Forget the Credit Card Rewards and Consider Spending with a Debit Card

Are credit cards good or evil? Probably neither, right? They are just tools to help us manage and spend our money. Consider this, though. Why are there so many credit card commercials on television? Why is our mailbox stuffed full of credit card solicitations? Why do retail stores offer 10% discounts on your order if you sign up for their store cards? Why do credit card companies offer reward points, airline miles and cash back? Is all this an effort to help consumers spend their money wisely? No! This marketing blitz is aimed at getting us addicted to credit, so we spend more money, carry high balances and pay high interest rates to the card issuers.

Many of our clients use credit cards prudently and accumulate rewards while staying within their budget. They pay off their credit cards in full each month and go on vacations with their reward points. The academic evidence is pretty strong, though, that people are inclined to spend more—perhaps a lot more—when using credit cards rather than cash. So even people who use credit cards responsibly might end up spending more than they would with cash or debit cards. The 1%-2% you get back in rewards doesn’t seem worth it if you spend 10% more than you would without the credit card.

About 40% of U.S. households carry credit card debt month-to-month and don’t—or probably can’t—pay off their full credit card balance each month. For those households that carry debt, the average balance is around $6,500 and the average interest rate is about 18%. Put that together and you find that the average household with credit card debt is paying $100 in month just in interest. That $1,200 per year in interest expense sparks no joy. We often work with clients crippled by credit card debt, usually when a string of bad luck steamrolls into a level of debt that can’t be paid down quickly.

If you ever find yourself deep in credit card debt, formulate a pay-off strategy—typically either a “snowball” approach starting with the smallest balance or an “avalanche” approach starting with the highest interest rate. Then, look for all the small ways you can save money to apply more toward the debt. Finally, cut up the credit cards and don’t get burned again.

At Aptus, we believe that financial success, happiness and freedom hinges on spending less money than you make. We think a good cash flow system should help you determine the best balance of spending on important things like education and travel while saving enough for an emergency fund, paying off debt and building up retirement savings.

Our recommended cash flow system includes 4 basic steps

1)    Pay yourself first through payroll deductions into company retirement plans, automatic drafts toward debt repayments and consistent, automatic investments into IRAs, HSAs and other investment accounts. We recommend saving 10%-40% of gross pay, depending on your goals, age and circumstances.

2)    Set aside money for future expenses by auto-transferring fixed amounts each month into individual, named savings accounts, preferably ones that pays high interest rates. For instance, you might set up individual savings accounts for home repairs, car repairs/purchases, out-of-pocket healthcare costs and vacations.

3)    Pay your monthly bills, typically through auto-drafts. We recommend leveling out variable expenses like utilities to maintain consistency each month. Carefully accounting for all your bills provides an opportunity to eliminate or reduce expenses when feasible. 

4)    Spend the rest.

After you’ve 1) paid yourself first, 2) set aside money for future expenses and 3) paid your bills, you simply spend the remainder of your income. There are essentially three ways to spend the rest. You can use a credit card, but you can easily overspend. You can use actual cash, but this can be unwieldy. Or you can use a debit card, and if you’re a true cash flow expert a 2nd checking account.

Take your monthly remainder, multiply by 12 and divide by 52 to arrive at a weekly amount you will deposit into a 2nd checking account. We recommend setting up a weekly auto-transfer into the 2nd checking account each Monday, as it is easier to plan your expenditures over 7 days than 31 days. Then use debit cards to spend your weekly allotment. You won’t overspend because you can’t overspend.

Tim Quillin