Why Credit Cards & Cutting Savings Aren’t the Answer

Don’t get me wrong, I don’t object to credit cards in general. They offer better protection than debit cards for online shopping and can help meet extraordinary expenses quickly. I also know a lot of people who use them just for the convenience of having all their spending information in one place (make sure to pay them in full every month). However, with interest rates as high as 20% – 25%, using them for ordinary living expenses will only make the problems worse. If you are struggling to make ends meet, the last thing you need is to make everything 20% more expensive!

Cutting back on savings can mean simply pushing today’s problems into tomorrow. I’m sure you have all seen the charts about the power of compounding. Cutting back your monthly savings means giving up not just the dollars you would have set aside but what you would have earned on those dollars. Over time, that can have a really big impact on your ability to meet your future goals.

Closing the Budget Gap: Spend Less or Earn More

So what can you do? There are basically two ways to close a budget gap: earn more or spend less (or, of course, some combination of both).

Since an immediate increase in income is often not an option, the low-hanging fruit is likely to be trimming expenses. Consider using a budget app such as PocketGuard or Monarch Money to help you better see where your money is going. Nerd Wallet and Forbes both provide reviews of available apps to help you choose one that works for you.

Armed with that information, you might be able to trim without really even feeling a pinch:

• Is there a subscription or streaming service that you pay for but hardly use?
• Do you buy produce that you end up throwing away?
• How much do you really spend on those Starbucks runs over the course of a month?

If you aren’t that lucky, be intentional about how you cut back. If at all possible, leave yourself a slice of the budget for the things that bring you the greatest joy while looking for ways to trim around the edges:

• Clip coupons
• Shop at less expensive stores
• Cut back on frequency instead of cutting out activities altogether

Finding ways to minimize the impact will make it easier to stick to the promises you make to yourself.

Build Savings Strategically

The flip side is savings. While it is not guaranteed, the silver lining to cost-of-living increases is that many forms of income also increase based on cost-of-living indexes. There may be a bit of a lag before income catches up, but if you use that gap to get a better handle on spending, it can actually work in your favor. One of my favorite techniques to really start building savings is to split raises:

• Any time you get an increase in compensation, increase your retirement contributions a little
• Keep a portion for current spending too

Another way to do this is to save “extra income:”

• Bonuses
• The third paycheck you get for a few months if you are paid bi-weekly

Putting a percentage of that “windfall” in a high-interest savings or money market account can help you:

• Build an emergency fund
• Start saving for your next car
• Prepare for emergencies or big purchases without relying on high-interest credit

At today’s interest rates, you can keep the money readily available while still getting some decent earnings. And when those big expenses hit, you will be better prepared to roll with the punches.