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?
You use credit cards differently than me. I pay off my balance every month but I charge everything I can and I charge to manage cash flow. I have 4 credit cards. They are all cashback & I have changed their cycles such that one card closes its cycle every week of the month. That’s means the credit cards close their cycles on the 7th, 14th, 21st & 28th of each month.
Mainly, I charge to credit card during the 1st week after its cycle closes. If AmEx closes on the 7th, I charge everything to AmEx between the 8th and 14th of each month. From the 15th to the 21st, I switch over to Visa which closes on the 14th. So forth and so on. Using this process, everything I charge is due about 7 weeks after I charged it. There are a few exceptions because Discover has 5% cashback categories that I charge to throughout the month. With bill paying applications on checking accounts, I set up the credit card bill payment a few days before it’s due so I’m floating the money for most of the grace period.
My father taught me this process as a child when bills were paid via checks in the mail. My father would write the date that the check was to be mailed on the return envelope. Back then most checking accounts offered interest so my father was just trying to maximize interest payments. Nowadays, the cash I use to pay the credit card bills is sitting an a zero interest checking account but I move money between checking and 1% savings a few times per month based on expected short-term cash needs.
Is it worth it? Probably not for the extra interest I earn but it’s second nature to me now. However, charging everything to credit cards in this manner allows me to see expenses coming 7 weeks in advance and plan cashflow accordingly. It doesn’t matter how large or how unexpected the expense.
I’ve heard of this technique before. If interest rates return to 80s levels this will leave you far ahead of others. Ultimately this post is less about cash back or even about maximizing your numbers. It’s about exactly what your doing. I apply it situationally but you can also do it as you have perpetually. That is give yourself a significant lead time on cash flow to allow you to adjust. Thanks for the great add of the alternate method.
I’ve always been one to pay off my credit card balances, but I have used balance transfer cards to shift large purchases for real estate projects so that I could use the time value of money to get zero interest over 18 months. I just mark the date I intend on paying it in full on a calendar reminder so it doesn’t get missed. It’s great if you can pay it off… but terrible if you can’t.
As far as day to day expenses, I’m like you. Charge mostly everything for either airline mile points or cash back then pay it off every month in full.
What types of real estate projects are you applying this too? I agree sometimes it makes sense to loan at a low interest rate if you can make a higher return for a moderate amount of risk.
I use a credit card to manage cash flow occasionally as well. Like you, I like to pay myself first each month, and will charge my card if I have a large purchase during a month where I’ve already used up all my paychecks. In the entire 20 years I’ve had a credit card, I have yet to pay interest on any balances. In fact I average about $300 back each year from that credit card due to points.
If you have the discipline to do this, and it’s done on your terms, nothing wrong with the strategy!
It’s a difficult game to play as some people end up utilizing credit cards as a gateway drug to higher spending. But if used responsibly there are a lot of benefits.
Very much related to my post today about emergency funds! Using credit cards makes the most sense to me. It’s easier to track your expenses, you get added protection on purchases and don’t have to worry if you lose your card, and you earn lots of rewards points. As long as you pay your balance in full each month, credit cards provide way more benefits than using cash or debit.
Right there is the key, paying them in full each month. The whole reasons companies can offer such great rewards is so many people can’t keep to that discipline.
I have to admit that I’m really boring with my credit cards. I use them to pay everything and then I pay them off at the end of the cycle. Based on what you and Dan have shared above I clearly could be optimizing more.
Thanks for sharing!!!
I have a few credit cards and I was using it as a poor student with no other means to borrow money. When I built up my net worth, I find that using a credit card during cash crunch was inefficient for my savings. I prefer to use other means with lowered interest rates like a line of credit. I documented how I prepared for any cash crunch in this post, http://www.isaved5k.com/2016/12/11/how-to-build-access-to-a-100000-emergency-fund-with-0-locked-up/
I don’t typically use this approach for emergency funding. It’s more for surprise minor expenditures. I.e. I wouldn’t loan 13 k for my roof on a credit card if it needed replacement. However if I suddenly need to spend four hundred dollars for a car repair I can usually absorb this in my normal earnings. I just need to know far enough ahead of time to adjust other expenses. That’s really the point here.
Living on the edge! A nice way to keep all of your dollars hard at work. I’m a little to lazy to play it that close so we keep a small buffer in our checking. We do use credit cards exclusively for spending to reap travel rewards. We don’t keep an emergency fund, so in case of an emergency we would leverage our credit before touching investments 🙂
if I didn’t play it that close I always fear I’d be tempted to waste it. So it’s as much about maximizing investing as it is about forcing myself to be frugal. Whatever works.
FTF — I completely agree with using cards for cash flow and liquidity. I get several 0% offers every month and could probably access $50K this way if I wanted to. Even better if I can build cash back.
You still need a plan for a truly bad emergency (like a major health issue), but that’s what life / health insurance are for. I’m always surprised when people do everything “right” and skimp on insurance.
What are your cards of choice? I run almost everything through my Venture card (pays 2%), except for ordering on Amazon (the Amazon card now pays 5% back on Amazon purchases) and for groceries (Amex blue cash pays 6%). To me, this is just free money and I can’t think of a reason not to use them. –R
Rich, We do a lot of card churning for signup bonuses. I’m currently using an Amex premier gold for the 50k signup bonus. I’m no sure what card is next but we make about 3-5k a year on card cash back. You can learn more here: https://fulltimefinance.com/leverage-your-credit-to-get-free-stuff/
I love the credit card grace period! And I also never pay the interest because even if I’m in a cash crunch I use the HELOC (home equity line of credit) as a cash buffer to pay off the credit card bill right before the due date. The HELOC has a low interest rate and has allowed us to never have an emergency fund.
But as you say: It’s not for everybody! For people who go from one cash crunch to the next, who have no spending discipline and low savings rate this would be a slippery slope, a gateway drug, as some have called it!
I’m late to the party but I’ll comment.
I have over 14 credits. Most of them consumer ones ( they can only be used at the place that issues them)
(Best buy, Walmart, Amazon, dobbs) etc.
I use these for big purchases and long periods of no interest. Washer ,dryer, refrigerator goes out.. best buy. 18 months 0% . Car repair? Dobbs 6 months no interest. Amazon.. ( life)
But I also have 3 main credit cards that I use. For cash back of course. The statement closing dates are the 5th,15th,24th of every month. So on these days I switch the card I’m using and charge everything to the statement that just opened.
This means at any given time I have anywhere from 44-54 days before what I’m buying today becomes due. In my bi weekly salary world that’s 3 whole paychecks. Sometimes four, that I have to work with to pay the credit card bill when it becomes due. Been doing this for 7 years. I never pay interest.. and I never not have the money to do what I need.
Credit cards are an incredible tool, for budgeting. But u have to follow your budget!! You can set a 300$ food budget every month and then spend 500$ I don’t care how many cards you’re spreading that out over it will catch up to you.
But if done correctly you can get rewards and also stay on top of things. I tell my younger friends all the time. The interest rate in a card doesn’t matter. As long as u don’t revolve the debt..pay it off in the time they give u and ignore that interest rate completely.
You know, I’m not even sure what my credit card interest rates are, though I’m sure they are outrageous.