March is Get Off the Credit Card Float month
We’re trying something new this year. Every month, we’re going to focus on a different budgeting topic, and in March, we’re asking...
Are you riding the credit card float?
What’s the credit card float? It’s when you’re using next month’s money to pay this month’s bills, by taking advantage of the no-interest grace period on your credit card.
So what’s wrong with that? If I’m not paying any interest, who cares if I’m using my paycheck to pay off last month’s bills and then borrowing more money to fund this month? (I get this question a lot!)
The problem with the credit card float is that it means you’re on the financial edge. You’re not paying interest right now, but as soon as an unexpected expense comes up—and they always do!—you’ll be unable to pay the statement balance on the card.
In other words, the credit card float is the opposite of aging your money or living on last month’s income. It’s living on next month’s income. That’s the opposite of a healthy budget, because in a healthy budget, money sits around, waiting to do its job.
How do I know if I’m on the float?
Can you pay your credit card, in full, right now, and also cover your current obligations? In other words, once your Credit Card Payment category matches the balance on the card, do you still have enough money left over to fund your categories until your next paycheck?
If not, you’re on the float. But we can help!
How much float do I have?
Like ice cream floats, the credit card float comes in different sizes. When you get paid, how much of your paycheck has to be set aside for your credit card bill? That’s the size of your float.
Care to share?
If you’re on the float and comfortable sharing, you can use this template to share how much you’re reducing your float over the course of the month (and beyond!).
Amount I’m currently floating:
I want to get off the float by: [month] [year]
Which means I need to budget: [amount] per month
Or, if you’ve already gotten off the float, feel free to gloat! How’d you do it?
In the next post, I’ll talk about ways to get off the float. (It might get controversial...)
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Matthew said:
It’s when you’re using next month’s money to pay this month’s billsLess severe cases will use money already in categories. They make enough budgeted purchases to sufficiently raise the CC Payment category Available in the roughly 4 weeks between bill generation and bill due date.
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dakinemaui That is exactly what I do. Sometimes holding my breath with the anticipation that it will work out.
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Matthew said:
Amount I’m currently floating:The amount of float is the difference between the CC account and Payment category balances (both as positive numbers).
For example, account balance of -$2500 and category Available of $2000 is a float of $500.
The only way off the float is to budget to the Payment category, which reduces the float / difference. Budgeted purchases maintain the float at the current level (and are crucial to successfully riding the float). Credit/yellow overspending makes it worse.
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I'm not sure about the best method of getting off of the float but if you carry a balance on your credit cards from month to month I would recommend researching Dave Ramsey, he has some good methods to get out of debt. They include tightening you belt and snowballing your debt until they are paid off. He also hates credit cards and recommends that you not use them but I do not hold that position. I think credit cards offer a lot of benefits if you use them wisely (rewards, fraud protection, and acts as a buffer to protect your checking account). Also if you are debt free having a credit card can help maintain your FICO score.
I like Dave also hate the idea of debt, especially credit card debt. I have decided to treat my credit cards as debit cards and I pay them off daily if there is a balance. I log into each account and manually reconcile daily and since I have the cards linked to my checking account it is just a few button clicks to pay them off while I am logged in. I am finished with all accounts before I drink a cup of coffee.
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Today I want to highlight one way to get off the credit card float. It's the easiest... but it only works if you have enough money on hand that you weren't really on the float to begin with.
Many new YNABers have had the experience of realizing that their emergency fund wasn't as big as they thought. Maybe you started YNAB with a $1000 emergency fund in a separate savings account, but then once you started budgeting, you realized that actually you've been dipping into that emergency fund for totally foreseeable expenses: annual fees, repairs, computer replacement, veterinary bills, and so on.
We call those True Expenses, and we think an honest budget is a better budget: if most of that emergency fund is there to cover future car repairs, annual premiums, and feline dentistry, instead of keeping it in an Emergency Fund category, use it to bulk up your True Expenses categories. It reduces stress by helping you truly prepare for the inevitable, and you can always move money between categories (aka Whack-a-Mole, aka WAM, aka Roll With the Punches) when necessary.
So what does this have to do with the credit card float?
If you have enough money in your emergency fund—or any savings that isn't already budgeted out into specific categories—you can budget that money to your Credit Card Payment category. Boom, you're off the float.
Really, you're just adjusting your budget to show that you weren't on the float to begin with. You probably weren't going to take on high-interest credit card debt before drawing on your emergency savings, right? This way, you can take better advantage of the YNAB method (because you're only budgeting with the money you have), and still go back on the float in the event of an emergency.
I wrote a blog post recently that isn't strictly about the credit card float, but it's definitely related:
Here's What to Do With a Windfall of Money
Often, the best thing to do with a windfall of any size—or with your own savings—is to make it "disappear into your budget." It's like setting up a shield against money stress by making you more ready for the unexpected and more flexible when it shows up. Getting off the float is a big part of that!
So I'm curious: When you started YNAB, how did you budget your "savings"? Did you put it into a Savings category? (We don't recommend this, but it's normal to start out that way.) Budget it out for True Expenses? Use it to get off the float? Something else?
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Matthew I would totally recommend that someone use EF money to get off the float. The only reason they even have that money in the bank is because they didn't send it to the CC!
In the event of an emergency, a) there's not too many that cannot be put on a CC (either directly or indirectly) and b) if the emergency is within their normal CC usage, they go back to riding the float (without interest).
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Matthew I do have a "savings" category for my EF. The money in that category doesn't have a job, other than to sit there and look pretty.
I didn't use EF money to get off the float. We didn't have much in there anyway, but what we did have is still there, and growing slowly.
I'm still in my first 6 months on YNAB, so I figure I've still got some surprises to watch out for, that aren't going to be real emergencies, but that WILL catch us off guard, so the EF is basically an insurance policy against falling back into debt.
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Krys said:
the EF is basically an insurance policy against falling back into debt.I really don't understand this -- if you have the EF as cash, you're already in debt. If you pay the debt off, then later have an emergency (equal to the EF amount for illustration), "falling back into debt" just puts the debt balance exactly where it is now.
Perhaps it's an emotional argument which is why it's a bit beyond me (personal feelings and whatnot). If you're happy, that's great! 🙂
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dakinemaui I didn't express myself well there.
While I was in debt to the CC Float, I didn't use the emergency fund to pay that off. My thought process was that the EF would be there in case of a real emergency, which I did not consider the CC Float to be. I've paid off the Float, and all expenses are currently being paid for as they're incurred. No more Float, no Float-related debt.
Having the EF there made me feel better. Knowing that I had existing debt that would be gone soon did not feel like an emergency to me. It felt like a lesson to be learned, not to be erased.
Not sure I did any better of a job of explaining myself here than I did before.
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dakinemaui I think it's more about feelings in this case. If you work hard to get out of debt, then have an emergency and have to go back into debt, it's going to be harder to find the motivation to start over again. At least having a small emergency fund can help insure you against most of those options while you top it off after you get out of debt, at least, that's Dave Ramsey's plan. I'm modifying it to pay off my debt while I work on getting my E-fund higher. If my debt were credit card debt I wouldn't do that. It's at 5.85% interest, which I still want to get rid of ASAP, but I also want an emergency fund so badly that I didn't want to wait until I pay off my debt to build one up larger than the $1k baby emergency fund.
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PhysicsGal I guess it just comes down to viewpoint. I would see that as a victory that I dodged N months of interest, not a failure for getting back to the same place. I appreciate your thoughts on the matter in any case.
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This is a discursively very weird thread but Imma just study it.
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WordTenor Just an experiment we're trying! If "stuff directly and/or vaguely related to the credit card float" isn't your bag, wait until next month and we'll be discoursing on something completely different. (Well, not completely different. It'll still be budgeting-related.)
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Matthew When I'm not ynabing, I'm a discourse analyst who researches internet communities. So I'm very interested in the strange back and forth or lack thereof created by posting what are essentially blog posts inline with a thread in which other people have replied to the previous essentially blog post. It's a genre mismatch which is causing some really fascinating things to occur here.
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WordTenor If there's one thing we stand for around here, it's genre mashups.
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Matthew Can you delete my reply to this thread? I would appreciate it. Thank you.
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When I started YNAB in September I used the proverbial savings account with no purpose to clean up the credit card float.
Now I use my credit card the YNAB way-charges I make are covered by money in my budget and earmarked for the payment.
I am also funding true expenses while beginning to build up a “real” emergency fund.
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I cheated and got off the float with my HEL to also pay off my entire credit card balance and pay off my ex in the divorce (which was why I had a balance instead of my usual float). It's nice to be on time with my spending, ie off the float, yet make money off the banks for delaying paying it off.
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I JUST got off the float! It took me 4 *focused* months to pay it off.
I started in November, and paid it off at the end of last month (February).
We received money for Christmas, and instead of using that to buy something for ourselves, we put it toward the float. I received a Christmas bonus and an annual performance bonus from my job, and both of those went toward the float, too.
We reduced spending on dining out and on groceries, and cut back on other purchases as well. All of those "savings" went toward paying off the float.
Every extra penny we could find or scrounge up over the past four months went toward paying down the float.
How much were we floating? $3,695
How long did it take? Four months (November to February)
I have a journal that details my life on YNAB, and this experience in particular is covered, if you're interested in learning more.
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Krys Great job, you really stayed focused on that goal :).
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Krys I was hoping you'd chime in on this thread! I've been following your journal and cheered when you announced you were off the float - Great job! :)
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Krys yaaaasss!!!! queen moves right there! amazing!
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This is one of my complaints about YNAB - the float isn't as clear as I would appreciate it being. That being said, I don't know that I have any suggestions for how to make it clearer...
But I can say that when I have had a card that I was using AND was carrying debt (i.e. float) it made it easier for my brain to wrap around separating them into 2 accounts - 1 that is "purchases" and 1 that is "debt". Being able to see JUST the debt number (or the old float) alone, and budget a specific amount to it each month made it easier to manage paying off. Then knowing how much money I was putting on the card that was actually budgeted for and paying it off to zero each month helped my brain tremendously. Budgeting funds directly to the card that was also currently in use only served to confuse my brain.
I have used zero interest balance transfers in the past in order to help separate these things, but sometimes you need to use the card you are carrying debt on and this somewhat convoluted method is what my brain appreciated most.
I was able to pay off my float with the tax return this year. I only have about 10 more months of paying off a zero interest balance transfer until I am personally out of credit card debt. That doesn't include my business debt, which is a number I'm not even going to talk about here, but personally I won't have any debt (other than the car and that kind of doesn't count), which I can say I have never not had credit card debt as an adult.
Next thing is building my business so that I can knock out that credit card debt, too!
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farfromtheusual said:
I don't know that I have any suggestions for how to make it [the float] clearer...A graph showing the difference between CC account balance and CC Payment Available vs time would be supremely clear.
ETA: The float (i.e., that difference) could also be put as one of the headers in the account register with very little effort. Making people aware of it would be huge.
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dakinemaui I think so. This has been my argument about not being able to roll over spending into the next month. I can VERY easily ignore that mounting number, especially when there was a number there in the first place (i.e. float) as I can ignore over spending rolling into the next month. I'm just ignoring numbers in two different places. I've met SO much push back about this, but BOTH can be just as equally ignored.
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farfromtheusual said:
Being able to see JUST the debt number (or the old float) alone, and budget a specific amount to it each month made it easier to manage paying off.I completely agree. Debt -- if you have any -- is an important number and deserves to be visible directly on the Budget view. The user shouldn't have to calculate it themselves.
Combine this lack-of-visibility with the fact that debt can automatically grow through inaction -- by not resolving an overspent category before the end-of-month -- and you've got a recipe for disaster. Debt can grow unintentionally & unnoticed over a period of time.
I really despise the YNAB credit card mechanics.
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bret said:
I really despise the YNAB credit card mechanics.SO glad I'm not forced to use them!
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bret YES. This has been my argument against zeroing out the categories at the end of the month when there is over spending. It's just POOF gone. I'm SO glad to hear other people understand this. While ignoring over spent categories one month to the next is bad, it is EQUALLY as bad to ignore the debt when it piles up on the float because it's not CLEAR in front of you.
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I'm brand new to this, and still trying to figure out how YNAB handles credit cards. I think what I'm seeing has something to do with the float, but not 100% sure.
That part I'm confused on right now is the "budgeted" entry for each credit card in the "Credit Card Payments" section. It doesn't make sense to me because I budget for things in their respective categories, then use the card to pay for them. Once a month, a transaction from my checking account pays off the card in full.
So since I already budgeted for the things I bought with the credit card, what number should I put in the budget for the credit card?-
Blue Memory YNAB only keeps up with budgeted purchases automatically. You need to budget directly to the CC Payment category for anything else.
For example, any starting balance on the card and purchase rewards issued as a statement credit are very common. Some approaches to reimbursements leverage overspending and might therefore require a direct budget entry.
It should be the exception, though.
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dakinemaui I'm afraid I still don't follow. Is this something that will make more sense after the first month?
Ex: I budget $100 in tools for the month. I then buy a screwdriver for $5 using my credit card.
The transaction is caught by YNAB, and I assign it to the tools category.
I see my available tools budget shrink to $95 as expected.
On the left, my credit card account shows as a red -$5.00
Under the "Credit Card Payments" category, where I have budgeted $0, I see a -$5.00 activity and -$5.00 available. Do I just ignore this, knowing it will zero out when I pay my next monthly credit card bill? -
Blue Memory yes, you ignore the red on the left; the nummer on the left is your balance, not an amount you budgeted. The -5 is what you owe on the card, -5 available there. So if you also have 5 set aside in the credit card category (it moved from tools to credit card, like you described) the zero each other out.
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Powder Blue Pony I think I figured out what the issue is, but still slightly confused on how to handle it.
I used a simple example of a card with no balance, and the one purchase. You are absolutely correct in how that worked.
In my actual account, there was a starting balance of whatever was on the card. It also has the Feb credit card payment that cleared in March, and it has all the purchases this month (which have all been assigned budgeted categories).
It looks like my payment number, which is currently negative and red, is calculated as [total outflow NOT including starting balance] - [payment inflow].
So if I had a starting balance of $100, a $200 "inflow" from paying off the previous month, and used the card to buy $50 worth of budgeted items, it would show a payment of -$150, which shows in my budget as $150 of over spending.
How do I resolve that? -
Hi Blue Memory !
The starting balance needs to be budgeted for.
If you have an outstanding balance on a credit card when you set it up in YNAB, and you plan to pay that in full, you’ll need to budget for it in the Credit Card Payments category directly. That’s what lets the budget know you plan to take some of the money you have and use it to pay off that existing balance. Here’s a video explaining how this works.
This thread is about riding the credit card float - if you find that you can't budget for your starting balance and pay off all of your credit card transactions, you may be riding the float.
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Blue Memory
Blue Memory said:
Under the "Credit Card Payments" category, where I have budgeted $0, I see a -$5.00 activity and -$5.00 available.The Activity and the Available will both be +$5. You still have the cash that was backing the tool purchase. Tools goes down, CC Payment goes up. When you pay the CC bill later, Payment goes down.
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Blue Memory One big thing with YNAB -- never ignore red. That's a sign of missing money and an infeasible plan. You should always shift funds from a green category to fix red (could be either categories or To Be Budgeted).
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farfromtheusual said:
other than the car and that kind of doesn't countDifference of perspective is so very intriguing for me here; I have learnt over recent months carloans are very common in the US and don’t mean to judge at all. But imagine the difference with my perspective: I’ve never considered a loan for a car, ever. No one in my surroundings has, as far as I know, I must say, because I don’t always know. And it is possible to get one, so maybe more people than I know carry a loan on their car.
My fascination on the subject goes further than cars: I took a student loan. Oh, and a mortgage! Still carry some of the student loan and lots of the mortgage. Imagine if it hadn’t felt as an option! Maybe it would have stopped me getting my degree, but it’s also quite possible I would be without debt. (Quite content with the mortgage option though)
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Powder Blue Pony credit does one thing: accelerate timelines. Blanket statements notwithstanding, we in the US are all about getting stuff NOW. 😋 It's ingrained into our society for better or worse.
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Powder Blue Pony One metric by which I judge my own financial growth is if my “This costs so much I’m willing to borrow money for this” threshold number is getting bigger. I’m currently willing to borrow money for a car or a house, but I am planning to buy my next car brand new in cash, which will take years of saving. So soon, cars will be in my “This purchase is small enough I shouldn’t need to finance it” category. I am hoping that within the next twenty years or so, houses will end up in that category, too.
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WordTenor Yep, I'm down to only my house is worth having a mortgage. I am not willing to pay interest on anything else. And yes, the next house purchase will be paid for with cash.
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Faness said:
The starting balance needs to be budgeted for.This seems to be a very common issue. What is missing from the onboarding process that causes this issue to occur so frequently? This definitely seems to be an area that needs to be shored up in the software.
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Superbone When a credit card with a balance is added, there's a prompt to budget for the balance now or later (in prettier and more explanatory words). However, if later is selected, the prompt doesn't come back up as a reminder and there's no way to get back to that explanation.
We're currently working on improvements that should make this a less common occurrence.
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Faness The issue is that when you tell YNAB that you plan to pay the balance, it doesn't budget the money for you.... it creates a goal to budget the money. If you don't follow through, it won't happen.
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Faness Also, the base question is phrased poorly. Most people in the Pay In Full position are actually paying the statement balance, but take a look at how it asks "Do you pay your entire balance every month?"
Since neither option 1 nor option 2 match the real-world scenario, they may just choose option 3.
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We used our tax return money last year to pay off the last of our credit cards. Since then we've only used cards for pre-budgeted purchases. We pay off the balances on the cards as soon as we make the purchases.
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One way to get off the credit card float is what I call the slow way:
Continue operating on the float, but reduce your float bit by bit each month by budgeting money to the Credit Card Payment category whenever possible.
The big advantage of the slow way: You never pay any interest, because you're always paying at least the statement balance on your card.
Disadvantages of the slow way: It's slow, and that can be discouraging. It's easy to convince yourself that it's okay to skip a month or slide just a little further back onto the float. And it doesn't let you take full advantage of the YNAB Method, because you're often operating with overspent categories.
In this blog post, our own Janelle walks through how she put her money where her mouth was and got off the float the slow way, over the course of a year.
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Matthew said:
it doesn't let you take full advantage of the YNAB Method, because you're often operating with overspent categories.Only in extreme cases will this be true (overspent categories). Someone no more than a month "behind" will have enough for the statement balance accrued from budgeted spending between the roughly 4 weeks between statement close and the due date.
For those who are between 1-2 months behind, one could argue that interest is a small price to pay for clarity (i.e., the "quick way" off the float). However, it's been pointed out that they did fine managing the float (and avoiding overdraft) without YNAB and can also have the full benefit of spending guidance in their normal spending categories. (Only the CC Payment category is overspent.) Any guidance is better than a general "don't overspend as much next month".
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Matthew said:
Disadvantages of the slow way: It's slow,And yet, it's quicker to get to paid-in-full status than the alternative (the so-called "fast way" off the float).
Without YNAB, the Dave Ramsey "cut up your cards" approach is very effective at preventing "backsliding". With the help of YNAB, riding the CC float can be a very safe thing with obvious feedback when you are backsliding vs. making progress. I think most would find the unquestionably shorter timeline to be... motivating.
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So... March didn't really turn out to be Get Off the Credit Card Float month, huh?
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Matthew probably not, but it might be "cut back on discretionary spending" month.
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nolesrule Indeed.
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Matthew gotta be on the float first, so step 1 check. 🙄
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Matthew 😂 not as it will be widely remembered, no...
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Matthew Actually, March was the beginning of the end of our credit card float. Nothing like hunkering down during a pandemic to reset financial priorities.
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