I often have people write asking how to handle credit cards with the envelope method of budgeting. Many people use credit cards to rack up reward points and pay off the balance at the end of the month. There are two methods one could use, and NeoBudget users have successfully been using both methods. Which one will work for you really is a matter of preference.
Method #1 – Separate Accounts
The method that is most true to the envelope method of budgeting is to keep track of your credit card in a separate account tab from your checking account. You can download your credit card statement in a format supported by NeoBudget (currently QIF, OFX, and QFX which most banks and credit card companies support). Then import that statement into NeoBudget just like you would your checking account. The difference is that your credit card account will always be negative.
Throughout the month, your credit card account will keep getting more and more negative. You can create envelopes inside this credit card account to track different categories of spending. For example if you use your credit card only for gas and groceries, just create those two envelopes.
Now at the end of the month, you can look at the negative balances and know exactly how much to transfer from the corresponding gas and groceries envelopes in your checking account.
For example, lets say you have a $250 credit payment due. Looking at your credit card account in NeoBudget, you can see that $150 was spent on gas and $100 was spent on groceries. When you pay your credit card, simply record this transaction in your checking account and take $150 from your gas envelope in your checking account, and $100 from groceries.
Method #2 – Same Account
Another method that has been used is to track your checking and credit both in the same account in NeoBudget. The benefit of this is that what you see in NeoBudget already accounts for your spending on your credit card. So if you have $200 in groceries in your checking account and you spend $150 on a credit card, your envelope will say $50 even though you haven’t yet paid your credit payment.
To do this, simply import your credit card statement directly into your checking account in NeoBudget just like you would your bank account statement.
There are two pitfalls to watch out for with this method though:
First, this makes balancing your budget very difficult. You can’t just go down the list and compare transactions with your checking account. You need to look at both accounts and add the ending balances. It can get tricky and confusing if there is an error somewhere.
Second, when it comes time to pay your credit payment, you have to fudge the books a little bit. Since you’ve already recorded all the transactions in your account in NeoBudget, when you make a credit payment you are really just transferring money from one account to another. And since both accounts are tracked inside the same account in NeoBudget, it’s a wash. You either don’t record the transaction at all, or you record it twice: -$250 (the payment from your checking account) and +$250 (the payment into your credit card account).
You also need to track interest. Usually this will show up in your credit card statement as a separate line item, so it should import just fine as if it were another transaction.
Conclusion
I recommend method #1 as it’s easier to track. But I know of many people who use method #2 successfully. It really boils down to doing what works for you.
Do you have a method that I haven’t mentioned? Please let me know!
