Use This Credit Card Strategy for Clarity
This time of year, I am involved in so many strategy conversations with clients and their taxes. The conversations that are the most fruitful for everyone involved, are the ones where the #KnowYourNumbers work was done up front. It’s hard to create a strategy without CLARITY. This week, I am going to share a simple tip that has worked wonders for my clients, and even for my own accounting.
THE PROBLEM
Self-employed business owners, especially at tax time, have a tendency to “wing it” and estimate their expenses for their tax preparer. As I teach in my Quickbooks Online Course, it is much better to have a handle on this daily or weekly, and not just throw something together at year-end. You will be leaving money on the table if you don’t have a clear accounting of what you spend.
I’ve noticed that many new business owners tend to use their debit cards (linked to their bank accounts) for nearly everything. Although I do prefer clients to use electronic methods of payment, I DO NOT recommend using debit cards for business or even personal expenses. I prefer using credit cards and here’s why….
SAFETY: If your debit card gets hacked (VERY common at gas stations) then the hackers have direct access to the funds in your bank account. Sure, your bank will ultimately refund the stolen amounts, but it is a hassle and the process can take weeks. In the meantime, this can wreak havoc on your cash flow. By using credit cards, at least your cash balances are not affected while the fraud is being resolved.
PRIVACY: There are many situations where you have to turn in bank statements to third parties (loans, mortgage applications, government programs such as for grants and PPP loans, etc). These statements are under scrutiny and if you use your debit card for literally every transaction in your life, then this information is now exposed. If you are applying for a loan or a grant, do you really want the reviewer seeing EVERY spending habit that you have? On the other hand, credit card statements are rarely requested.
CLARITY and PEACE OF MIND: Remember the saying “I’ve got my mind on my money and my money on my mind”? Well, in my opinion, this is not a good use of your time! Setup a strategy that is on autopilot so that you do not have to constantly check your funds and see what’s posted, what’s fraudulent or not. Your attention is the most valuable asset you have - spend it wisely. If most if not all spending goes on your credit card, this simplifies your daily review of your account.
Practical Application
I only have two credit cards that I use regularly (AMEX and a Citibank Master Card) and I pay them off in full each month so there are no interest or fees. My AMEX has been hacked but getting a replacement card and the charges reversed was seamless and had NO IMPACT ON MY CASH FLOW. Everything was resolved with a quick phone call.
In addition, I only have 6 -7 transactions in my bank accounts each month (other than deposits). A few utilities and other items, and then the payoffs of my credit cards. It frees up so much mental energy, makes cash flow planning a snap, and gives me peace of mind knowing that my bank accounts are secure.
Another benefit is that many credit cards offer cashback or points. Make your money work for you! Just last year (pre-COVID) my husband and I flew to NYC and saw Hamilton...for FREE courtesy of American Express points.
If you are comfortable using credit cards and you pay off the balances each month, this strategy will significantly streamline your accounting, improve your clarity, give you more peace of mind, and even protect your privacy.
I highly recommend it. Be sure to use a separate credit card for business purchases as well for even more clarity.