credit card budget

How to Create a Monthly Budget with your Credit Cards

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At first glance, preparing a budget with a credit card may seem like a strange concept. In many cases, people are creating a monthly budget to pay off their credit cards. However, budgeting with credit cards can be perfect for your financial plan. You simply need to understand how to do it and follow through with using it properly. Let’s learn how you can make credit cards part of your financial budget planning process. 

Why Preparing a Budget With Credit Card Can Work

You’re probably thinking of high-interest rates and debt when you think of using your credit card for budgeting. But there are clear and distinctive benefits to preparing a budget using this method that can benefit you over other ways.

Using your credit card responsibly can have a positive impact on your credit. Keeping your credit card usage below a certain threshold and making on-time payments are two of the biggest influences on your credit score. And having a good credit score will help you get approved for a home loan and get you a better interest rate. 

Most credit cards offer rewards when you use them on purchases. When added up, these rewards can equal several hundred dollars or more of savings. Using cash or debit on your purchases won’t earn you rewards.

Another thing that makes paying a credit card advantageous is when you utilize their grace period. If you have a tight budget or need to wait for your next paycheck, the grace period can give you a few extra weeks to make up the money. 

Creating a Monthly Budget

Before you start your credit card budget, you need to take some initial steps to prepare your financial budget planning. Here are the things you should be doing first:

Start Tracking Your Spending

You need to have a realistic view of how much you’re actually spending because you can create a spending budget. Take a look at your previous bank statements, credit cards, etc., to find out how much you are spending in areas like groceries, gas, dining, and entertainment. These costs are your variable expenses that may vary month to month. 

Tracking your spending is very important in the budgeting process. One of the common reasons people can’t follow through with their budget is miscalculating these variable expenses. For example, can you expect to go from spending $250 on eating out to $75 a month? It would require a pretty big behavior change that is difficult to change overnight. 

Develop Your Plan

Decide what goals you want to accomplish with your budget. It could be paying off student loans or paying credit cards. Paying off debt is certainly a great goal to achieve. But make sure you think about other goals you may have. If you don’t have emergency savings to help provide a cushion when the unexpected occurs, you should consider contributing a portion of your savings from your budget here. 

Other reasons to use a budget include setting aside money for retirement, college, down payment on a home, or your next car. Try to set aside at least a little bit towards one of your savings goals too. 

Calculate Your Fixed Expenses

You’ll also want to write down your fixed expenses like mortgage/rent, car payment, student loan payment, etc. These costs are consistent each month. You’ll also put your minimum debt payments for items like credit cards with a balance and student loans. 

Don’t forget to list those occasional costs that come throughout the year. These periodic costs include things like school expenses, birthday gifts, Christmas presents, and car registration.  

Writing down all your monthly expenses in one place will make it easier to create a budget based on your actual spending. A credit card budget especially needs to be accurate to your monthly spending. After all, you don’t want to incur credit card debt by using this method. 

Figure Out Your Monthly Income

Determining your monthly income is pretty straightforward if you have one job paid regularly. For example, if you are paid biweekly, you’ll take your payment and multiple it by 26, then divide it by 12 to come up with your monthly income. 

If you have variable income because you work on commission or are self-employed, you’ll need to figure out your average income per month. Take a look at income over the last 12 months and find the average amount. You may even want to underestimate your income a bit to give you more wiggle room. 

The goal is to have your monthly income be more than how much you spend. If your income is not covering your expenses, look for ways to save money or cut your expenses. You may even pick up a side hustle or part-time job for additional sources of income. 

Choose Your Budgeting Plan

There are many different budgeting methods out there. The trick is to find the way that works best for your situation. Here are a few of the most popular budgeting strategies out there:

  • Zero-Sum – You use last month’s income to fund your needs for this month. Every dollar you earn is allocated toward a purpose, including bills, entertainment, savings, etc. The purpose of the zero-sum budgeting method is to get you spending efficiently while getting you to save.
  • 50/30/20 budget – Using this method, you will split your income among three big categories: 50% for necessities, 30% for wants, and 20% towards savings and repayment. It can be used by itself or in a combination of other budgeting methods.
  • Envelope System – This system is ideal for reducing unnecessary spending and staying out of debt without tracking everything. You set a spending limit for all your expenses such as groceries and fill envelopes with cash that you can only use for those purchases. 

How to Start Budgeting with Credit Cards

To create a spending budget with credit cards, you need to divvy up your bills accordingly. That’s because some of your bills will need to be paid using a form of cash. Look at what purchases can be charged to your credit card and what you will need to rely on other payment methods. For example, your mortgage or rent can generally not be charged to your credit card. Your credit card spending limit will become this amount. 

Be sure to determine what spending limits will be for categories like eating out as well. Once you’ve determined your credit card spending limit, you can move on to the next part of your credit card plan. 

Track Your Credit Card Spending

It would be best if you had a handle on where you are at with your spending at all times. Most credit cards allow you to set up notifications, so you know when you reach different levels of activity. Set up notifications to receive text alerts when you go over 30%, 50%, and 75% of your spending limit.

Try to start paying credit cards as you go to keep yourself under 30% usage if possible. It’s not a bad idea to also set up alerts to notify you every time your card is used for purchase. This way can help catch fraudulent activity much faster. Otherwise, you should log in at least weekly and review your transactions. 

You should be able to cover your credit card bill the following month as long as your monthly spending is aligned with your credit card spending estimation. You would need to make adjustments if your estimate was off. Consider solutions if you exceed your limit, such as whether to reduce spending in other categories.

Dealing with Billing Cycles

Bills don’t have the same due date, making it hard to manage different due dates each month. Many credit cards allow you to change your bill cycle. If you’re having this problem, pick a date in line with when you get paid. 

Don’t Carry a Balance

Avoid carrying a balance when using a credit card budgeting approach. You need to pay your full statement balance to avoid incurring a high-interest rate. The benefit of using a credit card is that it allows you to maximize your grace period. 

For example, if you had a car repair that came unexpectedly, you could charge it at the beginning of your bill cycle to get another 21 days from the 30-day cycle to repay the expense.

Get Strategic with Your Debt

Credit cards are an accessible way of getting a short-term loan without relying on payday or personal loans. But if you don’t use these tools wisely, it’s just as easy to start overspending. Every time you use your card to pay for something above your budget, it puts you at risk of increasing your debt.

Be sure that the purchase you want to make is necessary. If it’s something you can wait a few weeks on, then delay it until you can budget for it. Make these purchases on the credit card with the lowest interest rate in case you have trouble paying the full balance in time.

Tips for Using Your Credit Card as a Budgeting Tool

If you’re still on the fence on whether you can use your credit card for budgeting, here are some tips that others have found success with. They might be the solution to making your budget with credit cards a success.

Use Budgeting Apps

Technology can make us more successful in endeavors such as budgeting so take advantage of them. Money management from apps or budget planners can make tracking your spending much easier. Budgeting apps are not a silver bullet for your finances, though. You’ll still need to regularly monitor, tweak, and update your budget from time to time. Here are a few apps to look into:

  • Mint – This personal budgeting application is user-friendly and free. You can track your overall finances and even set up alerts to make sure you make on-time payments.
  • Prism – If you have multiple credit cards and have trouble remembering when they are due, this is the app for you. You can add all your credit cards, and Prism will create a calendar with all your upcoming and paid bills. You can also make same-day or schedule payments. 
  • Budgeting Method app – If you’re using the envelope system or another budgeting method, there’s almost certainly an app out there for it. Download your budgeting method app and use it to help you organize throughout the day. 

Use Your Rewards Wisely

It’s tempting to use your rewards towards making a purchase on Amazon or another retailer. But if you don’t really need the product or service, why use your hard-earned rewards this way? Instead, use your rewards to help you way down your credit card. It can be helpful if you’ve had a month of unexpected expenses to cut down your credit card bill with rewards that have been accumulating.

Another way to use your rewards wisely is to consider the bonuses offered on each of your credit cards. For example, if you have a credit card that offers 3% on dining and gas, make that card your go-to for those types of expenses. 

Don’t Budget off Your Credit Limit

Your budget should be based solely on your income. Don’t use the limit on your credit card as the number that’s used to base your monthly spending on. Credit cards are not a source of free money. You can use a credit card to help you keep track of your budget. It potentially improves your credit score and gives you extra time to pay off things when necessary. 

Prioritize Your Emergency Fund

You don’t want to have to rely on credit cards if you have an emergency occur. For instance, if you lose your job, it could be a few months before you find another one to replace it. Relying on credit cards during this time will put you in a hard financial spot afterward. Make building a safety net a goal when you start budgeting. That way, you have dedicated funds to rely on that won’t get you in more debt when you use it.

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