According to MarketWatch, nearly $1 billion in gift cards goes unredeemed each year. While this might not seem like a lot of money (in contrast with the estimated $118 billion we spend on gift cards annually), $1 billion is still $1 billion. Heck, if it came in cash, I'd take it in a heartbeat! On that note, one main reason we don't rush out to spend down our gift card balances (a reason marketers and company accountants count on for extra profits come year-end) is because there isn't a wad of cash burning a hole through our pockets. But this is in essence exactly what a gift card is—cash. Unspent cash. Cash we could be using to meet our needs and satisfy our wants. Best of all, those unused gift cards offer one of the best ways to stick to our carefully outlined budget—especially in today's increasingly cashless marketplace.

Gift cards versus prepaid credit cards 

If you’re like me, you might be thinking, "Well, can't a prepaid credit card help me just as easily?" Technically, yes, if you’re as disciplined as a drill sergeant and impervious to "impulse purchases." This doesn’t describe me…or most people.

With a prepaid credit card, you only have a set amount of cash to spend before you have to reload the card (and often pay an additional fee to do so). However, you can still spend that amount on anything you want, versus on only what your budget outlines as "approved" spending.

When you use gift cards rather than prepaid credit cards, you ask those gift cards to play "bad cop" to your "good cop." The gift cards tell you exactly how much you have to spend and where you can spend it—and there’s no wiggle room. Especially if you are new to making and keeping a budget, this can be an invaluable source of support!

Note: For the sake of emergencies, it’s not a bad idea to keep a prepaid credit card in your wallet so you have some discretion with your spending. But if you do decide to do this, be sure you have the discipline not to spend it on non-emergency purchases! If necessary, find a friend who can serve as an accountability partner to help you stay on track.

Gift cards versus cash 

If you’re thinking, "Well, why not just stick to the cash envelope system so many financial experts recommend?" well, this is a great question! Here, it’s important to recognize that gift cards offer some benefits cash simply can't match.

  • Gift cards can often be bought at a discount, which is like having more cash in your pocket to spend than you would have if there was actual cash in your pocket.
  • Gift cards are often replaceable if lost or stolen (especially gift cards purchased digitally) whereas with cash, when it's gone, it's gone.
  • Gift cards enforce your budget for you through their store-specific nature (and sometimes, through their expiration date).
  • Gift cards are not as alluring as the feel or sight of cash-in-hand so it is easier to restrain spending.

6 steps to using gift cards as a budgeting tool

If this is your first time using gift cards as cash to set and keep a budget, follow these simple steps for the first month. After that, you can adjust as desired to suit your individual preferences and needs.

1. Make your initial budget.

First, determine your necessary expenses  so you can create categories—for instance, groceries, pharmacy, household goods, auto maintenance, clothing, etc. You can use Excel (or similar software) if you like, or there are many free online budgeting tools that work very well and offer additional benefits, such as account linking, reports and alerts.

Great free online budgeting tools:

2. Next to each category, make a list of the stores where you most frequently shop.

To make the gift card system work, you need to know which merchants you frequent most often. So next to each category, make a note about where you typically buy certain items. Put a star next to your favorite (first-choice) vendors.

3. Write down a list of all your existing gift cards.

For this first month, you’ll be more governed by any existing unused gift cards you have in your possession. For instance, you may have unused gift cards for Target, Starbucks, Walmart and CVS. Write down each gift card you possess, along with the unused balance.

4. Make it your goal to use up the balance on each of your existing gift cards first.

Remember that gift cards are like cash (if it helps, you can actually write "$25 cash" or "$50 cash" on each unused gift card); you want to spend down the unused balance as much as you can for the first month on your new budgeting system.

5. For successive months, purchase a gift card for each of your starred vendors that will just cover the amount you have budgeted in each category.

This system will take some getting used to, and you may find yourself needing to supplement your budget with cash or a prepaid credit card for the first few months until you get the hang of it. The easiest kinds of gift cards are reloadable, which means you can simply add more cash to the card when you have maxed out your available balance. However, not every vendor offers reloadable gift cards, and they do make it somewhat easier to overspend if you’re not sure you trust yourself yet! Also, you want to try to purchase discounted gift cards at every opportunity so you can get a bit of extra "cash" for your budgeting money.

Here are some great, free sites where you can purchase discounted gift cards:

6. Keep adjusting as needed to replace cash or credit-based spending with gift cards.

Patience and perseverance will be your friends as you continue to refine your gift-card budgeting system. After one year's time, you can sit down and re-evaluate your system (and your budgeting confidence), making additional adjustments as needed from there.