Negative Starting Balance & Credit Card Floats
I'm brand new--and I'm sure someone's covered this in an exciting blog post or riveting youtube video--but I'm been sleuthing around and can't quite find the answer to what I'm sure is a tremendously common scenario.
I have about 0$ in my account at any one time. I charge everything to credit cards. I earn points (yippee!) and get a free trip to Europe once a year. I pay off the balance every time. I'm living within my means.
But when I try to budget in YNAB, it sees the 0$ in the bank, and as I start budgeting $100 to books, $700 to groceries, $4,000 to credit card payment, etc., I just get redder and redder. Twice as red as I ought to be, actually, because I'm marking down my budget for expenses (books, groceries, etc.), plus paying off last month's books and groceries, etc., that were on my credit card.
So where I'm expecting to see something like
Expenses: Books $100, Groceries $700, Other Stuff $3,200
$4,000 - $4,000 = 0, I balance
instead I get
Expenses: Books $100, Groceries $700, Other Stuff $3,200, Last Months' Credit Payment $4,000
0 - $8,000 = -$8,000
Should I delete the credit cards entirely from the account? That would solve half the issue, although it'll be hard to explain the future activity in my chequing account when I pay them off.
I've read somewhere that here "you're basing your budget off of what you have" but I'll always have $0, except twice a month when I get paid and pay off my cards.
Riding the CC float in YNAB is very easy when you are only a month "behind". In such cases, normal budgeted purchases build up the CC sufficiently in the 4 weeks between statement close and due date. You, however, are an extreme case since you are somewhere between 1 and 2 months behind.
Approaches for severe cases are controversial. Normally and YNAB's recommended practice is that the budget is the plan solely for your cash, leading to credit overspending scattering throughout the budget without the benefit of category guidance. The one favored by many very experienced users here is to set up the budget to be a mix of future-credit and cash, providing that all-important spending guidance and an obvious mechanism to plan for float reduction over time.
This hinges upon the fact that a red/negative category (advance notice, this will be your CC Payment category) signifies missing cash, which is equivalent to the future extension of credit. (You obviously can't use cash to pay since that's missing). You have presumably done a reasonable job of managing cash-flow thus far (not overdrafting on any expenses that must be paid in cash), so it is assumed you can continue to do that -- YNAB will not help you in that regard, as it would if used as officially recommended. Managing cash-flow also becomes easier as your float is reduced.
So, the setup:
- When you are paid, allocate that to spending categories (Groceries, etc.) Make your best guess at a feasible plan. (It doesn't have to be perfect, as you can reallocate when you realize the plan isn't quite right.) TBB should be $0 when you're done, as always.
- Immediately before your CC Payment, reallocate money from the CC Payment category to elsewhere in the budget that you feel is necessary to cover expenses (including True Expenses) until you're paid again. If you completely drain the payment category, you will be set up for roughly 2-months of CC float. However, the idea is to get OFF the float, so only use as much as you really need!
- Your payment will take the CC Payment negative/overspent. While this is negative, your categories are not backed by cash. By design, they are showing a mix of future credit (yet to be extended) and cash (if you have any).
- Base your spending decisions on category guidance and shift money from elsewhere in the budget to avoid overspending (or at the worst, cover it after the fact). Basically, you operate YNAB as a paid-in-full CC user would, instilling those all-important good habits. ANY uncovered overspending (or covering from the CC Payment category) will increase your CC float and should be avoided if at all possible.
- Continue to pay the CC statement balance on/near the due date. Again, this will take the Payment category negative as long as you are more than a month behind.
- YNAB will correct for the missing cash (red/negative Payment category) when you move to next month's budget area by reducing TBB. If you end the month in this situation, you must undo this correction with a negative budget entry to restore the same (negative) Available amount in the CC Payment category; i.e., the float present in the budget. (As an aside, this may cause the previous month's TBB to increase -- just leave it alone and focus on the current/next months' areas.)
- As one of the priorities to juggle, you need to budget toward the CC Payment category to reduce the float over time. Make sure you ADD to any existing budget entry (say from restoring the float in Step 3) using the built-in calculator., resulting in a less negative value (closer to 0). Eventually, you will end the month with a green category and won't have to do Ongoing Step 3. Eventually after that, your payment of the statement balance will leave the category green, meaning that you are less than 1 month behind. Eventually after that (keep going!), the CC Payment Available will cover the entire CC account balance, meaning that card has paid-in-full status.
Best of luck with things, and don't hesitate to ask if you're confused.
As a big-picture concept, you may be wondering why you should get off the CC float at all. The simple answer is that you have no fall-back position that does not incur interest -- as evidenced by your previous dip into your line of credit.
A paid-in-full user, on the other hand, can handle significant expenses before the debt cannot be "floated" interest-free. As such, I consider it a form of emergency fund. (Indeed, I would advise anyone riding the CC float and who has a cash EF to put the EF toward reducing the float, simply because it is easier to use YNAB in that fashion.)