Credit cards and interest are confusing me
For this question, let's just focus on the Amazon Card shown above. I started a fresh budget, and added the Amazon Card which has a balance that I will budget to pay $75 on each month. I was charged $4.28 in interest this month, which I also budged for. This leaves $4.28 left in the payment column, and I have no idea if I'm just supposed to let it sit there and roll over into the next month, or transfer that extra money into the To Be Budgeted category.
You need to move 4.28 into your Amazon Card budgeted Payment amount. Currently you budgeted $75 for payment. If you want to budget $75 plus $4.28 interest then you need to budget $79.28. You said you already budgeted for the $4.28 interest. Where? You need to move it to your Amazon Payment category.
The $4.28 is the payment you still need to make to the Amazon card.
You have budgeted $75 against the category of Amazon card. Then you budgeted the $4.28 in the interest and fees category. YNAB knows that the budgeted amount is against your Amazon card because you would have had it as the payee in the interest and fees category. So, it moves that amount to the payment on the Amazon card line.
Once you make the payment of both $75 and $4.28, the payment will become $0.
When you spend budgeted money, YNAB automatically reserves that money for paying back the card. So when you budgeted $4 for interest, YNAB added that $4 to the $75 you had already budgeted for paying the card so that you had $79.28 available to send to the card. You sent only $75, so you still have $4.28 left that you could send. This is just like groceries: if you had $79 in groceries and spent $75, you’d still have $4 you could spend on additional groceries. The only difference for the credit card category is that money moves to that category automatically. But just like any other category, it can be underspent and overspent.
The best practice for the fullest card paydown is to budget for both your interest charge and for the amount you wish to pay down the card in addition to that. I would certainly say that if your interest charge is this small each month, this is probably the best course of action for you. So next month perhaps your interest will be $4.05, and you’ll end up with $79.05 reserved for paying the card. Pay that whole amount; not just the $75.
Some users would rather just budget a fixed amount to the card each month. In that instance, you can manually split your amount into the budget for the card and the budget for the interest as described by Navy Blue Pegasus , or you can budget $75 to the card category and leave the interest category overspent. A shortcut is that you can cover the overspending with the credit card category and it will effectively split your budgeted amount into “interest” and “remaining.” In your example, if you did that, you would’ve seen your $75 change to $70.72 budgeted to the card category and $4.28 budgeted to the interest category. But this way does not budget for the interest separately from your debt reduction amount, and your card paydown will be slower as a result.
How did you arrive at the fact you can only pay $75? In fact, you budgeted $75 for debt reduction over and above that after paying for any budgeted purchases. The Interest was budgeted separately -- you "bought" additional time. If you made any other budgeted purchases, the cash backing those purchases would also have moved to the CC Payment category.
Until your payment exceeds the statement balance, you should be paying the full amount shown in the Available column. Anything less unnecessarily incurs interest.
The amount you throw at any expense is dependent on priorities, and it all has to fit. As the per-month demand from various True Expenses decreases, it's highly likely you can devote more than $75 toward debt if that is in with your priorities.
So if I may indulge everyone's patience just one more time... I have the Amazon and CitiBank cards budgeted appropriately based on the explanations I received here, but I'm still confused with how to handle the PNC card, which is what I run all my expenses through and then pay off each month without incurring interest. This may only be a problem since this is the first month in this fresh budget, but after I recorded my credit card purchases and credit card payment for the entire *calendar* month, I was left with $482.44 in the payment column. Could this be from the fact that my billing cycle ends somewhere in the middle of the calendar month, but for this fresh budget I started recording my expenses at the very start of the month? If so, then what do I do with the green column? Leave it alone? Or instead click on it and move it to the To Be Budgeted category? (if I do this, it actually puts a negative number in the Budgeted column). Thanks in advance!
Beige Hail said:
that $75 is what I can spare in my monthly finances
Your budget indicates you can afford another $4.28. Obviously not a make or break amount, but the concept I'm trying to get across is the Available column tells you what you can afford, not the Budgeted column.
Beige Hail I'm sorry, it seems you don't understand the basic concept of how YNAB handles credit cards.
Have you spent any time with the training material? Here is a recorded class from YouTube I found on a quick search, https://www.youtube.com/watch?v=nQ0-MHav2u8, there is so much more.
I have three cards, which are all Paid in Full (PIF) cards, and I use them for most of my monthly spending. Very seldom do I ever budget money to the cards, YNAB funds my spending automatically, with the money I have budgeted to the categories I spend from. My payment column equals the balance on the card. When making a payment, I could send them the total balance on the card. I could pay off the credit card at any time with the amount in the payment column.
If I had a balance I was paying off over time, that is the only time I would budget money to the cards monthly.
I never take any money out of my card categories. That is money YNAB has put aside to be sent to the card company.
I highly recommend you take a class or research some YNAB material. It helps much more than I can, in a post.
In your first post, you budgeted $75 to pay down your credit card debt, you also budgeted $4.28 for interest charges. As YNAB told you, you had budgeted $79.28 to pay on the card and you could have sent that entire $79.28 to the card, as it was all budgeted.
For your PNC card, you currently have $482.44 available to send to them to pay on your card. The way you have that money available is when you spent during the month, for budgeted expenses, the money was moved to the card payment. As is shown in the activity column, you spent $482.44 during the month on the card, it was all budgeted, and moved to the payment column as you spent it. Don’t move that money anywhere, except to your card payment. That is it’s job now.
There is a bunch of educational material in YNAB, stuff you can read, watch, ask questions. You can even contact support if you have more questions (the ? in the lower right of your budget)YNAB is a change to the traditional way of budgeting. From your questions it seems you are attempting to use the traditional budgeting concepts to budget in YNAB. It will never work. One of the things I heard in a recording recently is to start using YNAB, you have to forget everything you thought you knew about budgeting. Please take some time to learn what YNAB is teaching. It will make a world of difference.
Beige Hail said:
do I need to reassign the $482.44 to the To Be Budgeted category
Typically, no. The only time you would do that is if something else was more important than reducing your CC debt. (This is the motivation behind Rule 3.)
It's understandable that you're struggling with the larger picture of how YNAB is meant to be used. Hopefully the above will make more sense after the webinar. Good luck!
So for future visitors who may have the same confusion about what to do if you pay less on your credit card than what you spent that month, and therefore have a green number in your Payment column. I sat through the credit card webinar and asked my question at the end, and Dave, who was super helpful and didn't accuse me of not knowing how YNAB works, said to just leave it alone and let it roll over into the next month.
Beige Hail said:
I sat through the credit card webinar and asked my question
You'll have to forgive the rest of us who see beyond the single question you posed. As the saying goes, "you don't know what you don't know," but we saw a glaring lack of understanding that would cause problems later.
It's your choice to take that as criticism or a learning opportunity. It was certainly meant as the latter.
Beige Hail said:
just leave it alone and let it roll over into the next month.
This would effectively mean that the credit card is never paid off as your unpaid interest charge simply incurs interest every month.
With a credit card that carries a balance (debt) that you don’t intend to pay straight away you have to budget for your debt payment, interest charge and purchases. At some point during the month, you have to pay it all.
It turns out that the correct answer to my second question (what to do with the green $482.44 in the credit card payment column) was to zero it out at the end of the month by moving it to the To Be Budgeted category. For anyone who's interested, read on to see a summary of why that was the correct thing to do. Otherwise, I want to thank everyone who's contributed their time and efforts in helping me sort through this.
1. I "started over" with a fresh budget in January, but didn't actually budget for any items right away since I didn't have time to sort through the lingering questions I had. I did, however, record all my transactions faithfully, knowing that I would be retroactively setting the budget later once I got my final questions answered. I completely understand that this isn't the way YNAB was designed to be used. But it's a flexible system and it can handle it.
2. I freelance, so my income is unpredictable. January was a rough month and when it came time to pay my credit card balance, even without the benefit of a working budget in place, it was obvious that I couldn't afford to pay the full balance from the previous month, so I only paid $200 out of the $682.44 in purchases I had made on the card in January.
3. Once I got a week into February, I knew I needed to resolve my YNAB questions once and for all and finally get the budget up a running, so I went back to January and retroactively set up a budget for that month by looking at the activity column for each category and putting in the opposite number in the budgeting column. So if Groceries showed activity of -$100, I put $100 in the budget column. This created the green $482.44 in the credit card payment column for January, which didn't make sense to me, since it implied that the money was available for spending, when in reality it wasn't (and this became the distraction that many of you here kept focusing on.... "you obviously have the money, just pay that stupid card and the green number goes away!")
4. Going into the workshop, I had assumed that I'd get a chance to actually talk to the instructor to explain my situation... I didn't realize that the only communication was via text chat. So I didn't have this elaborate step by step process typed out. I only had time to quickly cobble together a quick summary: "If you happen to pay less on a credit card than you made purchases on in a month resulting in a green number in the payment column, what do you do with that number? Leave it alone, or move it to the To Be Budgeted category?" He said just leave it alone and it will roll over into the next month. Not his fault, he didn't have the larger context.
5. But after doing that and then working on February's budget, it was obvious that the numbers were off, and then I finally understood that in this situaton the green number needed to be moved to the To Be Budgeted category, because in real life, that's what I had done! I couldn't afford to pay for all the credit card purchases I'd made in January because that money had to be used for other things. So that's when the lightbulb went off in my head.
6. By zeroing out the green number, that put the budget for that card in the negatives for that month, which I guess is how the incurred debt is indicated?
I realize that if I had typed out this entire scenario to begin with, there may not have been so much confusion. Ironically I was trying to simplify things by giving as little information as was necessary.
Beige Hail said:
which didn't make sense to me, since it implied that the money was available for spending
It's available to pay the CC bill, just like the money in the Electric category is intended to pay the electric bill.
As I said above, if you need that cash to pay for upcoming events things that are more important to you than decreasing debt, then yes, reallocate it wherever needed. This is, of course, not a long-term strategy.