Sticking to your monthly budget isn’t always easy. If you use credit cards, there’s always the chance that you’ll overspend. Using your debit card to pay for everything can also be risky, with overdraft charges looming if your balance gets low. And the fact of the matter is, you can’t use cash for everything anymore.
Enter the prepaid debit card. Regardless of your budgeting needs, a prepaid debit card can help you stick to your budget while avoiding the drawbacks of other payment methods.
Here are five ways you can do it.
1. Go hybrid with your envelope system
The envelope system is a budgeting system made popular by Dave Ramsey. The way it works is by putting cash into an envelope for each budgeting category you have. You then use the cash throughout the month.
Once an envelope is empty, you don’t add more cash to it. You can, of course, borrow money from other envelopes, but then you have less money for that category. The purpose of the envelope system is to force you to use only the money you’ve budgeted and nothing more.
The risk of cash
The problem is that it can be risky to carry around hundreds of dollars in cash when you’re out and about running errands. It can also be an issue at home, says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “If there is a robbery and the cash is stolen,” he adds, “there is little chance of it being recovered or replaced as would be the case with a bank insured deposit.”
Instead, consider using a prepaid debit card for your spending categories with larger allowances. This way, you can load a specific amount of money onto the card each month, which you can’t overdraft, and you can still use a cash envelope system for smaller categories.
2. Give yourself a weekly allowance
There are some recurring monthly charges that you can’t avoid – rent/mortgage, insurance, and utility payments can’t be broken up into smaller chunks. But for those expenses that happen throughout the month, you can give yourself a weekly allowance to cover them.
For example, say you budget $1,600 a month for all of your expenses outside of the monthly recurring ones. Break that up into weekly chunks; for simplicity’s sake, say $400 a week.
Tracking expenses helps you understand your spending habits and make adjustments where needed.”
Again, once the weekly allowance is gone, it’s gone. This can help you avoid overspending on certain categories at the beginning of the month, like groceries or entertainment, which can leave you high and dry at the end of the month.
3. Automate your savings
Some prepaid debit cards come with a savings account to help you plan for future purchases. In some cases, they offer great interest rates.
For example, the Mango Prepaid Mastercard offers a 6.00% Annual Percentage Yield (APY) on up to $5,000 in savings in its Mango Savings account. The only catch is that you have to have a net direct deposit of at least $800 (total direct deposits less any ACH transfers) and keep a balance of at least $1.
You can automate your savings by setting up an automatic transfer every month from your prepaid debit card account into the savings account tied to the card. Treating it like a bill this way helps you avoid overspending on things you don’t need.
4. Track your expenses
“There is an old saying that you can’t know where you are going unless you know where you have been,” says McClary. “Tracking expenses helps you understand your spending habits and make adjustments where needed.”
With an online prepaid debit card account, you can easily track your expenses throughout the month to see where you’re spending your money. This way, you don’t have to keep track of all your receipts and go through all of them to make sure you’re staying within your budget.
You may also be able to opt into receiving text or email alerts every time you use the card and get daily balance updates. This way, you won’t be blindsided by a big credit card purchase or cashed check that hits your account days after you made it.
5. Budget for future purchases
Instead of using your prepaid debit card for everyday expenses, consider using it to save for one big future one. For example, if you have a vacation coming up, add some spending money to the card each month so that you can use it while you’re on your trip.
Not only will this help you spread out the cost of the trip over multiple months, but it will also force you to stick to a budget while you’re on vacation. You can also use it for other things like holiday spending or a future wedding.
Keep an eye on those fees
Budgeting with a prepaid debit card “allows you to optimize certain areas where you may be able to spend less while diverting more money to savings or to make faster progress paying down debt,” says McClary.
But using one has some drawbacks of its own. This biggest drawback is fees, which can eat into your budget. Some prepaid debit cards are largely fee-free, but others may charge you to activate your card, load cash onto it, or even to use it for purchases.
McClary advises paying close attention to the user agreement before applying for a prepaid debit card. The last thing you want is to be unpleasantly surprised by a fee you didn’t know existed.
Research prepaid debit card options and compare their fees before applying for one. Consider how you would use the card and how you want to add money to it (direct deposit and online money transfers from a checking account are typically fee-free). Here’s a good guide on how prepaid debit cards work.
As you consider using a prepaid debit card to help you budget, decide on the way that works best for you. As with any budget, it may be hard to get used to in the beginning. But over time, a prepaid debit card can keep you from going into unnecessary debt and paying unnecessary overdraft fees.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.