Newbie with a taxrefund
Hi, everyone. I started YNAB in April. After a muddled start, I am beginning to understand it. There is the general problem that I don't have enough money, but that's not really the issue here.
I will be getting at least $3,600 in tax redunds within a few week. (At least because I haven't done my state return yet.) I owe $3500 on my car and about $30K on a personal loan at 8%. Would you recommend paying off my car with the money or using the $3600 to build true expenses and an emergency fund? Paying off the car would free up about $300/month. I would like to say that could all go snowball the personal loan but even my current expenses are more than my income right now. I've been able to avoid dealing with that and even build a $1000 buffer so far but ONLY because of weird income the past two months--stimulus check and some refunds from my daughter's camps that cancelled. I also did pay off a small credit card (but guess what that personal loan really represents).
I think there's value in both options (car vs. savings), but I am (soon to be was!) bad with money. I'm curious what you all would do.
Thanks!
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Approximately how much greater are your true expenses than your current income each month? Is that a temporary or long-term situation?
If paying off the car loan would close most or all of the gap, I would do that. If I was facing a larger shortfall and it’s going to continue indefinitely, I would perhaps use the extra money to start building up my true expenses categories (to prevent future debt).
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Which would feel the best to you?
Both options have merit.
Paying off the loan eliminates anymore interest AND it frees up money to put towards your budget for today.
Bulking up true expenses allows you to smooth out the inevitable ups and downs in the budget. It makes the tight months not as tight. Many call this debt prevention.
If you are struggling funding day-to-day expenses I would be inclined to say pay off the loan. $300 “back” a month is significant. Then use this new found money to fund true expense categories.
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I'm not sure it makes much difference--the car is only at 1.9% interest. So basically I could pay that and cut off a year or so of payments or budget that $3600 and have an extra $300/month essentially pre-funded for a year. I think I am leaning toward paying off the car because YES IT WOULD FEEL AMAZING but also because it will allow me to (maybe, hopefully) pay down the personal loan a little faster once I feel comfortable with my buffer. I just wasn't sure if that was the right choice. Thank you both!
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Also, I do have a three-paycheck month in July so I can use the extra to build up some categories. I just realized that!
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Lavender Sparrow Those three paycheck months are wonderful!
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My inclination would be to pay off the car since that's easily doable and clears up a nice chunk of funds and then use those extra funds to:
1. Cover current expenses fully.
2. Split the leftover between paying down the other loan and building up true expenses.
3. Extra paychecks and such I would probably split between paying off the loan, building up true expenses, and building up an Income For Next Month category to eventually get a month ahead (budgeting all of next month with this month's income).
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Personally my strategy was to free up as much monthly cash as quickly as I could, so I would get that $300 a month back as quickly as possible. Especially if you're monthly income is stretched thin. The extra breathing room and ability to pay more down faster is invaluable to me.
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Welcome to YNAB! I'm glad that you're kicking around the ideas and exploring the options, which is a great way to figure out what works best for you.
I was in a similar situation when my stimulus check came in. I was paying out about $110 towards debt every month, so I took the stimulus check and funded those debt categories. That extra $110 every month has made a HUGE difference in my ability to cover my true expenses, and have enough left over that I can work with things and buy things as I need them.
SO, if giving yourself a $300 raise every month would cover the true expenses, then that sounds like the way to go. Paying down the loan will knock out a chunk of that, but it won't free up any money monthly, so that's probably not the wisest option.
Funding your categories is good, but that will only go so as you can make it stretch funding your categories. Sometimes people struggle if they have money "sitting there" and it causes them to be more likely to spend it, so that is something to consider as well. Would you be tempted if it's sitting there staring you in the face...
Also, I thought I would throw this out there for you. I wrote a 'getting started' guide of things I wish I knew when I began using YNAB, so maybe it will help you a bit, too. https://support.youneedabudget.com/t/h49pm4/far-from-the-usuals-guide-to-getting-started
Feel free to message me with questions or anything, I love helping newbies get started. If I can share anything that helps save someone else some dollars or stress that makes me happy!
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farfromtheusual
Thank you! That was very helpful. I was under the impression that I had to fund everything, including tru expenses, monthly from the get go.
I'm crawling out from a divorce. Because I make quite a bit more than my ex-husband, I bought him out on the house and was required to individually assume a lot of our joint debt. So my mortgage increased by about $500 / month, and suddenly I'm paying that, plus the lion's share of the credit cards (personal loan) on my same income. It's depressing. But as a friend says, divorce is expensive...but so worth it.
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Lavender Sparrow You can only fund as much as you have funds for. So when you run out of money, if you haven't funded all of your monthly expenses until you get paid again, then you just won't be able to pay some things.
The beginning is tricky, particularly when money is VERY tight (which is pretty much how I've lived for the past 4+ years - my income was at or below my necessary expenses). Congrats for crawling out of the divorce, and with YNAB you'll be in a MUCH better position in the long run than without.
And remember - you only need to fund things until you get paid again. That does rely on the fact that you will get paid again, which is a bit of an assumption, but in the beginning it's the only way to survive until you can get to a better place where you're funded further out. So between now and pay day what bills are going to be due? Fund those first. That's why it is helpful to have the due date, and amount (if it's consistent, if it's not, then working with averages is awesome, but takes time to get to that point) in the name of the bill (for example: "Mortgage, 1st, $2000"). Then you know at a glance what needs to be funded between now and the next time you get paid so it's easy to prioritize. Then as you gain extra funds, you can begin adding money to them ahead of time. I've worked up to having an extra mortgage payment sitting in the mortgage fund at all times. So on the 1st when it comes out, next month's payment is waiting.
Hopefully my guide to getting started will help a little bit with a few things to make your life easier. Like I said, I've lived on the edge of that line where there just wasn't enough funding coming in, and had to prioritize what went to added debt on a credit card vs what was paid for a long time. Thanks to the stimulus check I've crawled a little further out from under that line, and so I'm finally able to get more ahead now, but it's very slow going.
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In your situation I would pay off the car loan to free up cash flow, but I would also look at cutting unnecessary expenses as much as possible.
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Lavender Sparrow said:
I had to fund everything, including tru expenses, monthly from the get goGiven that you only have so much income, you should fund things in order of priority (most important first). When TBB is $0, it'll be the less important things that will have to wait. Adjusting the timeframe or scope of discretionary things that do get funded may let you hit some things that are a little lower on the scale.
It does get easier once you get past the "startup phase" on various true expenses. Saving for an annual bill due 2 months after you start YNAB requires a 500% larger contribution compared to being able to spread it over the "full" 12 months. The difference will let you go deeper into the priority scale thereafter.
You might also consider using startup capital, if possible, to jumpstart this "steady-state" condition. In that same example of the annual bill due in 2 months, contributions at the nominal level of 1/12 the amount will only amount to 2/12 (or 1/6) of the total. Putting 10/12 (5/6) of the amount in initially enables the 1/12 contribution level to hit the target.
