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Credit Cards: Good and Evil

There are people out there that will tell you to avoid using credit cards at all costs. Then there are people out there that advocate for using them as much as possible.

Personally, I use them for as many expenses for both my personal life and my business that I can, and there is good reason for that. However, I wouldn't universally advocate for them to everyone. When deciding if you are going to use credit cards, you have to be honest with yourself. You have to know that you have the discipline to use them for the proper purpose.

I say this because there are generally two ways to use a credit card. You can use it as a purchasing tool, or you can use it as a financing tool. Spoiler alert, you should only be using it as a purchasing tool.

Using a credit card as a purchasing tool is when you make a purchase with the card that you already have the funds to cover. This can be beneficial because you can use a cash back or rewards card to effectively get a discount on that purchase.

Using a credit card as a financing tool is when you use a card to make a purchase that you don't have the funds for. Business owners might do this to buy inventory that they intend to sell or to buy a new piece of equipment that will be paid off over time. This is very risky and should be avoided. If the inventory doesn't sell or the equipment doesn't generate the return you were looking for, you can be stuck with heavy interest.

Only use a credit card when you can pay it off right away. Carrying a balance wastes cash.

For both my personal life and my business, I make almost all of my routine purchases with a cash back credit card and then pay off the balance immediately with the cash that I have on hand. To properly manage this, you need to have a system in place to keep on top of your purchasing decisions and avoid over spending.

Segregating your cash for specific purposes is one great way to systematically prevent overspending. For your personal expenses, you can set up separate accounts for separate purposes. You might have one for your rent or mortgage, one for other necessities like groceries and gas, one for debt payments like your car payment or student loans, one for savings, and one for your entertainment. The two out of this list that you could most likely use a credit card for are other necessities and entertainment categories. Once you have your money segregated like this, you can easily monitor your spending by category and ensure that your credit card balance doesn't creep above what you can pay off. I also recommend making it a habit to routinely make payments to your credit card. You don't have to wait until the due date to make a payment. I would also like to note that you can break down your accounts even further than the list that I have above. The other necessities category could be broken down to groceries, gas and automotive, utilities, etc. The more you separate your cash, the more control you will have over it.

This same system will work for your business as well. You can create separate accounts for the individual spend categories just like you can for your personal budget. I have been using YNAB for my business even though it is designed for personal finance. I just modified the spend categories to represent the categories of my business instead of the standard personal finance categories. I then connected my bank accounts and credit cards so that as transactions come through, I can categorize them appropriately and always be sure that I'm not spending beyond what I have currently available to cover. So now, when I order inventory for Nordic Jo's Coffee, I can quickly check to see what cash I have available in my inventory category, calculate what my order should be to not exceed that amount, and pay for that order with my credit card to be able to gain the cash back benefit without risking overspending.

If you would like to discuss this further, or if you would like to hear about other cash management methods, find me on LinkedIn (Cody Thieling).


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