One of the good things about this economic depression is that it seems to be getting a larger number of people to put some real thought and effort into living within their means.  I’ve been reading a lot of newspaper and magazine articles on the subject and finding that, although most of the tips are things I already do, they are mostly good ideas.  There’s one tip I keep seeing, though, that doesn’t make a lot of sense to me: Destroy all your credit cards and make your purchases with cash only. The theory is that this prevents you from spending money you don’t have.  Now, it’s possible that there are people whose minds work so differently from mine that they really cannot understand that a credit card is not free money but only a way of delaying the actual transfer of money from yourself to the seller, so they truly can’t function responsibly with anything other than cold hard cash.  But I doubt that most people really have that problem.

Here’s what works for me, and has worked for me without fail for the entire 15 years I have had credit cards, and I bet it will work for you, too!

Consider the money spent as soon as you spend it, even if you’ve paid with a credit card. Set up some type of system to track how much spending money you have–it could be a sheet of paper where you just add and subtract, a ledger, a spreadsheet, or financial management software like Quicken–let’s call it your “tracker”.  Whenever you buy something, no matter how you pay, subtract that amount from your tracker.  Then, the next time you are thinking about buying something you’d like to have but don’t really need right this minute, look at how much money you have available in your tracker, not in your wallet or your checkbook balance.  Get used to thinking of your tracker’s balance as the money you have available. Then, when the credit card bill comes, you’ll be able to pay it from your checking account, because the necessary amount will be there; you won’t have spent that cash because you’ve been treating it as unavailable.
The tracker can help you in many other ways, too.  If you write down where each chunk of money went (“groceries” “bus pass” “purple swirly skirt” etc.), you can look back over it and think about where you might cut expenses.  If you’ve been having trouble paying bills on time because it seems like you forget all about the fact that electricity costs money until the bill comes and then you don’t have $40 to spare, you can set aside that money in advance (for example, when you’re writing the check for this month’s bill, subtract $40 for next month’s) to prevent you from spending it.  You can set aside money for savings into another window/column, and remove it from there when you accumulate enough to make a deposit to your savings account worthwhile.  You can set aside money for charitable giving and deduct from that balance as you make contributions to charities.

Always pay your credit card balance on time and in full. That way, you have the convenience of paying with a handy little card, being able to buy things by phone and Internet, etc., at no charge because you will never pay any finance charges.  If you’re short on money and have to choose between paying off credit cards or putting money into a savings account that earns interest, pay off the credit cards! Yeah, it’s good advice to “pay yourself first” by saving, but most credit cards earn interest for the card issuer at a higher rate than most investments earn interest for you, so it’s smarter to pay them now than to pay yourself first and end up paying more to the card issuer later.

What about those times when you absolutely do not have enough money to meet serious, immediate expenses? Well, the first thing to do is see whether you can borrow money from a friend or relative without interest.  If not, go ahead and charge those expenses to a credit card, but count that money spent in your tracker so that you now have a negative balance.  Take that seriously.  It’s not “just on paper”; it’s money you really owe.  Every cent of cash in your wallet is borrowed money.  Every time a credit card statement comes, pay off as much as you can, not just the minimum payment.  Don’t buy anything nonessential until you have paid off the debt.

Use credit cards for large purchases, and carry only a small amount of cash. See, the thing that bothers me about the cash-only philosophy is the psychological effect of having two hundred dollars in my wallet.  I’m a very responsible, cautious person, but if I’m thinking, “Gee, I really don’t feel like eating that leftover spaghetti squash with sardines that I brought for lunch . . . maybe I could go out. . . .” and I have a big wad of cash, I’m a lot more likely to tell myself, “Oh, why not?  I’ll still have enough money!” than I would be if going out to lunch will drain me down to my last (physically present) dollar.  Using credit cards also is a lot more convenient than handling large amounts of cash and counting change.  Carrying less cash means I have less to lose if my purse gets lost or stolen.

Choose credit cards that earn perks you can really use. I have a Discover card that has become just my emergency backup card because it offers a choice of cash back or a larger amount in gift cards from “selected retailers” which are mostly stores that sell things I rarely need and chain restaurants I normally don’t visit because they’re too expensive.  It’s tempting to choose the gift cards because they’re a larger dollar value than the cash back, but if they wind up making me buy things I otherwise wouldn’t or go out of my way (most of these stores and restaurants are inconveniently suburban), that’s not a good value!  The credit cards I use most are the Costco American Express, which earns money refunded in a certificate that I can spend like cash at Costco, and the Target Visa, which every time I earn 1,000 points sends me a coupon for 10% off everything I care to buy in one day at Target.  This Target coupon expires about a month after I receive it, so as soon as I get one I stick it under a special magnet along with a list of what we’re going to shop for at Target; we work on that list until the last week or so before the coupon expires, watching the weekly sales circulars, and then we go to Target!  That maximizes the number of items we get at the discounted price.  We try not to go to Target except when we have a coupon, so we rarely pay full price there!  (The card earns points for every purchase.  I use it to pay my son’s preschool tuition, so the points add up pretty fast.)

Charge recurring expenses to credit cards so you earn more perks and have fewer bills to pay by check (which takes time and costs money for stamps).  I’ve signed up for quarterly or monthly credit-card donations to some charitable organizations that I want to support consistently; it saves time for me and money and paper for them if they get my donation without sending me a bunch of junk-mail, and when I want to read about what they’re doing I can do it online.

Don’t have too many different cards. It gets confusing, which can make you more likely to forget a payment or not realize you’ve misplaced a card.  My policy is to have one Visa or MasterCard, since those are accepted almost everywhere; possibly a second special-purpose card (this is the AmEx now–Costco does not accept other credit cards, and it’s so much easier than writing a check! That card also earns bonus points when used for restaurants or gasoline); and one extra card just in case I get into some kind of situation where I have lots of expenses and restricted access to cash, such that I might hit the credit limit on my other cards.  I often ignore the extra card for months or even years at a time.  I’ve learned that this can inspire the credit-card company to call and try to lure me into spending by offering better perks!

P.S. After I posted this article, my mother-out-law Elsa suggested this additional tip, which I think is very wise:
Keep one card at home, never in your wallet, and use it for online purchases, automatic payments, etc. That way, if the cards in your wallet get stolen, which happened to me last Christmas, and you have to cancel all those cards, you still have one card available to use for essential payments.
Daniel and I decided that we should keep the cards for our “extra” credit card account at home.  Having our other cards stolen is one example of the “some kind of situation” in which we would need the extra card!