This sounds a bit strange since we usually associate credit cards with overspending and incurring unnecessary debt, which leads to financial strain and difficulty in managing finances. Then, how do credit cards figure here? Well, credit cards can be quite useful if you use them wisely and responsibly.
Let’s first look at a question to which many of us wouldn’t have a ready answer. What are your monthly expenses? Yes, this number would fluctuate every month due to the seasonality of your expenses or due to some unplanned expenses. Still, do you have an average number?
When I interact with clients and ask them about their monthly expenses, I get only vague answers. And it happens because they have never tracked this number. This is more likely to happen when your cashflows are comfortable or when you retain a lot of cash in your bank account.
And why haven’t they tracked? Because it is cumbersome and time-consuming.
Not knowing how much you spend every month has consequences. If you are unsure, you are likely to err on the conservative side and the cash will gradually keep piling up in your bank account. You would set up SIPs (or recurring investments) for a lower amount than you should. More importantly, you may be spending much more than you thought you were. And spending more means savings less.
To manage the spending, you need to measure it first.
So, if you are struggling with “why I don’t have anything left at the end of the month,” you need to track and analyze your expenses. You already know your monthly income. With a firmer grip on your expenses, you will be able to plan and budget better. You will be able to plan for the seasonal expenses (insurance premiums, school fee etc.) by saving for such expenses every month. This will reduce the burden in the months when such expenses come due.
How Can Credit Cards Help in Budgeting?
As mentioned above, the key problem is tracking expenses.
It is difficult to track your expenses if you use cash for payments unless you record all the transactions diligently on a spreadsheet.
It is also not easy if you make all the payments online from your primary bank account because that will have cashflows of all kinds. House rent, EMIs, investments, dividends, interest and of course all small and big expenses. Plus, you can quickly tell by checking your primary account balance how much you have spent in that month. Because you must have started the month with a non-zero balance and then the balance would keep fluctuating with these inflows and outflows. Not impossible but this makes mental accounting difficult.
What is the workaround?
Make ALL your expenses on your credit card: Groceries, restaurants, medicines, restaurants, malls, food delivery, entertainment.
When you look at the credit card statement at the end of the month, you would know how much you have spent and where you have spent. A simple way to figure out your monthly expenses. Once you have the number, you can analyze the expenses to see the areas of leakage. Areas where you are spending much more than you thought or you should. Or even during the middle of the month, you can quickly check your card account to see how much you have spent. You can look at the outstanding amount (or current dues) to know where you stand.
Plus, a credit card also provides you with a way to limit expenses. You can set up a monthly transaction limit on your credit card. Yes, you can set overall monthly spend limits and even per-transaction limits for different types of transactions (merchant/online/tap and pay/ATM). The monthly spend limit is a nudge to control your expenses once you inch near to the spending limit.
This limit can be arbitrary initially. However, as you get a better hang of your monthly expenses, you can refine it.
Once the monthly limit is in place, you can easily keep an eye on how much you have spent every month. And how much you can spend for the rest of the month without any guilt. Once you know you are approaching the monthly limit, you can prioritize essential expenses and control discretionary expenses.
And remember, all this effort is a waste if you don’t pay your credit card bills in full on or before the due date. Additionally, it is easy to overspend when you use a credit card. Therefore, be responsible with your credit cards.
But There Are Limitations
There are a few payments you can’t make using a credit card. For instance, you can’t pay your domestic help using a credit card. Or a local vegetable vendor. Taxis and autos. Or a roadside tea stall. There are many merchants that don’t accept credit cards. Additionally, you may not be comfortable swiping your credit card at every shop.
For such expenses and at such places, you might want to pay using cash or UPI or bank transfers.
Now, you can use credit cards for cash withdrawals too but that is not a good idea. UPI linkage to credit cards is still not fully functional. Currently, only Rupay cards are allowed. For other cards, the commission structure (merchant discount rate) still needs to be worked out.
Now, these expenses can add up to quite a bit. What do you do for such expenses? If you use your primary bank account for such expenses, it leads to the clutter we set out to avoid.
There is a simple solution for this:
- Open a new bank account. Let’s call this secondary bank account.
- At the start of the month, transfer money from your primary account to the secondary account. You can link this account to any UPI app (Paytm, GPay, PhonePe, or even the bank’s own mobile app) and use this for payments where you can’t or don’t want to use your credit card.
- If you must withdraw cash for any payments, withdraw from the secondary bank account.
- Pay all credit card bills exclusively from this secondary bank account.
By the way, earlier, you couldn’t use credit cards for paying house rent. Now, you can but you must pay extra.
It Does Not Have to Be a Credit Card
The intent is to be able to get a real-time view of your monthly expenses. And you do not need a credit card for this. If you do not own a credit card for any reason (the bank won’t offer you or you don’t want to apply for one), you can still track and manage your expenses.
In fact, you can do that from your primary bank account too but that can be a bit of a pain.
The best option is to open a new bank account (secondary account) and make all your expenses from that account. Just transfer the money from the primary account to the secondary account at the start of the month. And start tracking and managing your expenses.