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I think you’ll agree that in today’s world it is extremely difficult to stick to a monthly budget.
Yet it doesn’t have to be.
According to research by The Pew Charitable Trusts, almost half (46%) of American families spend less than they earn each month.
In this post, you’ll learn which payment type can help you stick to a budget, too – one that could even put more (free) dollars in your pocket.
Prepare to be surprised and defy budgeting convention.
What Do People Spend Their Money On?
One of the biggest problems that you may have when budgeting is not knowing where your money goes. Without understanding your outgoings versus your incomings, it will be impossible to set a budget. So, what are the main expenditures of the average American?
According to the Bureau of Labor Statistics, the average American spends 33% of their income on housing. This makes it the largest area of expenditure totaling an average of $20,091 per year. Housing expenditure includes rent, mortgage interest, interest on home equity loans, property taxes, property insurance, and maintenance and repairs.
Transportation accounts for an average of 13% of Americans’ income, which in 2018 equaled $9,761. This includes things like public transport passes, gasoline prices and vehicle purchases. According to Experian, the average American household owns 2.28 cars, with personal vehicles taking up a large portion of these transportation costs.
The last major expenditure for American households is food. Everyone has got to eat, right? Spending on food increased by 2.5% last year and was calculated by both foods consumed at home and outside the home.
In 2018, the average household spent $7,923 on their food.
Why You Won’t Want to Bust Your Budget
Making a budget from scratch is the easy part. Sticking to it is difficult. However, when you keep to your budget you will start to see the benefit almost immediately.
Here are some of the major drawbacks of breaking your budget:
When you don’t stick your budget, you will overspend. You are more likely to use loans or expensive credit cards to satisfy your spending habits.
Accumulating debt creates financial stress and makes budgeting more difficult. Debt might feel free while you’re swiping those cards, but it incurs interest, which in turn means your finances worsen faster.
Unable to do the things you want
If you create a budget, you don’t have to miss out on exciting events. Budgeting does not mean you stay cooped up at home counting your pennies.
Using a budget, you can pre-plan for additional expenditures outside of your necessities. For example, as Christmas approaches you might budget a little extra to buy a loved one a nice gift or to go out for a Christmas meal with friends. (Tip: the best budgeters know how to get free gift cards!).
However, if you don’t budget and are tempted by impulse buys, when the important things come around you will have no money left for them.
We’ve all been there – about to pay for our weekly groceries when our card is declined at the cashier. It’s a mortifying moment. Maybe you have a credit card you can put the charge on or maybe you don’t, and you must put everything back. Either way, this is embarrassing and feels like you have a big red sign above your head saying ‘broke’.
When budgeting, you are always aware of how your finances stand. This helps you avoid these uncomfortable moments.
A survey by Northwestern Mutual found that money was the biggest cause of stress among Americans, with 44% of people citing it as their most dominant stress. Setting a budget can help you avoid this stress. You will understand your finances and always know where your money is going. Budgeting can also help you save and ensure you have a cash reserve for financial emergencies.
Why Is Budgeting Difficult?
Budgeting can be difficult. We have all been guilty of saying we will cut back on our spending, only to break that promise. This can be for many reasons.
Often, we set unrealistic expectations for ourselves. By not being able to stick to these expectations you then feel like a failure and give up altogether.
Another common reason is not having a goal. Think about why you want to budget. Are you trying to get out of debt? Do you wish to save for something special? Having a goal keeps you motivated and helps you to track your progress toward financial success.
What Are Your Payment Options for Budgeting?
There are several options for budgeting, including cash, direct debit, and credit cards.
With a cash budget, you only make purchases with cash rather than with card or transfers.
You are probably familiar with direct debits because this is likely how you pay your mortgage or utility bills.
Credit cards give you a temporary loan from your bank. Usually, if you pay these back within 30 days of your statement date you can do so without paying interest.
Credit Cards That Pay You to Budget
Some credit cards, such as the Discover card, offer rewards with spending. If you can stick to your budget and pay off the balance of your card every cycle, a rewards card gives you an extra boost when trying to budget.
For example, the Discover card offers cashback on spending. This way you get a little something extra back on your everyday costs. Each time you spend you gain a cashback, which accumulates on your cashback balance. Simply reclaim the cash when you desire.
Discover offers a variety of cards with different rewards so you can pick one that best suits your needs:
- Discover it® Cash Back: You get 5% cashback on up to $1,500 each quarter
- Discover it® Chrome: You get 2% cashback at gas stations and restaurants on up to $1,000 each quarter
- Discover it® Miles: 1.5 miles for every dollar you spend, on all purchases
Credit cards are a clear winner when it comes to making payments with your budget:
- Your spending habits are easier to track, because they are detailed on your statements
- Providing you pay off your balance in full when it is due, you won’t incur interest
- You can earn cashback or rewards, giving your finances an extra boost
Yes, it makes sense to budget using credit cards. However, you must be disciplined. You need to create your budget, stick to it, and pay off your card before it starts charging interest.
According to consumerfinance.gov, around 39% of credit cardholders in America pay off their credit cards each month. If you can be like these, then a credit card might be a great option to help you get your finances back on track.
Creating a Budget with a Credit Card
We’ve established that credit cards can be helpful when budgeting. But is not often that you hear the words ‘credit card’ and ‘budget’ in the same sentence. For your credit cards to be helpful, you need a working budget in place. Here are some top budgeting systems you can use with your credit card:
- 50/30/20: This is a common budgeting plan where you set aside: 50% of your income for your essentials like rent, food and transport; 30% for wants; and 20% for savings.
- Zero-sum: Use last month’s income to budget this month’s expenses.
- Spreadsheet: Create a spreadsheet with two columns: one for your expected expenses and one for your actual expenses. This helps you establish where you are overspending.
- Online software: There are several online budgeting software programs available. Personal Capital is a great example. They have several free tools aimed at helping you manage your personal finances, and some are also available as mobile apps, letting you know what’s happening with your money in real time on your smart phone.
- 7-step budget building with a credit card:
- List expenses
- Compare to income
- Cut overspend
- Create budget categories
- Use cards that are best for your spending
- Check-in regularly and pay off at least 2x each month
- Review at month’s end and start a fresh
Budgeting to Achieve Your Financial Goals
Budgeting is a critical skill for effective money management, which in turn is critical to achieve your financial goals. Therefore, it makes sense to develop a budgeting strategy based upon your financial goals. Thus, we recommend you follow these seven budgeting steps:
- Step #1: Set your financial goals
- Step #2: Predict your income based upon your last six months’ income
- Step #3: Predict your expenses (necessary and discretionary) based upon the last six months’ expenses
- Step #4: Calculate your savings rates (minimum savings rate is income minus all spending, maximum is income minus necessary spending)
- Step #5: Evaluate your financial goals against your spending
- Step #6: Track your savings every month
- Step #7: Track your net wealth regularly to monitor progress toward your financial goals
Which Payment Type Can Help You stick to a Budget? Credit Cards.
Sticking to a budget can be tough. In today’s world, with so many online payment options we can often feel detached from our spending and start accumulating debt quickly. However, if you examine your finances and put a realistic budget in place, budgeting with credit cards can be one of the best options available to you.
Use credit cards that earn the best rewards for you and get a little something extra back when you make purchases. But also make a budget and ensure you keep your spending in check. You can use online calculators to work out how much you should be spending in each category (rent, food, clothing, etc.) each month.