Monday, March 31, 2008

How I don't overspend on a CC

As I drew up a complete budget, I've tracked my spending for 2007, detailed all money spent on a CC or cash, and finally I understood what my percentages are. I realized why I always say people can use a credit card but not overspend if you are controlled. Because we have a built in control using our budget. What?

Well I've realized that 55% of our income is gone pretty much before we see it. Then another 30% is gone to housing, a conscious decision. So 85% of our income is gone before we have a chance for it to really be seen even as cash from auto-debits. It is invested, saved, gone to bills.

So I have 15% of our income to really play with in our checking account. We now take home less than what we did when we were both graduate students and making 1/3 of what we make now! Crazy! Of that 10% goes to fixed monthly bills. Bills which we've agreed to pay and decided is important to our lives. So we spend 5% of our income a month as choose in "fun".

Our 10% includes things like homeowner's dues, car insurance, car tax, electricity, cable/internet/phone, natural gas heat, cellular phone plan, pet health insurance and food, and blow allowances. The electric and gas are on budget billing with it's respective company so I use that amount and it works out well.

Now some of these bills are auto-debited on a credit card, but they are budgeted as a fixed amount. So I have 10% of monthly fixed obligations, which can be decreased if we lost our jobs and needed to tighten our belts, such as cable, internet, etc, but which we have deemed currently as important and necessary to our current lifestyle.

Strangely it's even how I ranked them in our budget unthinkingly. Our budget goes Income, pre-tax savings/deductions, taxes, after tax savings/deductions, fixed expenses, and variable expenses. Everything I mentioned goes in the fixed expenses with the mortgage, property taxes, insurance.

Food, eating out, entertainment, fun, personal care, clothes, etc are all variable amounts. I get 5% with which to prioritize my spending. These are charges on the credit card. I have a dollar amount monthly with which I can spend on whatever categories I see fit. I have "budgeted" amounts but I don't have to stick to them as long as I stick to the monthly 5%.

I realized this is something we've done since forever. This is how we've always budgeted and paid CC in full. We never really have had a lot of variable expenses. Most of our expenses have been "pre-set" even if paid for by a credit card. We view them as a monthly obligation and not "our" money.

During my 2 month cash experiment, all our fixed bills were still paid by credit card or auto-debit. Nothing changed except my 5% was in cash. It made me way more frugal in a negative way, because I refused to buy groceries then ended up spending more $$$ to compensate afterwards to restock the pantry. A more appropriate behavior would have been to just use the cash naturally and grocery shop every week instead of trying to go 4 weeks without shopping (I spent less than $100 for 3 adults in a month, it was ridiculous). I also specifically did not eat out because we didn't want to spend the cash.

But now that I have my cash data, my budget percentages, I realize that I don't have a real problem overspending because I don't have much money to overspend with. I consciously have $X/month. I know I have $X going to savings for specific target funds (tuition, property taxes, etc) and those funds are untouchable.

Because of this I don't have large CC bills. On average probably $1k/month including all fixed expenses charged and variable expenses. But my budget busters come when we pay for DH's tuition on a credit card and slam down $25k/year (but at 5% back who wouldn't use a credit card?).

So while CC aren't making me rich, they are helping with my frugal behavior. So I guess this is my personal plan on how not to overspend on a credit card. I have a lot of fixed expenses, hence 95% of my income is gone before I can have fun. I do realize that part of my fixed expense are for fun and it's ironic I only consider 5% fun money.

My plan is to one day have 50% fixed expenditures and 50% fun money. But I'd have to make a lot of money to do that!


Jim ~ said...

I believe it's a psychological thing regarding credit card use. If you charge and pay off the balance in full every month, the industry sees you as a deadbeat because they can't make money off you. You're taking the 5% back from them on top of it so they're losing money with you. They want the people who float a balance from month to month.

I used to be the one to pay the balance in full, but costs of college really caught me off guard and books and such started building a balance greater than I could handle. I got careless and charged a lot of crap too. Once I get these things paid off doesn't mean I won't use them, but rather think about how I use them more. For the sake of getting out of debt I'm not using credit, just paying on it. It's much harder to get out of debt if you dig the hole deeper.

Sense to Dollars said...

I haven't tracked my cash spending vs cc spending, but I'm probably not too far off using the cc. The only place I *might* be overspending is at the grocery store--I don't buy anything else unless I absolutely need to. I probably break even with the rewards I get from my cc. It seems like every other month or three I'm getting a $50 check from them (5% cashback rocks)!

I enjoy your blog--you always seem to post on topics that I enjoy and am interested to read. Keep up the good work!

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sfgirl said...

Wow, you have really figured out all your payments regarding how you spend income, I should start doing this also!

Cynthia Morales said...

I always track my family's spendings.This way I can allocate equally and correctly the budget without leaving any gaps.