What is the first thing that comes to mind when thinking credit card? Many will associate the word credit card with ... well … credit. A potential plastic evil that permits buying new gadgets, paying at the restaurant, stocking up on clothes, and too frequently having to repay a big chunk of money at the end of the month.
In fact, if you are not paying attention, credit cards can indeed be evil making spending too easy. The simple action of handing over your card instead of physically experiencing parting with your money can quickly have you go over budget. Only weeks later when that dreaded statement comes through your mail box does reality hit.
So it is time to use them to your advantage.
Credit card saving power
Credit cards are usually not considered money saving instruments, but accumulators of debt. So the general opinion would lead you to believe.
Here at Captain Finance we believe in enriching our lives in every way possible. Credit cards might thus, at least at first, not strike you as the most appropriate tool. But choosing the right credit card can enrich your life in multiple ways. One of them is by gaining points that carry a real monetary value. The other is by earning interest while someone else is lending you money at 0%.
But beyond these obvious benefits, credit cards are fantastic saving vehicles.
In order to avoid overspending and get the most benefits, it needs to be used strategically. But as you know, I am a fan of keeping things as simple as possible to avoid going off track.
Spend and enjoy
A few months ago I went out with friends in the south of France. We enjoyed a terrific dinner in a nice restaurant run by a young couple. Starting with a nice bottle of red wine from the nearby region of Gaillac and fresh bread dipped in fine olive oil, we moved on to Entrecote (a very good piece of steak for the non-French speakers amongst us) and burgers with a Toulousian (that is where we were – Toulouse) twist: a sauce combining champignons with Cantal (a fabulous cheese).
These types of evenings are worth every penny: Enjoying great food and drinks with wonderful friends. I would never want to miss these memorable and life enriching moments just for the sake of saving a few Euros.
The bill came to € 30 each. I handed over my credit card to settle the bill and went on to enjoy the rest of the evening.
Psychology and Money
The money I had spent came from my leisure budget, but parting with my money occurred in cyberspace “protecting” me from feeling the pinch. The budget remained unaffected creating the too common issue of overspending. If your respective stash of money remains dent free by deviating spending through cards, a credit card will indeed turn into a dangerous financial trap: spending without actually feeling it is what leads to those bad surprises at the end of the month.
The savvy financial sailor, however, will not fall into that trap. A few days later, back in Paris, I opened my leisure budget box and took out the € 30. I then put them into a special account. An account specifically set up for money spent with my credit card.
There different ways of going about setting up a unique credit card account:
- Take the money out of your box and pay it directly into the special account.
- Transfer the money from your current account into the special account
- Take the cash, put it into a special envelope and head to the bank bi-weekly or monthly to save you time (compared to option 1)
- Use the money you put away following your credit card spending for you next month’s budget. Instead of taking it to the bank, put it into your dedicated box and draw from the available money. This way you have no need to withdraw money for future budgets, saving you from having to visit your bank or ATM.
But why go through all this extra work (the more you do it, the more it becomes engrained in your behavior. You will indeed find it alien that you have not always done it this way)?
The reasons are manifold:
- You know the saying: Out of sight, out of mind. That is what drives our spending. When we don’t realize how much we are spending, we spend more. The closer we keep it within our sight, the greater the psychological effect. In order to keep to your budget without the hassle of tracking your spending, reducing your stash of real money is paramount. By sticking to the feel and sight of a diminishing pile of money, your subconscious will cap your spending.
- Don’t delink the emotion of loss when parting with your hard-earned cash through artificial digital payment systems; touching your money will reemphasize your money’s value.
- Refrain from accruing debt by letting the cyber world take care of all your spending. Keep it in the analog world to stay on top of your spending.
Thus, each time I use my credit card to pay for something, the amount must be covered by money from the respective stash (leisure or groceries). In fact, paying with my credit card allows me to save money.
Earning money by using your credit card
Save money, you might wonder, you simply shifted the money from one place to another and still have to pay back the credit card amount at the end of the month.
Four ways a credit card helps you save:
- You are earning interest on your principal: by paying with your credit card you are able to keep money in your savings account for longer and earn an extra 27-31 days of interest (depending on the month)
- Get a credit card that earns air miles (or some other type of incentive): by using your credit card, you accumulate miles towards a free flight, hotels, car rental, or clothes
- Profit from the power of human conditioning: Have you ever heard of Pavlov’s dogs? Pavlov tested whether he could trigger the same excitement and anticipation regardless of the stimulus. He did so by providing food to his test dogs while simultaneously ringing a bell, playing a tone on a piano, and numerous other stimuli.
Be your own Pavlov and use the power of psychology for you own benefit. The quicker you transform a card transaction into a cash transaction, the stronger the conditioned impulse. Each time you pay with your card in the future, the emotion of experiencing your stash of money shrink becomes stronger. But for the psychology to work, you need to do it as quickly as possible. Don’t wait before you transfer or take out the money. Do it instantly and let the power of your subconscious do the work for you.
- Your credit card statement: Ever looked at your credit card statement after a few days of spending? The panic that you experience when realizing you have spent more than you remember. That is a very powerful mechanism to stop your spending immediately. While many find themselves in trouble using their credit card, with the above strategies, you can smile as you have accumulated wealth, earned interest, collected miles, and grown stronger financially. But the shock when viewing the credit card statement remains the same limiting your willingness to spend.
If you stick to these strategies, pay your credit card in full from your monthly cash flow, you will become richer in so many ways. Your savings grow, your air miles add up, and enjoy life without going over board with your budget without too much effort.
All thanks to the saving power of your credit card.