Why should you use credit cards for budgeting in the first place?
If you think from the basic level, credit cards can help you with two important uses for budgeting:
- Help manage your cash flow by allowing 30 days to make interest-free payments.
- Assist you to track each expense you make which is one of the basic steps for budgeting.
A credit card gives you the benefit of maintaining the cash flow. It will also help you to maintain the balance between your income and spending needs each month.
Tracking your expenses is required to assess your spending habits on a month-to-month basis. If you are trying to build a budget with a credit card, there are a few that are available that will help you categorize and chart your expenses.
How to build a budget with a credit card
To use a credit card to build a budgeting strategy, you should first require a workable budget in hand. Collect your latest credit card statement or you may check it online and go through all the transactions. Then, you must categorize your expenses. A budget worksheet would be useful for you in this case. It features common expense categories and it’s easier to add up your money that’s going out. Later you may compare it with the money that’s coming in.
Now you’ll have all the expenses listed in front of you to compare them with your income. The next thing you should do is to find answers to these candid questions:
- What expenses are necessary and you can’t avoid?
- Which expenses you can avoid for a while?
- Is your spending under control?
- Can you manage money for an emergency purpose?
- Are you able to set money aside for savings, retirement, and investments?
- Are you able to pay off your debts properly?
If you are getting positive answers to these questions already, congratulations!
Now, if you don’t have the answers clearly, you may strictly follow these below-given steps and successfully build a budget with a credit card.
Build a budget with a credit card in 5 steps
Once you’re clear with your budgeting strategy, these 5 steps will help you to achieve success:
Step 1- List all of your expenses
When you create a budget for the first time, the initial thing you need to do is to make a list of your actual monthly expenses. You may start by listing everything you pay for every month, such as your mortgage or rent payments, credit card bills, car installments, food costs, utility bills, along with certain annual payments like insurance premiums, etc. List the importance along with other non-essential expenses if you want to become successful with your budget.
Here’s where your credit card statement comes in handy. Make sure to include the few purchases you might have forgotten about. However, to do so, you should make all the payments through your credit cards.
Step 2 – Compare the total expenses with your income
Once all your expenses are listed, it is crucial to compare the total expense with your actual income. Chances are, you already know the answer. If your monthly spending is higher than your monthly income, you’re probably going to fall into debt or are already in deep debt.
On the other hand, if your income is higher than your monthly expenses, you have the option to save money each month. Generally, we use credit cards for paying most of the expenses.
Step 3 – Find out options to cut expenses
One of the best ways to save from your ever-growing expenses is to look for other ways to reduce expenses. After all, reducing non-essential costs and saving money… is the real motto of budgeting in the first place, right?
You may practically set up a budget for spending. For example – if you like to spend $200 a month for “eating out,” you may set up a budget with that number keeping in your budget plan.
Your credit card monthly statement for the last two or three months may help you to analyze how much you’re spending on each category. You need to compare your current month’s expenses in different categories with last month. You need to focus on necessary categories first, such as groceries, utilities, credit card bills, phone bills, meds, etc.
This way you will have a clear picture of your current spending pattern. You will know whether you are spending more or spending less than in the last few months. Once you find out your problem areas, you’ll need to prepare a plan to adjust the expenses meaningfully.
Step 4 – Create realistic budget categories for next month
Once you are aware of the facts of your spending in the last three months, it’ll be the right time to create new budget limits. You can do one thing, take your average spending on the last three months and fix it on each variable category. For next month, try to reduce it down by 20%.
Step 5 – Start the new month with a fresh budget
Once your new budget is ready, start the new month with a brand new budget plan. This is where your credit card can be helpful. For the new month, do not use cash or debit cards to make payments. Instead, start making the entire purchase using your credit card.
You may need to see the current status of your new budget once a week, so take a look at your statement online. Pay your credit card bills in full each month so that you may stay on track and avoid paying interest.
If you find that you are crossing your budget almost every week, you may ask your credit card provider to reduce your credit limit to the amount you intend to charge each month. For example, you might have budgeted $2,000 each for groceries, transport, gym, gas, entertainment, Internet, and cell phones. So, you may ask your credit card company to lower your credit limit to $2500 so that you may stay within your budget and have $500 for emergencies.
A credit card to build a budgeting strategy can be easy as the credit card itself is a valuable tool. But you must keep all the records of your spending, else you can’t create a great budget to manage your finances well.