I have read several personal finance books over the last five years. One of the books I read was written by Dave Ramsey. In his book he talks about using an envelope system to budget. If you aren’t familiar with the envelope system, you basically have separate envelopes for every budget category in your household (i.e. groceries, water bill, house payment, entertainment, etc.) and when you get paid you put the budgeted amount of cash into the corresponding envelope. When you buy something it comes out of corresponding the envelope, and when the envelope is empty you stop buying things.
I think this method is for people with absolutely no self-control. If you have just a little self-control and care about being better in life like I do, then you need to be using credit cards rather than cash and envelopes.
Paying in cash is not efficient!
Let me explain why. Every time you use a credit card the credit card company charges the merchant a small fee to process the transaction. You pay the merchant the exact same amount whether you use cash or credit. Where you gain efficiency is that some credit card companies offer to split their earnings with you as a way for you to use their business. These are called rewards credit cards.
Before I get into the benefits of rewards credit cards, let me interject my disclaimer for credit card use. You MUST pay off your credit card in full every month. Just like with the envelope system, where you cannot use more cash than is in your envelopes, you should not be charging more than you have the cash to pay for. Acquiring credit card debt with high interest payments is a very poor idea and inefficient way manage your capital.
Ok, so back to rewards credit cards. There are basically two schools of thought when it comes to rewards credit cards.
- Sign Up Bonus Only
The first school is to look for credit cards with initial sign up bonuses. Many credit companies offer high bonuses to sign up with them and then spend X amount of dollars. After the initial sign on bonus the “cash back” incentive is usually nothing to very low (less than 1%). Therefore, to make this reward work in the long term you have to look for and sign up for new reward credit cards with high bonuses. In my opinion this option has higher total rewards, but is much more time intensive.
- Best Overall Rewards
The second school of thought is to look for credit cards that offer the best overall rewards. Credit cards that offer best overall rewards offer “cash back” in the form of up to 2% of the money you spend. Although this may seem like a lot less than initial sign up bonuses, the 2% is for the duration you hold the credit card; thus, you set it up once and the time needed to manage your finances will be minimal.
Both of these types of rewards credit cards give you money back for your purchases and help you gain something from your spending, rather than using cash and gaining nothing.