Ralph sent me e-mail last week describing a clever budget trick he picked up from a friend:
My wife and I had dinner last night with a couple of 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 Land’s 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 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. 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.
Note: Ramit at I Will Teach You to Be Rich recently shared a similar concept: How to use a separate debit card for discretionary spending. The beauty of his system is that you can apply it to all your expenses, not just to isolated merchants like Land’s End and Starbucks.
Note #2: Be sure to read the comments. GRS readers are wary of this idea. They do not like it, and for a number of reasons. Make sure you understand the pros and cons of gift cards before trying “reverse credit”.
This article is about Budgeting, Hints and Tips, Money Hacks, Shopping
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I would be very wary of Visa/Amex gift cards as well. Especially if you were going to hang onto them for a while before using. I had a VISA gc given to me at Christmas. The fine print told me that every month I didn’t use it, they would deduct a service charge…meaning that the balance would be nickel and dimed to Zero before I had originally planned on using it.
I also think it said something about usage fee of $5 or something EVERY TIME I used it. So if I had a 100 gc, and wanted to spend 50 of it now and 50 of it later, I really only had 90 to spend…(or something like that)
I ended up using it the following grocery shopping trip….
Credit card companies letting you KEEP a “reverse credit” balance. Yeah, THAT’s going to happen.
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I would remind people to look at the laws in their State about gift cards, too. All the advice above is really great and worth the read! In WA state, it is illegal for gift cards to expire (I forget how this came about, something involving a lawsuit a few years back) so there is no fear of that happening here unless, like said above, the business were to bankrupt – even if they stayed in operation through the bankruptcy.
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I use my Discover cashback to do this. In November I use my balance for gift cards to buy Christmas presents. You can get 20-50% off through this program. Last year I got $200 worth of Land’s End gift cards for $160, and I bought my family some gorgeous wool sweaters.
This works great for me because the money is out of reach, and I don’t activate any cards until I’m about to use them, so they won’t expire.
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This is off topic, but with all the Starbucks references here I’ll chim in.
Why do so many people rave about their coffee? I’ve had a few cups and wasn’t impressed, especially not after paying that much for a cup of coffee. I make coffee at home, which costs pennies AND tastes much better since I control the amount of grounds.
I don’t get it.
/shrug
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Interesting post and such a variety of comments! I wanted to add in my fairly recent theory, that somewhat combines the forced savings/reverse credit idea with the earn interest on your savings idea: I recently started a couple of “savings goal” accounts at SmartyPig. We are moving to a new home in May and I will need to purchase some items to furnish and decorate. I earn interest on the savings (over 4%), have the opportunity to share my goal with family and friends for moral support, have monthly automatic deposits to help reach my goal, and can withdraw on a SmartyPig debit card or get a gift card (with a little extra $ on it as a bonus). So my theory is that if I need to save for a specific purchase in mind, and especially if the store is on the SmartyPig retailer list, it makes sense to do the SmartyPig savings goal. What do you think?
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@ ktoth04 – The ING rates keep dropping due the Fed cutting rates (among other things). It has nothing to do with your balances. The same thing happened to me as well as many others.
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This got me thinking about another (related) idea. If I were to set a goal for the % of my income that I felt comfortable allocating to non-essential spending — eating out, movies, travel, highlights for my hair, new clothes — then I could simply have that percentage withdrawn from my paycheck every month, into a separate debit account. I think I would be motivated to spend less, because I’d want to carry over money into the next month. If I was able to cut costs consistently, then at the end of the year I could use any extra money for a splurge…in my case, that would be a trip, since travel is the carrot I dangle for myself to keep me motivated about other responsibilities.
Has anyone tried something like this, or do you have any input? I like this idea because seeing the balance increase would definitely motivate me. Also, at the end of the year, if I had a LOT of money left over, I could then cut down the monthly % by one point and start again.
What do you think?
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I think this is a great idea, simply because most adults don’t save for individual purchases like they probably did when they were kids. Instead, they put it on their credit card at 23% interest, and worry about paying for it later.
I agree that it’s not as good as just saving the cash in an envelope, but it’s much better than using a credit card.
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@ ktoth04
Ahh… savvy beat me to it. ING interest rates have been dropping quite frequently. However, if you have an Electric Orange checking account, that interest rate does get slightly better with larger balances. The rate structures for all the ING accounts are on their website.
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This is a pretty good idea. Remember, though, that some cards start dinging you if they are inactive for six months. Check the terms if you are planning to save them up.
Something else I do: I deduct money I put on my credit cards from my checking account. At the end of the cycle, I write a check to cover the entire balance. That way I’m earning rewards, but not paying any interest to the credit card company.
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I have a Business Paypal account with a debit card attached to it. I can transfer money from my bank account to the Paypal account. If I am going on a trip or shopping with a limit, I transfer the amount I want to spend to the Paypal account. I can go online and track my spending and my balance to be sure I am staying on budget. I also get cash back with every purchase. It’s not a lot but it adds up. they also send me an email everytime it’ is used. If there is unauthorized activity I know immediately.
I also can save up for something special by transfering small amounts over a period of time.
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Giftcertificates.com and Points.com are wonderful site to use to manage our gift certificates.
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Quicken Savings Goals are the way to go. A Quicken Savings Goal is a fictitious account that exists only in Quicken that looks and works just like a regulary account in Quicken. As an example, I am planning a trip to Europe next year. Each month, I transfer a set amount of money from my bank account to a Savings Goal account called “Vacation.” When I look at my Qucken balances, I see the money in my Vacation account rather than my bank account, which is enough to keep me from spending it on random things. In reality, however, the money is sitting in my bank account accumulating interest (and benefitting from federal deposit insurance).
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I think it is brilliant.* Gift cards, the savings “gateway” drug.
For folks who are so far from making that leap to fiscal health, this may transition them from their swipe-swipe-swipe mentality while still using plastic. Instead of paying it later, you pay it forward.
Baby steps. Brilliant!
*for the fiscally fit, this does not make sense and is riddled with flaws (note the previous 60-odd generally negative remarks)
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Really dumb idea in my mind. What happens if you loose the cards? House gets broken into? Fire? Company goes out of business (hello Bombay Company!?!) and doesn’t honor the cards.
One word for you: No frills, no fee, high interest savings account.
Done and done.
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This is a terrible idea. Sacrificing the liquidity of your money by tying it up in any kind of gift card is not the proper way to limit spending. Better advice would be to learn simple self-control. I feel like this site and others are really starting to scrape the bottom of the barrel for creative financial advice and it is painfully obvious to anyone who knows about personal finance.
Furthermore, what difference does it make if all the money is in one HYS account? If you put your money into an account, just debit the the money into categorical sub-accounts in your own records. We call this “accounting.”
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I think it can be a way to TEACH somebody about allocating money. But I prefer to put that cash in a high yield savings account. It’s safe, and your money will grow as well.
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In spite of the drawbacks to gift cards, I have used them as a way to control my “latte factor”. In my case, its a “smoothie factor”. I buy a gift card to Jamba Juice at the beginning of the month for the total of my budget. Then, when its gone, its gone. Also, I never let myself have a Jamba Juice unless I’ve had a hard workout beforehand. I use the workout as my “permission slip” and the gift card as my external control.
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I actually use a version of this in my own life. I have two bank accounts, both of which are accessed by their own debit cards. One of my accounts is for essential purchases, like food and gas, while the other is for things that I don’t need in order to live, like new clothes and music from iTunes. I find that it works pretty well and that I tend to spend less when I rope off a bit of money that I can waste and still pay my bills at the end of the month.
I do like the idea of using a gift card for a coffee/smoothie budget though. I think I’ll start using that trick as well.
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I like the concept of gift cards as your preset spending limit for specific items–I can add money to my Dunkin Donuts card anytime for example and for a while, that was my coffee/ treat allowance. I usually use cash now. I have a problem with Visa and Amex gift cards as I have a hard time using them. At Macy’s, for example, if my purchase exceeds the amount on the Visa/ Amex card, it will decline as the register reads the gift card like a regular credit card. They still work, you have know the balance and make a payment for the balance of the purchase before you use the Visa/Amex gift card. (Macy’s gift cards work fine and they can even look up “expired cards” with extra effort.) I think it is best if one makes an effort to use gift cards within 6 months of purchase or else they are forgotten in a drawer.
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Yikes! AmEx gift cards are a serious pain. My aunt gives them to me as a “dinner out” but you have to know the exact amount remaining on the card, and the phone number you need to call to get the balance is obliterated by the account number imprinting. Bleh.
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[...] In another entry, JD shares: Ralph sent me e-mail last week describing a clever budget trick he picked up from a friend: Go see what it is!! [...]
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[...] reverse budgeting idea (which I stole from Get Rich Slowly —although I think just putting it in the bank is better than gift cards) seemed to make sense [...]
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I stumbled onto this older post from a “related items” link.
I like this idea. I’m personally thinking of doing it for McDonald’s, I’ve been eating there too much and this type of curbing would help my physical health and my budget health.
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For some things this is a great idea. Example: our church sells gift cards for the local grocery store. The church makes 4% on every dollar. I purchase my months budget in cards each month and that’s how I keep track of my grocery spending.
I agree that some of the cards could definitely cause problems with service charges and expiry dates. Not good! I have found the MasterCard gift cards have far too high a service charge to purchase them.
Great topic! Thanks for sharing!
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