You can use credit cards as an essential tool to help you successfully manage your cash flow. Shrewd cardholders use their cards to improve credit scores, accumulate savings, and manage everyday financial activity.
But, don’t forget – credit is a two-edged sword. Those who abuse it can end up with spiralling debt…
- Treat Your Personal Life Like a Business
- Spend Less Money Than You’re Making
- Track Your Expenses and Income Carefully
- Keep Records of Purchases to Improve Cash Flow
- Pay Your Bills Promptly
- Don’t Carry Over Balances
- Tame Your Cash Flow Monster
You need to remember some essential points about cash flow management if you want to stay on top of your finances and avoid debt.
The guidelines below deal with the fundamentals of organizing your incoming and outgoing cash using credit cards, and we also provide some handy money saving tips:
Treat your personal life like a business
Let’s start with a fundamental financial outlook – think of your personal life as a business. Rent, salaries, and variable costs cannot be more than what a typical restaurant makes from selling meals, or it will rapidly go bankrupt. You should give your bank account similar consideration.
Spend less money than you’re making
Sounds simple in theory, but it’s challenging in practice. We recommend creating an individual cash flow report accounting for all weekly spending and income. This will help you to implement self-imposed barriers and act more responsibly.
Track your expenses and income carefully
When you track your expenditures, you’ll probably be amazed by the number of small, random purchases that appear. They can build up over time and leave odd gaps in your cash flow plan.
You need to track inbound cash. Your plan should include these entries:
- Ordinary income: This includes your fixed income, and your spouse’s income where applicable. Your salary is usually straightforward, but you should also list commissions and bonuses. Locked or reinvested income, unrealized capital gains from open positions in the stock market, or dividends should not be included. These funds are not directly applicable to your inbound cash because they are ‘illiquid’ (i.e. not easily converted into cash).
- Additional income: Savvy budgeters usually assign other, smaller sources of income to this section. These can include freelancing or consulting pay, pensions, government benefits; investment residuals and dividends that are not steady enough for inclusion in the ‘ordinary income’ section.
- Fixed expenses: These can include items such as rent, lease, and mortgage payments, scheduled investment contributions and taxes, and are the usual monthly expenses. Record these correctly under the date you expect to pay them. But, the list doesn’t end there…
- Variable expenses: This included bills that are mainly incidental. It’s the most challenging portion of a cash flow report. These expenses are difficult to predict and even trickier to track. They include items such as clothes, groceries, ATM withdrawals, medical care, and entertainment expenses (movies, restaurants, and streaming subscriptions, etc.)
Keep records of purchases to improve cash flow
At first, keeping cash flow records might prove challenging. Very few people have the discipline required to keep all of their original receipts, and it takes time and practice for it to become a habit. Therefore, at the start, many of your cash purchases may not end up on your cash flow plan.
If you use credit cards rather than cash, it helps you to keep more detailed documentation of purchases (although we still recommend that you save receipts for back-up). You can also save on travel, since many credit cards give you access to rewards points, and in some cases, you can get cash back from different expenses.
Pay your bills promptly
Manageable debt can slowly become unmanageable with neglect and attract fees and interest. There are many benefits to using credit cards for bill payments, including the fact that it automates the payment process.
It reduces the possibility of missing payments and incurring financial penalties. You can customize your automated bill payments, setting them up after your usual payday, for example.
The Tangerine cash back credit card, and others like it, also offer inducements for arranging automatic payments and recurrent bills, which makes this system more attractive.
Credit card users have a few weeks’ reprieve from the statement date to the payment date. Since you’re buying an item on credit with no obligation to pay right away, this, in effect, gives you a no-interest loan.
The credit card company will not levy any fees or interest on purchases made within the month, if you pay the bill within the grace period. Different card issuers offer different grace periods, and in some cases, cardholders may choose a billing date. Bear in mind the Canadian minimum grace period is 21 days.
Before you make your final decision, you should compare your options to find the best card for managing your cash flow, because not all issuers offer the same level of flexibility.
Don’t carry over balances
If you have a credit card with a low rate, it’s easy to be tempted to make just the minimum payment and carry over additional debt. But, we don’t recommend that. If you tend to overspend, you need to bear in mind that interest radically increases your purchase price, and this figure increases from month to month.
You can lower your ability to splurge by reducing your credit limit. But only take this route if you’re a chronic over-spender: reducing your credit limit can negatively impact your credit utilization ratio, which affects your credit score.
Tame your cash flow monster
You need discipline and practice to maintain positive cash flow. It’s worth a try, because when you stick to the plan, it can significantly increase your savings. Being disciplined isn’t always easy, but it’s totally manageable with the right tools at your disposal.