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Balancing need to save against urge to earn rewards


Consider your spending habits and self-discipline to create a plan that you can stick to

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QuestionDear Cashing In,
After speaking with a financial adviser about my retirement outlook, I realize I need to go into savings overdrive to make up for past years of excessive spending. Some might say a cash-only, envelope budget is the way to go, but I hate to give up the rewards-earning potential of credit cards. What’s the best way to stick to a budget and still earn points for the purchases I make? — Leigh


AnswerDear Leigh,
Your question is about more than simple personal finance. It hits on the psychology of consumer spending and reward accumulation. And finding an answer that works best for you boils down to exactly how much you trust yourself.

Now, it sounds as though your meeting with the financial adviser threw some cold reality on your budgeting. Most of us know that we should do a better job saving for the future and spending less, but sometimes it takes that outside push to make it happen.

Studies say cards spur spending
One problem is that it has become very easy to spend more than you should, especially when you use credit cards. Studies haverepeatedlyshown that people spend more using credit cards — so-called “invisible money” — than they do with cash. Swiping a card, signing your name and having the bill show up a month later is mentally a lot less taxing than going to the bank, withdrawing your cash and handing it over to a store clerk. If you’re prone to make impulsive purchases on credit, going to an all-cash budget can make a lot of sense, because you won’t spend more than you have.

However, as you point out, forgoing credit cards means missing out on rewards. Maybe you’ve even persuaded yourself that accumulating rewards is an important financial strategy, since it saves you money. That could be true, although I believe a lot of people participate in rewards programs because they feed our desires to beat the system and get stuff for “free.”

For most people, the actual amount of rewards can be quite meager. If you charge $2,500 a month on a card that gives 2 percent back in rewards, you’ll earn $600 a year in rewards. That sounds pretty attractive, but it is not the full picture. You’ll need to subtract from that amount any fees for paying late or carrying a balance and any card annual fees, and it also assumes you actually cash in the rewards instead of letting them languish in your account. That figure also doesn’t consider any additional impulsive spending you did because you were paying with a credit card instead of cash.

Leigh, you might ask yourself these questions: Is the amount I earn in rewards really worth it to me? Do I trust myself to keep spending under control if I continue using credit cards? What would be the easiest way to keep me in solid financial shape?

Cash-only approach
Answers will be different for different people. One extreme is the cash-only approach with a detailed budget in which you divvy up your cash into envelopes for different categories of spending. The other extreme is all credit cards and no budget.

If you trust yourself, a middle approach might be to use cards for certain expenses but not others. Maybe you commit to using your rewards credit card at, say, gas stations and the grocery store, but not at the shopping mall. Or you buy gift cards with your rewards card at the beginning of every month for certain budget items, such as dining out (though you would probably limit yourself to national chains such as Chili’s and TGI Friday’s). Gift card purchases typically do earn reward points, and merchant gift cards do not usually have fees.

Or start with an all-cash, envelope budget for a month, see how it feels, then gradually introduce card purchases if you feel comfortable doing so. Make sure you have a workable budget. Most people know they should have one, but polls have shown that only one-third of Americans track their monthly income and expenses. Online tools such as can help.

The answer for you boils down to what makes you most comfortable and gets you financially on track, Leigh. Good luck!

See related:5 things people fail to budget for, 4 times to go old-school with your finances

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