How to Optimize and Simplify Your Daily Finances

September 08, 2011

In my last few blog posts, I wrote about how  we can manage our spending to save enough to reach our financial goals.  Ideally, you’d pay yourself first by having your savings set aside before you can even spend the money.  If you have retirement plan contributions deducted from your paycheck, you’re already doing this.  But you can do the same thing with your other savings too.  At Financial Finesse, we have the option to have a percentage of our paycheck diverted into a separate bank account.  See if your company offers something similar, or have the savings transferred automatically from your checking account.

Once you’ve set aside your savings and only have the money you intend to spend, you still have to decide how to spend it.  In other words, should you use a check, cash, a debit card, or a credit card?

Let me make the case for using credit cards as much as possible, especially for big purchases.  This may sound counter-intuitive coming from a financial planner, but credit cards are like fire.  They can be invaluable when used wisely, but dangerous when misused.  The main benefit of using credit cards is being able to earn reward points or cash back on your spending.  Otherwise, you’re basically giving up free money.  Personally, I prefer getting cash back because it’s simple and straight forward.  You don’t have to worry as much about rules and limitations.  Here are the best credit card cash back offers that I’ve found based on what you’re purchasing:

Gas: 5% cash back from Pentagon Federal Credit Union Platinum Visa

Restaurants, Bookstores, Music, and Movies: 3% cash back from Citi Forward Visa

Groceries: 3% cash back from American Express Blue Cash

Everything else: 2% cash back from Fidelity Investment Rewards American Express

I like to have as many of my bills, as possible, charged directly to one of these cards so that I don’t have to worry about not paying the bill on time, and I get to earn as much cash back, as possible.  In addition, I use credit cards for big purchases and travel expenses.  This way I can also take advantage of some of the extra perks that credit cards often offer like extended warranties, travel protection, and car rental insurance.  Your credit cards probably have benefits like this that you may not even be aware of so you might want to look into it.  Finally, if your card is lost or stolen, your liability is limited to $500, while you can lose more with cash or a debit card.

Of course, the key to using credit cards is to make sure you don’t carry a balance so you won’t pay any interest.  I like to have my cards on autopay, in which the full balance is automatically deducted from my checking account so I don’t even have to think about it.  The same goes for other bills like my rent, utilities, and insurance premiums that I can have set it up to be paid automatically from my checking account.

The one exception is eating out, for which I use my debit card.  That’s because I need at least 10 debit card transactions a month to qualify for a  4% interest rate in my checking account.  I earn more from the higher interest rate than I lose in credit card rewards because these are relatively small amounts.

The end result of all this is that my cash management is optimized to make sure I hit my savings goals, earn as much interest and cash back as possible, and minimize the risk of a late payment on any of my bills.  Although, it may sound complicated and will take a few minutes upfront to set up, it’s actually a lot simpler and less time consuming to maintain because almost everything is on auto-pilot.  The only thing left to decide is where to invest your savings.