One off payment coming in... what to do with it?

Hello, 

Less YNAB specific and more money sense needed please!

I'm a complete YNAB newbie and tbh even though I've kept track of my out goings for years - I've never actually budgeted for anything and thus always run out of cash and ended up further in debt! So I ask this question with a completely open mind and a willingness to accept any advice people would be willing to give! 

I am a teacher, in the UK, and I mark for the public exams each summer.  This summer as I know I want to age my money and pay down debt and try and build some savings I really do not know what to plan to do with that income in July/August when it arrives! 

In the past I've always just thought I should pay it off a credit card - but I don't always! 

Should I budget it into the future? Save some? Or just pay off some debt? It's not crazy money but enough to make a difference in my world - £700/£800 - hopefully!?!?!?!?

So... any thoughts are most gratefully received! 😊 Thankee!

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    • Peter
    • Professional Designer, Web Developer
    • lasty
    • 2 yrs ago
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    Ruthie Toothie said:
    This summer as I know I want to age my money and pay down debt and try and build some savings I really do not know what to plan to do with that income in July/August when it arrives! 

    You're in luck. Building some savings is the same as aging your money, so your conflict between three choices has just been reduced to a conflict between two.

    I'd say do a bit of both. For paying down your debt, throw half of the income at it, then with the remaining half look at your savings categories that I hope you've already set up and decide which of your goals are most important to you. Maybe you want to build an emergency fund, or perhaps it's vacation money or money for your next mobile phone. The choice is yours :)

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
      • 2 yrs ago
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      Peter Thanks- that is very true! Happy to have less options right there! That's a really good point about splitting it! I've got a couple of savings categories but for now it's just an emergency fund and Christmas! But I think Christmas is sorted with the goal to pay in so much each month! Thanks mucho! 😊

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  • From a strictly mathematical perspective, paying down high-interest debt is almost always your best choice.  "Aging Money" -- by stashing it into an "Emergency Fund" or reserving it for future months -- comes at a very high cost ( £) when you have outstanding high-interest debt.  

    In a sense, when you have credit card debt your Age of Money is actually a negative number: Your money was already spent before you even earned it. You should focus on getting it back to 0 before worrying about making it a positive number.

    But there's an emotional aspect to these things. Throwing every spare £ toward debt can be emotionally draining -- pushing that rock up the mountain forever can burn you out. And if an emergency happens along the way, you might have no choice for handling it except to grow your debt again, which can be very dispiriting.

    IMO a good pragmatic compromise is to reserve enough cash so that you can budget one month ahead. E.g. on May 1, you should already have enough money set aside (that your earned during April) to fully budget the entire month. "Living on Last Month's Income" is a really empowering budgeting workflow -- it means you've broken free from the paycheck-to-paycheck cycle and have breathing room to see the big picture and budget in more comfortable monthly intervals.  Many would argue those things are worth the cost of the extra interest.

    In the end, it's 100% your decision. Compared to other budgeting systems YNAB is very unopinionated about how you should spend your money. It just provides a framework -- you identify your own priorities, and YNAB helps you implement them.

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
      • 2 yrs ago
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      bret Thanks so much! Funnily enough I was just thinking about what it would take to get a month ahead - or how long it would take! - so that's a really good idea.  

      I've just (I know I should have known this already!) found out what the interest rates are for my CCs and so will have a look at hitting the highest interest rate one first... although I had thought I should hit the debt that had the lowest balance first in order to get shut of that... but I see the logic in getting rid of the highest interest rate debt first!!! 

      Thank muchos! 😊

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      • monkeyhanger
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      • monkeyhanger.1
      • 2 yrs ago
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      Ruthie Toothie How bad and how different are the interest rates?

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
      • 2 yrs ago
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      monkeyhanger They are all pretty similar and under 20% - except for my store card which is an appalling 59% - so that one is going and is the lowest balance so not a problem... the others are all much of a muchness! From 17% to just under 19%. 

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      • monkeyhanger
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      • monkeyhanger.1
      • 2 yrs ago
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      Ruthie Toothie The 59% top trumps everything then! I'd be paying minimums on everything and even possibly delaying starting to save for some further out true expenses until you've got that bad boy gone. I wouldn't even be waiting for the additional money to arrive in the summer.

      After that it comes down a little bit to psychology and whether you would qualify for a balance transfer to a 0% card or even a 6.9% for the life of the balance card. If you do, there's a simple bit of maths to see whether to transfer fee makes the transfer worthwhile.
       

      After the 59% is gone

      The first thing I would do once the 59% is gone (or transferred) is to consider just steadying the ship. Mathematically, you are always best placed paying off debt and you can always use the credit card again in case of emergencies BUT for a lot of people that's how they got here in the first place and it perpetuates the cycle. Accepting what debt you have now and setting out a payment plan in YNAB whilst also putting money aside for your true expenses can break that cycle. Only you can decide.

      Getting a month ahead - I think you're UK based and paid once a month on the 25th unless I'm mixing you up with someone else. In YNAB4 terms you would have been 'buffered' or a month ahead if you didn't use any of the 25th money until the following month. I think you're fine going forward budgeting on the 25th and letting the money remain in the category available balances into May, then budgeting into May on the 25th. It's how you're used to working and the circa 1/5 of your salary that you need to get to that buffered position is probably best spent on 20% debt. Even if the debts at 0%, I'd still be tempted to attack that. IMHO the real benefit of getting a month ahead is for people who are paid more than once a month. That said, if you find it easier mentally to do that go ahead. You can easily work out the cost of doing so and you may decide it's worthwhile.

      Which debt to target? - Pure maths says target the debt with the highest interest rate and pay minimums on the rest. However, psychologically you can get a quick boost if you can pay a smaller balance off. This will also free up the minimum payments from that debt to target at the remaining balances. If your interest rates are so close that may influence things.

      Savings - Spreading out the costs of your true expenses is one of the key things that makes YNAB a success. Once you've been going for a while each category just gets 1/12 of the annual bill but at the beginning you often need to preload. Christmas is only 8 months away for example. Your travel insurance may renew next month. Using some of that money to get these categories where they need to be would be a great use of the money. If you manage to shift some of the debt to better rates, it's a no-brainer. If you can't then again you have to think which is best for you psychologically. Similarly, some people like to build a small fund (say £500) so that they don't have to automatically reach for the credit card if they have a problem.

      Personally, I'd leave any further saving for longer-term items or potential issues until I'd got the debt sorted out.

      I hope that makes some kind of sense. Without knowing the amount of debt you have and your options it's difficult to be more specific. Even then only you can know what your financial psychology is but this is a great time for you to think about it. You can easily calculate the £ cost of any decision. £800 at 1.5%/month (equivalent to a 19.56% annual rate) is £12/month. 

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
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      monkeyhanger Oh my word - thanks so much for taking the time to lay all that out and being so thorough! I really appreciate it! I think the 59% malarky is really shocking so I know that is the one I have to get rid of first - for definite.  I like the point about holding off on building savings until that is gone too! It will definitely be gone by the beginning of June i think - if not a little before! 

      I'm going to hit print here - and ruminate on these things as I hadn't really thought about the 'financial psychology' of it all tbh and want to make sure I'm not making decisions based on 'what seems good just now' as that hasn't been a good philosophy for me up to now! 

      I think tomorrow morning will be a tea and calculator session so I can really get to grips with how all this is laid out.  At the moment I've got a goal of being debt free in 6 years - but I don't know if that is dragging it out - and I'll need to do the maths in order to make some better decisions about that! 

      Again - thanks so much for your time and thoughts on this - it really is helpful and its great to really think about all of this and set true goals for getting rid of the debt!! Rather than just being overwhelmed by everything and burying my head in the sand!!  😊 

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
      • 2 yrs ago
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      monkeyhanger Also... had this thought at some point through the night - I've been selling bits of things in ebay and my PayPal balance will clear that store card - so I'm going to get rid of it now rather than wait! I think! Thanks for that advice and helping me get to the 'get rid as quick as possible' mind frame! 😊

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      • monkeyhanger
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      • monkeyhanger.1
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      Ruthie Toothie You're welcome.

      The 59% is definitely worth getting rid of asap. 

      If the level of the rest of the debt is such that you were thinking it would take 6 years to clear, then that's where your psychology really comes in. You need to work out what you can maintain in the long-term. Some people go all guns blazing and then when they get one problem, think they're a complete failure and the wheels fall off. A bit like one piece of cake on a diet leading to eating all the 'bad' things because, well, I've blown the diet today anyway. This is where having a small 'sh*t happens' fund and properly funded true expenses can make great sense even though you could pay less interest by paying it straight against the debt all the time. Conversely, having too much in might-never-happen categories while your debt is charging 20%pa doesn't make sense either. Only you can decide what is enough and what level of pain now you are prepared to take to get rid of that debt for your future self. And no-one else gets to judge either.

      You've got this.

      PS - if you're thinking 6 years, it's definitely worth looking to see if you can refinance some of it onto a lower interest rate/0% card.

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      • monkeyhanger
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       Ruthie Toothie

      I meant to add, the first step is to stop adding to the debt. It can take a few months to get used to YNAB and really recognise your true expenses so don't try and run too quickly.

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      • Ruthie Toothie
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      • Ruthie_toothie_080
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      monkeyhanger That is such a good point! I'm now at the point of - 'if I have not got the money for it, it stays in the shop' - as I am determined to not use the CC's any more! I am going to have a good look at what low interest options are out there - and do the maths properly about what I can and cannot budget straight to the debt! 

      As you say having that 'sh*t happens' fund as a cushion is great - but I don't want to just be putting money into a pot that could be made better use of to get rid of debt! So I'll have to ponder that too! 

      It's so interesting thinking realistically about the psychology of this and I know you are right that no-one gets to judge! Even me - I think one of the main things I need to do is to forgive my younger self for getting to this point - but I'm happy that I've enjoyed life and I'm going to be thinking of all that fun as I pay off the debt - happy memories and a lovely house I'm living in should help!!!! Not that I'm going to stop living but fun with little expense is going to be my 'go to' for a while!!!!! 

      I'll take it easy and hopefully get good foundations going now and see the good come around as the months pass!!!!! 

      Thankeeeee! 😊

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  • WooHoo! That one is paid! No more 59%! Happy days! 😎

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      • monkeyhanger
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      • monkeyhanger.1
      • 2 yrs ago
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      Ruthie Toothie That amazing feeling you've just got from doing that. That's why some people advise attacking your smallest debt first, it gives you a quick win and a massive surge of endorphins. Whatever you do from here on in, you're on a roll.

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      • Ruthie Toothie
      • Tentative but determined!
      • Ruthie_toothie_080
      • 2 yrs ago
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      monkeyhanger It certainly is grand!!! Good job as today needed some added good to it! Thanks!! 😄

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