Here’s some guidance on managing the money you get back from your credit cards.
- Credit cards routinely offer cash back on purchases.
- You may be tempted to use that money to splurge, but in some cases, it pays to bank it instead.
One of my favorite things about using credit cards is getting rewarded for the purchases I’m already making. Last year, for example, I scored upward of $700 in cash back on my most used credit card simply by paying for things like groceries, apparel, fuel for my car, household essentials, and leisure.
If you routinely 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 right approach? Or should you be saving your credit card cash back instead?
Managing your cash back
Credit card cash back really is bonus cash — money you got for free and weren’t necessarily counting on to pay bills with. You may be inclined to use that money to splurge on the things you enjoy. But while you should feel free to spend your credit card cash back under the right circumstances, if your savings need work, you may want to push yourself to bank that money instead.
As a general rule, it’s important to have an emergency fund with enough money to cover three to six months of essential living expenses. That way, if you lose your job or get hit with a large unplanned expense (like a home or car repair), you won’t have to go into debt due to those circumstances. Instead, you’ll have the option to raid your savings and avoid the longer-term financial consequences that can come with racking up debt.
If you don’t have a complete emergency fund, or if you have no money in your savings account at all, then it pays to put every extra dollar you can get your hands on into the bank — and that includes the cash back you get from your credit cards. Even if you only get $20 here or $30 there, if your emergency fund isn’t close to being complete, small contributions can add up over time.
On the other hand, if you’re all set with emergency savings, then there’s nothing wrong with spending your credit card cash back on the things that make you happy. In fact, that’s the approach I tend to take.