Money Management and Living on a Budget for Freelancers – Part 3: Payment Methods

Bank accounts, credit cards, Paypal—it seems being a modern economic agent means all these different options coming out of your ears. In this third section of my money management series, I’ll go over different accounts I have and how I use them, both to get paid and to pay others.

Cash and ATM

This is actually the last part of my expense budget in Mint, its own line item. I assign myself a certain amount per month that I can take out as cash and use however I want. These cash expenditures “don’t count” for any other budget line (if they did, my “groceries” would shoot up a bit in summer when I’m at the Farmer’s Market every weekend). But when the cash is spent, it’s spent.

Some people prefer to budget using only cash for this reason. The envelope method is certainly a good way to ensure you’re not spending beyond your means. I prefer to pay by credit card, but I see how replacing a card with cash can be a good idea in certain situations, such as when you’re approaching the limit of your monthly budget.

I don’t carry all my cash in my wallet; some is hidden in various other locations. This is not only to secure myself from pickpockets (who are probably scarce in my neck of the woods, though I suppose there’s always a risk) but from myself: if I only have $20 in my wallet, this Farmer’s Market trip can’t include that much splurging. So in this sense I do some cash-only budgeting as well. Otherwise, I mostly use cash when credit isn’t accepted or preferred: when buying things from markets and craft fairs, when tipping, and so on.

Checking Account

My checking account is very vanilla, but one of those wholesome organic slow-churned vanillas: it doesn’t pay me interest, I didn’t get a toaster when I opened it (it was long enough ago that I don’t remember what reward, if any, I did get; just that it wasn’t an appliance), and it does not charge me any monthly maintenance fees. I use it to pay expenses out of–particularly, to pay my credit cards with. For more on choosing a bank account, check out what the nerds at Nerdwallet have to say.

I try to funnel most expenses through a credit card for a few reasons: one, it means fewer payments to make over a month (helpful because my freelancer income can arrive at irregular times). Two, I earn cashback rewards when I pay with a credit card. Three, credit cards offer more aggressive protection against fraudulent charges than a debit card or cash (which offers none).

I still balance my checkbook monthly with pen and paper, alongside tracking the balance in Mint. I always try to keep at least $100, preferably more, as a “floor” in my checking account. This provides a cushion to avoid overdraft charges and other such penalties (I’ll climb back on that soapbox from the end of the previous post: pretty messed up how people are made to pay more money for not having money, isn’t it??). Remember, most banks—even wholesome vanilla ones and credit unions—take out expenses before adding income, so if you have two $100 charges, $180 in income, and a $20 balance, you’ll end up paying possibly two different overdraft fees. Pending widescale reform (and/or my overzealous friends with a homemade guillotine), try to keep a checking account cushion to avoid paying those fees.

My checking account is at a local bank; my savings account(s) are at my local credit union and online at Ally.com, both of which offer much higher interest rates. I’ll talk more about savings in my next blog post.

PayPal and other online accounts

I treat my PayPal account more as an income account than an expense one—it’s where I make and receive invoices. Only rarely do I pay for something out of my PayPal balance. But sometimes it’s easier to checkout through PayPal for an online purchase. My account is hooked up to Mint alongside my bank accounts and credit cards, so it’s easy to check the balance in any event.

I try not to keep a large balance because there are some scary stories out there of PayPal seizing accounts for various issues, more or less randomly, with very little recourse for the account owner. Here’s a discussion of why that could happen, and what you might be able to do about it, specifically for small business owners. Still, PayPal isn’t really optional for me, as it’s the way a lot of clients, plus Fiverr, pay. So two to three times a month, any time my balance gets much above $199 (as I reread this paragraph, it could certainly be lower), I transfer the bulk of it to my checking account.

For the above reason and because of the chunk it takes in transaction fees, I’ve started using payment options other than PayPal, like Google Pay. I’ve met some authors who seek payment through Venmo over PayPal, though I’m not mobile-app-savvy enough myself to go that route.

I’ve set my Google Pay account so that payments are automatically deposited in my savings account (as are my Upwork earnings)—a way to “pay myself first”. Then, as necessary, I transfer money from my savings to my checking to pay off credit card bills, rent and insurance checks, taxes, and so on. From my Ally savings account, I can make up to 6 outgoing transactions per month (and as many ingoing ones as I want). This is more than enough for my purposes. But do be aware of any transaction limits your checking or savings accounts have–or else you may be paying them more fees.

While I don’t make PayPal my primary account for holding money or making payments, I am glad of the credit card I have through them. On which note–

Credit cards:

Whichever card you use, pay off your balance in its entirety each month, before the due date. If you don’t have the money in your checking account or as a credible pending invoice (or in a pinch, in your emergency savings), don’t charge it onto your credit card. I’ve found credit cards a convenient and useful way to manage my budget, but that depends on not racking up any of their obscene interest charges. If you do, you’re not doomed to bankruptcy, but it makes everything much easier if you can avoid owing another 20% on what you already owe.

Mint helps keep track of credit card payment due dates. You can also arrange to be alerted by the card account itself. Additionally, I get account alerts for large or unusual transactions–if my card gets used in a liquor store in Tennesee, there’s a good chance I’m a victim of fraud. And as I mentioned, the zealous fraud & consumer protection is another reason I actually prefer to pay by credit card.

The big reason, at least the one I find most exciting, is that you can earn credit card rewards–earning money for what you spend, basically. Of course, you’re only earning a fraction of what you spend, so do not think you can spend enough money to make money here. But it’s a way to cut costs. And if a credit card does not give you rewards for using it, I suggest you stop using it (don’t, however, close the account, at least not without considering what it could mean for your credit rating–the total number of accounts you keep open, plus your total available credit, can show you’re more creditworthy).

That said, part of how a credit card company earns the money to pay those rewards is, aside from charging interest rates, charging transaction fees to the merchants you pay. For this reason, some very kind people sometimes prefer to pay for their Fair Trade purchases at Plowshare (a non-profit organization) with debit, cash, or with an additional donation on top of their purchase to cover the credit card fee. I try to keep this in mind when I make my own purchases. Yet I’m not particularily concerned about costing a Fortune 500 company 3% of my transaction. Even if that money goes to the credit card company, itself probably in the Fortune 500, since I’m earning a percentage back from them in rewards… Working the system like this might be something capitalists and anticapitalists alike can enjoy. Of course, if everyone did it like this–taking their rewards points and never paying a cent of interest–we’d no doubt have to completely rework the credit industry. I just can’t convince myself that’d be a terrible thing.

Credit cards offer rewards in a whole bunch of ways. Some people seem very excited about airplane miles. I don’t travel all that much, so for my purposes, cashback is where it’s at.

My Capital One card offers 1.5% cash back, and it can be paid either by check or by “erasing” purchases from my history (i.e. I don’t need to pay for them). I keep a balance of reward points on this account partially as another form of emergency savings, should a month ever come when my Capital One bill is higher than I can pay off–I can erase some purchases via the rewards.

(When saving up rewards, make sure to check what the rules are on expiration. Capital One rewards don’t expire “so long as the account is in good standing.” But never assume this without checking–and do your research into what counts as “in good standing”.)

Costco’s Citi credit card also offers some pretty excellent cash back rewards, including 4% back on gas (which I always buy from the nearest Costco anyway, since it’s significantly cheaper than other places). These rewards get paid out annually, and in my experience are often more than enough to pay off the annual membership fee. If you have a Costco store near you, I definitely suggest checking this out. I generally–stepping back on my soapbox–approve of Costco anyway because I like buying in bulk for savings, I approve of their $15/hour minimum wage, and their giant teddy bears are just plain good PR, okay?

My twin sister and her friend are shown actual size.

As mentioned, I also have a credit card from PayPal, a Mastercard that offers an impressive 2% cashback on all purchases. Given it’s $2 earned for every $100 I spend as I usually would (on groceries, bills, etc), that’s not shabby at all. In fact it’s higher than the interest on a lot of savings accounts. What more do I even need to say about it?

These cash back rewards get classed as “bonus” income in my Mint budget when I withdraw them periodically and put them in a savings account (or, if I’m drawing them out in December or January, they go toward my HSA and Roth IRA investments. If I’m withdrawing them around June, they can help cover my renter’s & auto insurance, and/or replenish my savings account after I’ve taken those large payments out.)

Lastly, I have a Target Redcard that gives me 5% off all in-store purchases, which is probably the best reward I earn percentage-wise. If you shop regularly at the weird red orbs (now being replaced by an even uncannier white bullseye on a red background), this seems worth going for. Just be aware, this is the one card that sends me politely threatening letters if I haven’t used it in a few months, reminding me to use it some more or risk my account getting closed. I generally take that as my cue to buy toilet paper or something. Also, on the topic of drawbacks, those weird red orbs (and the new white logo, which fills me with a disquiet as if I’ve slipped into a parallel universe) don’t make for as good PR as the giant teddy bears at Costco. But here I am talking about them, so I guess they work for brand awareness.

For the good of your credit score, you don’t want to rush out and open lots of credit cards at once–that leads to a lot of credit inquiries, which can lower your score.  One new card a year can still keep your score healthy, depending on the rest of your circumstances. You can check your credit score for free through your Mint account. I’m also able to check it through my CapitalOne card.

The more cards you have, the more due dates and balances to keep track of–once again, Mint.com helps with this, as can assigning particular expenses to particular cards (purchases at a Target store always go on my Redcard, and Costco and gas expenses always go on Costco. I’ve switched monthly payments like my Arcadia energy bill to the PayPal card.)

In the event that you do wind up with credit card debt, make paying it off your top priority. To save the most money in the long run, pay off the debt with the highest interest rate first—and credit cards have some of the highest interest around. (An alternative option is to pay off the smallest debts first. This is called the snowball method and is recommended by writers such as Dave Ramsey because it’s psychologically motivating to cross off the list of what you owe. But I don’t want to knock the psychological boost of watching your monthly interest drop, either.) A balance transfer can help reduce the amount of interest you incur each month, too. Remember, there’s just about no other investment you can make that will earn you 20% interest, other than paying off a credit card account that’s currently costing you 20% interest.

Mint’s Goals tool can help you track the debts you’re paying off. And even while paying off debt, it’s a good idea to save a small amount for if an emergency comes up (for instance, Dave Ramsey suggests building a $1,000 “starter” emergency fund, then paying off debt, then building the emergency fund further). I’ll discuss both Goals and savings in more detail in my next post.