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...
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...)
Less 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.
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.
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.
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:
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?
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.
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.
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!
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.
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?
other than the car and that kind of doesn't count
Difference 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)
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.
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.