reason sticking to credit works for us is that we don’t have to keep receipts for stuff like groceries, gas, and haircuts. Since all of our purchases are listed online, it’s easy to keep track of our spending that way.
- I pay off our credit card 2-3 times per month: Here’s the real key to how we make credit cards work for us instead of against us – we pay off our credit cards multiple times per month. Since we start each month with a dollar figure for each spending category in each checking account, paying off our bills helps us stay on budget and keeps us accountable. Meanwhile, paying off our accounts frequently ensures that we will never pay interest on our purchases.
As the month progresses, I keep an eye on our spending in all of our variable categories. And for the most part, when it’s gone, it’s gone: When we run short on grocery funds the last week of the month, we usually opt to eat food in the pantry or use up extras in the freezer.
At the end of the day, this is what works for our family. We have a system that not only allows us to earn rewards, but also keeps us accountable and on track.
Should You Use Credit Cards as a Budgeting Tool?
No matter what, budgeting can be a messy endeavor – especially at first. It usually takes some time to figure out your biggest challenges and weaknesses, but only then can you create a plan of attack. In this case, what you don’t know can hurt you.
Credit cards can be a valuable tool if you want to create a budget that works, keep an ongoing record of your spending, and earn rewards in the process — but only if you are capable of using cards responsibly.
And that’s the key: responsible use. Paying your bill in full each month, checking up on your spending periodically, and not using credit as an excuse to overspend are all part of using credit responsibly.
I think everyone can benefit from being more aware of their spending – by creating a budget and tracking their purchases. Using credit cards linked to online tools is one of the fastest ways to get you the most relevant data on your spending and savings.
If you want to try this method, you can find detailed analysis on credit cards and search over 1,700 different cards here:
Sometimes being aware and cognizant of where your money is going is all it takes to help you make meaningful changes in your financial behavior. So any budget method that raises your awareness of your spending habits is worth the effort.