How to paydown a credit card
I've been using YNAB on and off for years but after being away from it for a year or so I now have my credit card linked with a balance that I would like to pay down over time- ie. $10,000.00 that we (half of household unemployed) are trying to pay down and can only afford a couple hundred dollars a month. I started this month and added a "goal" of $200.00 in my "credit card payment" category. But then when I used my card for budget items, the money to pay those charges shows up in that section, which I understand, but then it shows my goal as "completed". Should I have separate line items then for paying down the VISA ? And where should the interest charges be assigned to?
Interest is an interesting question, and approaches vary with pros & cons to each. Most will categorize to Interest & Fees (a built-in category) or similar (that you've created). Where they differ is whether that Interest category is budgeted or not and if so, when.
- Leaving Interest Overspent -- Pro: it's easy. Con: your debt reduction will be less than what you've budgeted to the CC Payment category, so it's not obvious you're making progress without looking at two numbers (interest Activity and Payment Budgeted). Con: the CC Payoff by Date goal doesn't work, meaning it will yield increasing budget entries. (That goal doesn't consider interest in its calculations.) Con: visual clutter of an overspent category.
- Budgeting for Interest -- Pro: everything budgeted to the CC Payment category is progress. Pro: the CC Payoff by Date goal actually gives you consistent numbers if you budget its suggested amount. Con: the amount "spent" in the Interest category isn't consistent. You can budget last month's amount which leaves extra in the Interest category, and it's a manual step to reallocate to get everything to the Payment category.
- Hybrid of #1 and #2 -- Budget the desired total payment amount to the CC Payment category and use the "Cover Overspending Tool" to cover the overspending in the Interest category from the CC Payment category in a couple clicks. Pro: you don't have to do the math. Pro: no visual clutter/overspending. Con: you have to mess with the budget after the interest has posted.
- Sweep Interest Under the Rug -- Categorize the interest outflow as To Be Budgeted, which is effectively "debt management" in a credit account. (It does not actually impact TBB.) This is very similar to #1 but recognizes if you're not going to budget for it, why even have a category for it?
YNAB recommends/teaches #2, most veterans prefer #1 or #3 (but may not know about #4). My preference is #4, as it is the least work and least clutter. Interestingly, YNAB used to teach the equivalent of #4 in previous versions (not my original idea).