Not long ago Solving Finance had a post about a cash crunch situation. Essentially, he was struggling with a few day gap between a pay check and a bill. My comment to his post inspired this one. I sometimes find myself in similar situations, and in those cases I tend to use credit cards to manage cash flow. Before the FIRE community starts casting stones let me clarify.
Why A Liquidity Crunch?
Every so often I too encounter a liquidity, or cash, crunch. No, I don’t spend like a drunken sailer, in fact my yearly savings amounts are typically higher then my yearly expenditures. However, as part of my method for driving my savings higher I push much of my excess cash into accounts before I can ever spend them. This means 401K, HSA, Dependent Care FSA, Employee Stock Purchase plans, auto savings, and mortgage payments, or anything else I can get my hands on. My goal each month is to cross into the next with near 0 in uninvested cash. This reduces my risks of lifestyle inflation and maximizes my return. The only issue with this approach is on those rare occasions you might have a surprise expenditure after you’ve already pulled out your investments. So what do you do? The obvious options are pull from your emergency account, take on some debt, or cut back on my savings rate for a short period. In extreme cases obviously those are the right answer, but more often then not I encounter only a small liquidity bump once a year. In these cases there is another option.
Use Credit Cards to Manage Cash Flow
Now let me start off by saying if you always need to manage your Cash Flow and your savings are not part of the cash drain then you likely have a budgeting issue. In that case what I’m about to share won’t help you and may even make your situation worse. Consider setting goals and working on a plan to fix your situation. For all others we can proceed.
There are a few ways to use credit cards to manage cash flow. The most obvious is to signup for a new card that has a 0% introductory period. For larger expenditures this might work out. However, keep in mind this option can have a significant lag hike you wait for an application to clear. That lag likely makes it useless for the purposes of solving a short term cash flow issue. Long term cash flow issues would be more of an emergency fund issue which we can talk about in a later post.
Credit Card Grace Period
Almost every credit card has a Grace Period that applies to regular purchases, but not balance transfers. This is a period where your balance does not accrue interest. Typically this occurs in the period from first expenditure until your bill is due. This can mean a period of up to 60 days between when you expend cash and when a bill comes due. What this means for your cash flow is if you encounter a liquidity situation, shifting your expenses to a credit card that recently billed will extend the time period until your payment by a significant number of days. When you notice the coming issue immediately switch your spending to this card and it should buy you a little bit of time and cap in your spending. If you’re like me and tend to pay your bills immediately as they come in this is especially true as now you potentially have an extra 30-60 days from when you’d normally pay. You’ve essentially bought yourself at minimum 30 days at no cost.
Things to watch out for when Using Credit Cards to Manage Cash Flow
This strategy only works for certain types of expenditures and is not without risk.
- Some items require a fee to pay by credit card. In these cases the 2-3% up charge may not be worth the advantages over pulling from investments/emergency fund/ or taking debt. I say may as in todays day an age some cards provide a 1-2% return, so the answer is not a straight up no .
- If you find yourself routinely using your credit cards to manage cash flow it means you have a budgeting problem. This is a bad trend to start as sooner or later it will catch up with you. Once it does, 30 days probably won’t be enough. Don’t let this or any other strategy be your gateway to debt.
- It requires careful management and knowledge of due dates and your cash flow gap. You need to be at least a week or 2 ahead of your bills to utilize this strategy.
Have you ever used credit cards to manage cash flow? How about 0 % credit cards? Do you have any other cash flow management tips?