Credit Cards

Should you save or spend your credit card cash back?

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Here are some tips on how to manage the money you get back from your credit cards.

Key points

  • Credit cards often offer cash back on purchases.
  • You may be tempted to use that money to splurge, but in some cases, it’s worth putting it in the bank.

One of my favorite things about using credit cards is getting rewards for purchases I’m already making. Last year, for example, I earned over $700 in cash back on my most used credit card just by paying for things like groceries, clothing, gas for my car, home essentials, and entertainment.

If you regularly get money back from your credit cards, you may be inclined to spend it on fun things like vacations, electronics, restaurant meals, or social activities. But is that the correct approach? Or should you save your credit card refund instead?

Manage your cash back

Credit card cash back is really bonus cash: money you got for free and didn’t necessarily count on to pay the bills. You may be inclined to use that money to splurge on things you enjoy. But while you should feel free to spend your credit card refund under the right circumstances, if your savings need work, you might want to put in the effort to deposit that money instead.

As a general rule of thumb, it’s important to have an emergency fund with enough money to cover three to six months of basic living expenses. That way, if you lose your job or are affected by a large unplanned expense (like a home or car repair), you won’t have to go into debt because of those circumstances. Instead, you’ll have the option to plunder your savings and avoid the long-term financial consequences that can come from racking up debt.

If you don’t have a full emergency fund, or if you don’t have any money in your savings account, it’s worth putting every extra dollar you can get into the bank, and that includes any money we pay you back. get from your credit cards. Even if you only get $20 here or $30 there, if your emergency fund isn’t anywhere near full, small contributions can add up over time.

On the other hand, if you already have all your emergency savings, then there’s nothing wrong with spending your credit card money on things that make you happy. In fact, that’s the approach I tend to take.

Because I have a full emergency fund, I take the attitude that my credit card cash back is really bonus money. I tend to spend it on fun activities with my family, like theme park outings or weekend getaways.

You may want to commit

Forcing yourself to return your credit card cash to the bank month after month can be a drag. But if your savings need work, it’s a wise move.

That said, there may be a compromise you can look for. If you need to add to your savings but already have some money in the bank, you may decide to save most of your cash back but spend some of it on splurges. That way, you can enjoy short-term gratification while using that money toward a larger goal.

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