Even if you've managed to create a balanced budget for the year, you’ll experience cash flow shortfalls in some months. The key to making it through these months is to save money during the months you have a surplus in cash flow. Remember, just because there's money in your wallet (or your checking account) doesn't mean you can afford to spend it right now. You will probably need it later! There are essentially three choices for managing your cash flow: paying with cash, paying with a debit card, or paying with a credit card. The method that's right for you depends on a host of factors, such as how disciplined you are with your money and how often you get paid.
Paying for everything with cash is the easiest way to ensure that you don't overspend. However, it's the least flexible method of managing your cash flow and can leave you in quite a quandary if you have any large or unexpected expenses, especially at the end of the month. But, if you prefer to stick with cash, save those junk-mail envelopes! You'll need one envelope for each expense category in your budget. When you cash your paycheck, stuff your envelopes with the amount of cash that corresponds with your budget. When the envelope is empty, you’re done spending in that category. It’s that simple.
Paying with a debit card is a lot more convenient than paying with cash, but this method suffers from the same problem. When you're out of money, you're out of luck, no matter what extra expenses you have or how important it is that you pay them. Regardless of whether you choose the cash method or the debit card method, you'll need a back-up plan (like a family member you can ask for a loan or a credit card) for the months you come up short.
If you have the discipline to stick to your budget no matter what, this is by far the best option for managing your cash flow. But, if you lack that discipline, having access to a credit card could lead to overspending and quickly blow your entire budget. Still, there are many benefits to using a credit card. You'll enjoy much greater legal protections from your bank if anything goes wrong with a credit card transaction. And if you happen to experience a small shortage one month (like spending $310 on groceries when your budget was only $300), that's no problem at all with a credit card. You can carry that $10 balance for a month or two, and pay it off when your cash flow improves. In exchange for this ability to carry a balance, you will pay a trivial interest fee to the credit card company. Another key benefit to frequently using credit cards is that most offer some sort of reward, such as cash back or frequent flier miles. These perks can really add up when you use a credit card for most of your expenses. Finally, using your credit card, as long as you make timely payments, will boost your credit score, and having a strong credit score is critically important to your financial future.
