Don’t spend more money than you make. It’s common sense, right? Then why do so many people rack up credit card debt? Credit cards make it easy to spend more than we have — that’s why. Instead of keeping our spending habits in line with the actual cash we have now, credit cards let (no, encourage) us to spend based on money we expect to have later. We must be suckers, because we keep on falling for it!

Fortunately the New Year is coming, and it’s the perfect time for fresh starts and changing habits. So if you find yourself under a mountain of debt (or just the temptation to build it), make a New Year’s Resolution for 2010 — don’t spend more than you make.

The Concept

You can do it. It really is simple. If you make $xxxx per month, you can only spend $xxxx per month. Ideally, you’ll spend even less because you’ll want to put some of that money towards savings, investments, and paying down existing debts. If you make $xxxx per month, you don’t go out and spend an extra $1000 figuring “It’s alright, I’ll just pay it off next month!”

The Dangerous Cycle of Overspending

Is that excuse really so bad? Yes. Here’s why: It’s a dangerous cycle. It probably won’t end with that first month. You spend the extra $1000. Now you have to devote a part of next month’s budget to paying that charge off.

Why is this a problem? Because you’re just as likely to find something else you want to spend money on next month! You have even less money available than the previous month though. “No problem,” you think. “I can just use my credit card balance for this too, and pay it all off over the next few months!”

Ahh, the joys of “magic” money from your little plastic cards! There will probably always be something you want but can’t really afford. Credit cards can make you feel like you can afford things that are otherwise out of your reach.

Don’t get me wrong. I’m not saying to avoid using credit cards for big purchases or to avoid using credit cards at all. I’m just saying that you can be smarter about it in the New Year. Assign yourself a budget (we’ll talk more about budgets next week). Base that budget on the amount you could spend if you were going to rely solely on cash.

Then use your credit card to make the purchases. If you have a rewards card like the ANZ Visa Rewards credit card, you can get a little something back for doing it this way too! After you’ve made your credit card purchase, use the cash you set aside in your budget to pay the balance off right away.

The benefits? You won’t spend more than you earn — no debt. You’ll probably avoid paying any interest. You’ll earn some rewards in the process. What’s not to love?