Due to the high interest rates charged by credit card companies, it is essential to always pay your credit card balance off each month. If you don’t pay the credit balance off in its entirety you are essentially handing a good chunk of your hard earned money to the credit card companies. In order to pay your credit balance in its entirety every month, there are some key items that must be in place: 1) have a firm grasp on your household budget, 2) have a savings buffer, 3) only use credit cards for cash flow purposes, and 4) have discipline in regards to your spending.
Think of running your household budget like running a company. The goal is to collect more than you spend and run at a profit or at the worst break even each month. Therefore you must know your household budget, which is what can you afford to spend each month, which must be based on how much you collect each month. A savings buffer is also critical, otherwise a medium car repair would be likely to put you at a loss for the month, and you would be unable to pay off your credit card bill. A savings buffer should be two to twelve weeks of pay, which might sound unreasonable, but what if you are your spouse loses a job, and it takes some time to get a new job?
Only using credit cards for cash flow purposes means that you only use the credit card to make the initial purchase, with the full knowledge that you have already budgeted for that purchase, therefore you will have a sufficient bank balance to pay for that purchase at the end of the month. An example of this is filling up your gas tank on a Tuesday. You pay for the gas up front, but you will use the gas over the next several days, and you get a paycheck on Friday that provides you with the funds to “cover” that cost when the credit card bill comes due later. So using the credit card just helps smooth out the valleys when you are paying for something up front that you have not really used yet. Otherwise, your savings buffer would need to be even higher just to cover bumps in the flow of cash.
Obviously the final key is to have the discipline to avoid purchases that you have not budgeted for. This doesn’t mean you can never buy a new TV, it just means that you should buy the TV using surplus funds that you know that you have available for the month or from your savings account and not just making the assumption that you can probably buy it now because you don’t have to pay for it for a month.
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