A January spending freeze can help you save money quickly while resetting your spending habits for the new year. These strategies will help you plan a spending freeze and take advantage of credit cards rewards to boost savings
When you’re coming off the holiday spending rush, hitting the reset button on your budget might be a priority. Planning a January spending freeze can help you save money, and it’s also a good time to review your credit card habits.
If you’re considering a spending fast after the holidays, these tips can help.
See related: Balance transfer credit cards with no transfer fee
Know what a January spending freeze involves
If you’ve never done a no-spend challenge before, having a simple definition can help you get started.
“A January spending freeze is a period at the beginning of the year where you commit to not spend on anything except the essentials,” says Kevin Chen, credit card expert at Finder.com. “A spending freeze can help you get your finances on the right track for the year – especially while you’re still excited about your new year’s resolutions.”
For example, your financial goals for the new year might include paying down debt or buying a home.
Taking a break from unnecessary spending can help you achieve those goals, says Ben Watson, a CPA and founder of personal finance coaching platform Fiscal Fluency. The key is to commit to curbing extra spending for the entire month, or for as much of the month as you can if that’s not realistic.
Set the ground rules for a spending freeze
Hitting pause on spending in January means taking a closer look at your budget to separate wants from needs.
“A spending freeze slashes your regular spending to the bare minimum you need to keep afloat,” says Watson.
In other words, you’re only spending money on those expenses you need to maintain a basic standard of living. For example, that includes:
- Mortgage or rent payments
- Basic utilities
- Groceries and basic food items
- Basic transportation
Wade Schlosser, CEO and founder of debt relief company Solvable.com, says it’s helpful to begin a spending freeze by analyzing all of your expenses. From there, you can look for ways to lower your monthly bills. For example, you might switch cellphone carriers, get rid of cable in favor of streaming services or renegotiate some of your expenses, such as your car insurance premiums.
Watson says a useful trick for setting spending guidelines is to adopt the same mindset as if you were suddenly forced to live off your emergency fund.
“Imagine you were just let go from your job,” says Watson. “Would you go out to dinner and a movie that night? Probably not.”
Establish a clear savings goal: Save $1,000 in January
Not spending money means you have an opportunity to save a little cash instead. This is where it helps to have a specific goal in mind to stay motivated to stick with your spending freeze, says Schlosser.
Say, for example, that you want to save $1,000 this January. You could take the money you aren’t spending and route that straight into your savings account.
That’s good if you want to build your rainy-day fund or plan for a big expense, such as a vacation. If you know what you won’t be spending money on for the month, add up each item to see how close that could get you to the $1,000 mark.
For example, if you normally spend $200 a month dining out, that $200 could be the seed money to start your $1,000 savings goal. Or you might spend $200 per month on entertainment or clothes shopping.
All of that is money that can go into the savings pot. Seeing your savings add up might encourage you to stick to your no-spend plan beyond January.
“Enter your spending freeze with the idea that it could help you cut your expenses for the rest of the year,” says Schlosser. “It’s not just a one-month experiment – it’s the first step to living more frugally.”
Leverage your rewards credit card to increase savings
The other way to hit your January savings target is to put your rewards credit card to work.
“Put all must-haves on your cash back credit card if possible,” says Chen. “Not only do you save money you’d otherwise spend on unnecessary items, but you’ll also earn what’s essentially free money.”
Depending on the card, you may able to have cash back rewards deposited into your savings account. That’s an easy way to grow your savings cushion.
Here are a few worthwhile cash back rewards options for the New Year:
- Chase Freedom Unlimited: Earn at least 1.5% cash back on all purchases.
- Discover it® Cash Back: Enroll every quarter to earn 5% back on up to $1,500 in purchases in various categories through the year, and 1% on general purchases.
- Blue Cash Everyday® Card from American Express: Earn 3% cash back at U.S. supermarkets (up to the first $6,000 per year in purchases, then 1%); 2% at U.S. gas stations and select U.S. department stores, and 1% on other purchases.
If you’re eyeing the Discover it Cash Back card, note the quarterly bonus calendar.
From January through the end of March 2020, you’ll earn 5% back on the first $1,500 in purchases at grocery stores, Walgreen’s and CVS. If you max out that $1,500 spend in January, you’d earn $75 that you could earmark to savings. Don’t forget to enroll to be eligible for the cash back bonus. Additional purchases earn 1% cash back.
Apply existing rewards strategically
If you banked some rewards from holiday spending, think carefully about what you want to do with them.
For example, consider whether cash back rewards are more useful when applied to savings or debt if your card has a high interest rate.
“The interest rate on your debt is most likely higher than any return you’d get from savings accounts or investments,” says Chen. Applying rewards to the balance can reduce some of the interest you’ll pay.
Alternately, you could consider keeping your rewards cash for savings and transferring the balance to a card with a 0% introductory APR.
Schlosser says you could also consider redeeming rewards for gift cards as a money-saving measure.
“You may be able to get supermarket or grocery store gift cards to further reduce your spending,” he says. “You can also get gift cards to give as presents in situations where you can’t avoid giving a gift.”
If you’re thinking of using existing rewards to redeem for gift cards to cover basic expenses or as gifts, check the redemption value first. You don’t want to make the mistake of short-changing yourself when it comes to getting the most value possible for the rewards you earned over the holidays.
Once January comes to a close, go over your spending to see how much you’ve saved and what you earned in rewards with your credit card. You can then use that to plan your spending for the rest of the year to maximize both rewards and savings.