Accounting for saving money to pay credit card monthly

[TC]

Oh boy do I remember working my way through this question. Forgive me, 
but what follows is long :-)

When I first taught myself double-entry book keeping years ago, this was 
exactly the sort of thing I wanted to do. Rather than reserving money 
for a credit card, I was wanting to make sure that if I budgeted to 
spend 500 on food and 100 on clothing, then I wanted some mechanism to 
stop me eating (forgive the pun) into the food 500 if I was tempted to 
overspend on the clothing. But it was the same idea - having some way of 
reserving money for one thing, so I didn't use it on another thing.

Eventually, after much messing about, I realised that I was doing it all 
wrong.  This is a budgeting problem, *not* a book-keeping one.  You 
CANNOT do what you're trying to do within the the overall ledgers of 
Gnucash (or any other proper book keeping tool) and still have your 
books be accurate.  For example, you proposed:

 >                               DB      CR
 > liabilities:credit card:            $50.00
 > expenses:whatever:         $50.00
 > assets:checking:                    $50.00
 > ??? assets:hold?           $50.00

And in fact that is "correct" in terms of what you're trying to achieve. 
  But since that $50.00 on line three hasn't really moved out of your 
REAL checking account and into your "assets:hold" account, the books are 
now wrong.  Wrong. WRONG!

Of course, you could perist with that approach and simply ignore your 
REAL checking account.  Then, when you actually paid money from your 
checking account to your credit card you'd have...

                                     DB      CR
       liabilities:credit card:    $50.00
       ??? assets:hold?                    $50.00

...thus clearing both of those accounts. And, precisely because you were 
ignoring your REAL checking account, you would appear to have less money 
to spend (i.e. in gnucash's assets:checking).  And so you would achieve 
that protection-from-spending-on-something-else that you're looking for.

But it's all at the cost of having inaccurate books from time to time 
(realistically, they'd be wrong pretty much all the time, although 
they'd hover around reality depending on how much you used your card and 
when it was paid off each month).

I have two pieces of advice for you, born of long experience on this front.

First, keep your books spot on accurate.   They tell you what you *did*, 
not what you're going to do. Then, in parallel, use a spreadsheet to 
budget - i.e. to tell you what you're going (or are aiming) to do. 
Then, stick to that budget, tracking actuals versus budgets even on a 
weekly basis if that's what it takes.  DO NOT - this is the key - rely 
on the fact that there is money in your checking account when trying to 
decide if you have money to spend.  The fact that there is money sitting 
in your checking account should mean nothing as far as answering the 
"can I buy X" question is concerned. Your budget (and your current 
performance to budget) tells you that.

Now of course that can be hard.  You go to an ATM a week before the 
credit card payment goes off and think "Wahay! Loadsamoney!".  So you 
can trick yourself into thinking you have no extra money (which of 
course you don't - because it's already pre-allocated to paying off that 
card).  Trick yourself by predicting what your card repayment is going 
to be, and at the start of the month, shove that much (plus a wee bit) 
into a real other account that you don't look at.  Leave it there until 
a day or two before the payment comes off, then shove it back into the 
checking account.  This way, whenever you look at your chekcing balance 
(at the ATM say), you'll think you have less money than you do, so you 
won't spend! :-)


But my second piece of advice is even better:

Just don't do what you're trying to do.  Ignore those tempting reward 
points.  Forget that frequent flyer faff.  Pay with a debit card or 
cheque or cash and keep it simple.  So, you lose some air miles.  So, 
you don't get a $0.000273 rebate on gas.  So what. You avoid the real 
danger of missing the payment, or causing an overdraft because your 
auto-payment does go through but you've ignored my earlier advice about 
budgeting :-)  All it takes is a couple of overdraft penalties, or a 
couple of months of interest, and you wipe out any benefits.

Just by $53-worth :-)

tc



Christopher Scott wrote:
> Scenario:  I have a credit card that pays me "reward points" for each
> dollar I spend.  I would, therefore, like to maximize the use of this
> card.  However, I want to pay off the balance on a monthly basis. 
> Therefore, I want to be able to automatically account for money out of
> my checking account so that I don't spend it on something else.
> 
> How do I account for this?
> 
> Example today:
>                               DB      CR
> liabilities:credit card:            $50.00
> expenses:whatever:         $50.00
> 
> Going forward:
> 
>                               DB      CR
> liabilities:credit card:            $50.00
> expenses:whatever:         $50.00
> assets:checking:                    $50.00
> ??? assets:hold?           $50.00
> 
> Is this correct?  What kind of account is this (still an asset account,
> some sort of accounts/payable account, or something else)?
> 
> Thank you.
> 
> =====