BudgetingCredit Cards

Credit Cards as Your Automatic Budgeting Machine

The demonization of credit card usage is understandable when mentioned alongside the crippling amount of debt Americans are currently carrying. Avoiding credit cards is a strategy I wouldn’t argue against, either. For some people, that is absolutely the way to go. If you have struggled to manage credit card debt in the past or to pay off credit cards fully each month, you need to look at your actions, habits, and income before considering a strategy like this.

If you are in control of your spending, aware of your income, and able to pay off debts without concerns, allowing your credit cards to behave as your automatic budgeting machine is an idea that can simplify your life. With only a little bit of research, you can find the right bank to have your tracking and budgeting done automatically.

Automatic Budget Monitoring

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The idea of having a budget set and automatically monitored for you is nothing new. It is a sibling of the traditional method of dividing cash into envelopes labeled with their financial obligations (savings, investments, groceries, eating out, gas, rent, utility bills). When your money runs out for a specific purchasing purpose, it’s done. Using credit cards as ‘electronic envelopes’ can serve the same need. On top of that, choosing the right card will provide you with a return through rewards or cashback.

When selecting a card for this purpose, focus your attention on credit cards with tracking features. Use one credit card for a specific purchasing category and set alerts for when you are approaching your purchasing limits. Cards that also track the spending categories will give you a visual of monthly expenses to compare against your income.

Do not plan on having the credit limit equal to your budget for that category of spending. Reducing your credit limit can be a way to guarantee your spending doesn’t exceed that limit, but it has drawbacks. When you consistently pay off your card in full each month (which this type of budgeting depends upon), credit card companies are known to increase your credit limit automatically after some time. If your company increases your limit, you could exceed your personal spending limit without noticing. Also, while having a hard-cap on your spending would provide security, it could come as a surprise to you when you reach your limit and have an urgent purchase declined.

Thus, when applying this method, it is essential that you have spending alerts set to keep you always informed on how your spending looks. Whether those alerts are in place or not, you should still make a habit of checking your balance regularly. Having your budgeting done automatically is useful, but you should not feel it is an excuse to ignore your finances. Keep your budget at the front of your mind to defend yourself from the lure of impulse purchases.

Budgeting for People Who Hate Spreadsheets

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If you instead prefer to use one card for all of your purchases, you’ll want to look for a card that categorizes your purchases and will show you feedback at the end of your billing cycle. Your feedback will give you quality information on your spending habits and what needs to change. Of course, tracking your spending works the same way, but this is a low-friction method to achieve the same results. With something as important as understanding where your money is going, decreasing the effort required to gain clarity is a valuable thing. 

Implementing both of these strategies at the same time could be a challenge since you may struggle to find a credit card that will alert you to spending amounts within specific categories. Your best option may be to get a strong understanding of your average spending over a month by using a single credit card. Make the shift to setting budgets on separate credit cards once you understand your habits and where you can afford to make changes. This division of spending will also give you the chance to maximize rewards by using cards designed for certain purchases.

Utilizing this method effectively depends on awareness, diligence, and consistency. If you have trouble controlling your spending habits, it could be dangerous for you to attempt to use credit cards in this way. Your priority must always be ensuring that you can pay off all credit cards in full each month. 

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