Use 'reverse credit' to stick to your budget
Posted
May 12 2008, 08:18 AM
by
Karen Datko
Rating:
This post comes from J.D. Roth at partner blog Get Rich Slowly.
Ralph sent me an e-mail recently describing a clever budget trick he picked up from a friend:
My wife and I had dinner last night with a couple of young women we know. We talked a little about personal finance. One of the girls has an interesting idea on forced savings. She calls it "reverse credit."
"When I want to buy something expensive, I go to the store and buy a $20 gift card," she said. "I save these up. When I'm ready, I take all the cards and go get my new thing."
I think this forced savings plan is brilliant, and told her so.
I've actually been doing something similar.
Because I want to expand my wardrobe, I've been asking for gift cards for my birthday and Christmas. Over the past two years, I've accumulated $305 in reverse credit at Lands' End, and once I lose a little more weight, I plan to place a large order. By using reverse credit, I'll be able to adhere to a strict clothing budget.
You can use reverse credit to save for more than just large items. You might use it to budget for your morning coffee, for example. If you want to limit your spending at Starbucks, put a fixed amount -- $20 maybe -- on a card at the beginning of the month. When that card is drained, you know you've spent your coffee budget. At the start of next month, put another $20 on the card.
You may recognize reverse credit as another form of envelope budgeting. With the envelope system, you budget by physically placing cash in envelopes designated for specific purposes. You might have a clothing envelope, for example, or a coffee envelope. When you've spent all the money in any given envelope, you're done spending in that category until the next payday.
Reverse credit isn't for everyone. For one, gift cards have notable drawbacks. If these worry you, another way to do this is to open a separate checking account, deposit a specific amount each month, and then use the associated debit card as described above. If you already have control of your spending, this may seem excessive. But if you're trying to teach yourself to budget, this could be an effective way to do it.
Other articles of interest at Get Rich Slowly:
"The pros and cons of gift cards"
"Building your first budget"
"Budgeting for nonbudgeters"
