I recently received the following email (used by permission) from a reader –
Could you explain “how” you live without using credit cards – not the philosophy but the actual “process”? Do you use an envelope system, debit cards, or checks? I am just getting started and I was wondering if you could do a basic “how to” post (and I would like to know which types of accounts you use). Thanks so much, Chad
Chad, I’ll do my best to go through how I manage my money. If I leave something out of if something is unclear, feel free to leave a comment or shoot me an email, and I’ll try my best to clarify.
Creating My Budget
Every month, I sit down and I create a budget. My budgeting process is rather “simple”. My wife and I both receive our paychecks at the beginning of each month – mines arrives one week after hers. I divide my salary into three major categories – Give, Save, Spend – and then I break those categories into smaller sub-categories. For example: Give – Tithes, Offering, Charity. I then allocate, on paper, all of the funds that I receive for the month into those sub-categories. I spend every dollar, every month, on paper, before the month begins. I use YNAB Personal Budget (affiliate link) system – It’s simple to use and works with my spreadsheet program. I deposit our paychecks into my local bank – and I can move money between my local bank and my online accounts, as needed.
Making Payments And Spending Money
For any scheduled or reoccurring payments (electric bills, phone bills, automobile insurance) – I use online bill-pay from ING Direct’s Electric Orange Checking Account (affiliate link). The Electric Orange account is simple to use and I can use it to send a check to a company or an individual.
For any daily spending (groceries, gas, food) – I use cash. I use the Envelope System to manage my cash. Click here to view a video I made describing the Envelope System that I use. From time to time, I also use my debit card for these types of purchases – but I still find that I make wiser choices when I use real, old fashioned money. If you are just staring out, using the Envelope System is a great way to break yourself of the card-swiping habit.
For online purchases or for reserving a hotel – I use my debit card. Click here to read my post about using a debit card to reserve a hotel or to rent a car. (My debit card has built-in fraud protection. Ask your bank about their fraud protection policies.)
For any non-scheduled payments for which I might later need proof of payment(medical co-pays, school pictures) – I use paper checks. I write very, very few checks – maybe one or two per month.
Transferring Funds And Investing
Once a month, I transfer the amount allocated for savings from my checking account to my ING DIRECT -High Yield Savings. (affiliate link) If I need to make a contribution to a Roth IRA (or similar after-tax investment account), I simply login in to my brokerage account and initiate a transfer.
Chad, I hope this article helps to answer a few of your questions. Good luck with your debt reduction – and I hope you’ll check back in with me often and let me know how things are going.
Leave a comment if you have a suggestion for Chad – or a question for me!
I also use the envelope system for my day to day expenses but I get paid more than once a month so I have a bi-weekly budget as well as a monthly budget. When I was setting it up I found that trying to merge the monthly bills into a bi-weekly pay was causing me trouble so now each paycheck has an amount that comes comes out for the ‘ongoing’ expenses like Food, Gasoline … so it looks like this
1-Paycheck is direct deposited into checking
2-Money is automatically transferred to savings for for savings goals and periodic payments
3-I withdraw in cash the money for my envelopes.
4 Bills get paid online from checking account.
I just use a speadsheet to track the balance in my checking and project ahead the bills that will be coming out. At the end of the month any leftover is transferred to savings. If it is a month with some odd payment (like car insurance) I can transfer it from my savings and pay it. Long term things go to an online account but short term things, like car insurance, just go into my local account.
I disagree about using a debit card for car/hotel rentals. Yes, they place a hold on the funds for (often) more than the amount of the rental (a security deposit). It can take several days up to a week or more to get it put back into the account. Why would I want my money tied up like that?
This wouldn’t work for me because 1) I do not keep much money in my checking account, for which I have a debit card. It is for everyday spending only, and the bulk of my cash is in other accounts earning interest. 2) If I let them hold my money, that’s a about a week where my money isn’t earning interest for me. Yes we’re talking pennies here, but its just on principle. 3) I don’t pay interest on my credit card anyway, since I pay it in full each month, so there is really no penalty for me to use my credit card which leads to 4) It is more convenient at many merchants because they usually discourage use of debit, probably because so many people get up in arms about the big withdrawals they put on the account.
I used the envelope system for awhile but stopped. I seem to go on and off budget. my credit card debt is almost gone. my accounts are closed. will never use credit again.
I’m in the process of flattening my one real credit card (a rarely-used store card is not counted here) and if nothing else expensive happens, it will be at zero by year end. It will then be relegated a few annual payments and things like “its saturday and the car repair money is in high-interest savings.”
As for debit cards, I use them rarely and use dedicated accounts for the job. I have more sense than to run a debit card against a live checking account, I keep money in special accounts that are just for the debit cards. This limits how badly they can mess me up.
I have a spreadsheet of my monthly income and expenses that I use to keep things under control. Two checks a month, with payments pre-planned out of each one. As I am paid on a two-week cycle I get three checks twice a year. These extras are split between building up the emergency fund and a payment buffer for the used car I had to buy when my older one was wrecked by a woman who had a seizure at a traffic light. (Which is why the emergency fund is not full yet. Hmph.)
I too would be scared to use my debit card for any online purchase, hotel reservation or car rental. For security purposes, I would rather use my credit card and pay the bill in full.
Great blog and information! I use something similar to your budgeting. I do as you say “spend on paper” before actually spending the cash. I remember a time when I was younger and didn’t do this, and now I can’t imagine any other way. Yikes! I type up a “five month bill plan” I call it. I also set goals to get rid of debt. I hope in the next two years we can completely get rid of all debt but the house and regular monthly utility bills and such.
I’ve started using my PayPal debit card instead of cash for my monthly spending money. I transfer money to it from my checking account- all of the funds for groceries, eating out, gas, etc, and use that for purchases because I get 1% cash back (instantly) on everything. I do try to carry cash more often now, but I’m just more accustomed to spending on plastic.
Great article. I was in the mall the other day and Sears was trying to get people to sign up for their credit card. The default interest rate was 32%!! We have lived without a credit card for the last two years and have not missed those bills at all.
David
All this is fine for those having a set income. We are owner/operators of a truck and have no set income. Our income depends on the freight that he has hauled which fluctuates from week to week. So there is no way we can live without credit cards. We have our taxes to take off the top each week that must be paid. Right now we aren’t making enough to cover household expenses because i haven’t worked for over 3 years.
Sheila… Is there some reason for why you haven’t worked in three years?
NCN
Sheila.. You might be interested in this article that I wrote a few weeks ago…
https://www.ncnblog.com/2007/09/12/how-to-create-a-budget-if-you-have-irregular-income/
NCN
I haven’t worked because my mother passed away in 2005 so i was taking care of the estate for some time and clearing the house. Also at age 59 there aren’t many people that hire my age. I also take care of the books for the truck. I just haven’t worked for money paying job. We were doing ok for a while with me not working but now i need to return to the hell hole of a work force. I have a budget somewhat that i try to follow. and we are ok with that.
Not me!! I love my credit cards!! I love the rewards too!!!
Your system seems quite easy to follow, some of the details wouldn’t work for me because I need everything to be automatic (or it doesn’t get done). For example I have direct debits set up for bills rather than doing online bill pay.
I tend to use my debit and credit cards more or less interchangeably as I pay off my credit in full each month, and account for charges as they are spent rather than when the bill comes in (if that makes sense).
At the moment I’m using mostly cash for my spending money, but I’m going to try out Finance and Fat’s method in an effort to monitor my personal spending a little better – I tend to go through cash like water.
I have not used credit cards since 1980. I own a home (with a mortgage), a fairly new car, decent clothes, and eat pretty well. Yes, sometimes it is difficult to make ends meet, but it costs far less than putting groceries and gas on credit like some people I know have a habit of doing. People fail to read the “fine print” of their credit card agreements. Then, when payments go sky high, by golly, are they so surprised! When you live within your means, maybe you don’t get everything you want right away. If you gave thought to it, did you really need it or just want it? If you want it that badly, you will find a way to save for it. My belief about credit cards is that they have been, and will continue to be, the downfall of many people. Kids “I want it now” attitudes are fueled by their parents’ willingness to buy it on credit and pay twice the amount for it in the end. Without the use of credit, at least your children gain an understanding that they can’t have it all now. Most of the time, they didn’t need or want it anyway. My opinion of credit cards is that they are the biggest scam financial institutions have ever created. Unfortunately, there are millions of people who still unwittingly play into the scam.
As I have said earlier, We use the credit cards for unexpected expenses. And believe me there are plenty of them in owning a large truck that is your business. We don’t use them for gas and food like some people. They are there to help us in an emergency and used only when necessary. My main bills i usually pay on line or drop off or even use the snail mail! Very seldom is a card used to pay a bill unless absolute necessary!!! When used right, they are very helpful.
Six years ago I closed my bank account at Bank of America and moved everything into a local credit union. I got rid of my credit card, and when the credit union offered me a debit card, I accepted, but requested the old-fashioned type WITHOUT a visa logo.
I’m the only person I know who utilizes this method of keeping myself out of financial trouble. I often annoy others with my need to visit an ATM when we go out(can’t pay for dinner at most restaurants without the visa logo), and I get dirty looks when I pull out my checkbook in stores that don’t have a pin pad for purchases.
I have a car loan, student loans, and savings accounts that are all building credit… I just don’t buy the theory that you need to carry debt to build credit. I think that’s evil and if it makes my life a little less convenient I’m willing to deal with it to make a statement.
Added perk: if someone steals my wallet all they get is a drivers license and an ATM card that’s useless without a pin code. No shopping sprees with Victoria’s Secret and Macy’s credit cards!
Six years ago I closed my bank account at Bank of America and moved everything into a local credit union. I got rid of my credit card, and when the credit union offered me a debit card, I accepted, but requested the old-fashioned type WITHOUT a visa logo.
I’m the only person I know who utilizes this method of keeping myself out of financial trouble. I often annoy others with my need to visit an ATM when we go out(can’t pay for dinner at most restaurants without the visa logo), and I get dirty looks when I pull out my checkbook in stores that don’t have a pin pad for purchases.
I have a car loan, student loans, and savings accounts that are all building credit… I just don’t buy the theory that you need to carry debt to build credit. I think that’s evil and if it makes my life a little less convenient I’m willing to deal with it to make a statement.
Added perk: if someone steals my wallet all they get is a drivers license and an ATM card that’s useless without a pin code. No shopping sprees with Victoria’s Secret and Macy’s credit cards!
This website is awesome – so glad I found it today!
great blog, and yes everyone can do this
Having read your post I realize that it is possible to live without credit cards. However, in some situations we really need them.
I have been using credit card companies for years to bounce thousands of dollars in debt from one 0% interest card to another. It helps having good credit and getting plenty of new credit card offers in the mail. Even though I pay off my monthly credit card balance (except my 0% card), I would personally like to eliminate my credit cards, but see them as a fall back protection in case things get really difficult. Worse case scenario, it would be possible to max out my credit cards and file bankruptcy. I never use debit cards and have just set up an electronic payment system for most of my monthly bills so have reduced my check writing to a minimum. I also barter my handyman services for things like dental care, massage, cranio-sacral and others. I believe that is the future of grassroots finance.
As a person whose parents got into serious credit card debt when I was younger, I made a promise to myself a long time ago to never get a credit card. I’m a college student so the credit card companies send me countless credit card offers, but I just shred every one of them. I’ll build credit with student loans, etc. (and trust me I have plenty of those!) If I don’t have the money for it now, then I don’t need it. And why pay for something later when I have the money and can pay for it right now? Credit cards are completely unnecessary, and are simply built to cater to the average American’s “must have the latest cool thing now” mentality. I’m glad I’m not the only person who sees that it is completely possible, and better, to live without a credit card.
I use s simple budgeting system I got from my Dad. Two accounts, one for fixed bills, the other for spending. Since we can FINALLY live just on my Wif’e’s paycheque each month (she’s paid monthly) is split in two. Half into the fixed bills account the other half into spending. Each week I take out 200€ and that’s my spending for the week, most weeks I come in under with the balance being carried forward
My paycheque (man that feels soo good) goes straight into savings.
Super duper easy and minimal effort and I never worry about being short for the rent!
Spanish Debit Cards are actaully “charge” cards, They have the Visa logo which means I can use them to shop online, I purchase alot of stuff from Amazon.de and from the US so it makes it convenient. It also comes direct from my bank account so no worry about getting a nasty shock at the end of the month.
Sounds like you have been listening to Dave Ramsey per your quotes! Yes I too am an avid listener and he has changed my way of thinking. It is possible and quite pleasant to live without credit cards, its amazing to see so many people think they are dependant on them or need them for “this and that”, rental car, protection, emergency, etc….
If you liike your credit card so much, accidently be a day late, they will max out your APR and stick you with a fee. These companies are like playing with snakes! Dont do it!
The truth is debit cards with a Visa logo offer the same protection as credit cards on purchases, and a little planning on your part saving and creating an emergency fund alleviates the “for emergency” excuse.
RENTING A CAR is one place where I had to have a credit card. I had a debit card with enough cash on it to BUY THE CAR and that wasn’t good enough. this is the only time i’ve really needed one.
In addition to the envelope system, I also have a savings account which I use as a “line of credit.” Amy money I take from this automatically becomes a bill which must be paid just as I do the lights, cable, insurance, etc. In essence, I have my own private credit card. In addition to any monthly payments, I also add a set amount to it every paycheck so my “credit line” continually grows. I have found it is a lot easier, and a lot less expensive to loan myself money than to get it from the credit card companies.
Thank you for your info on how they caulate what your new min. credit bill will be. I am not handy with math, and it was very hard to figure out. now I know, you explained it well.