Newbie with credit card confusion
Folks, I've been using YNAB for just a couple of days. Getting the hang of it, slowly. The part I'm finding most confusing right now is how the credit card allocation goes. I've watched the 20 minute lesson on credit cards and read another tutorial, but something is still eluding me. So, I'm going to provide specific information about my account, and I'm really hoping someone here can help me parse it.
I have a credit card account on which I pay off the statement balance every month. (Yes, I'm one of these floater people. A note about that at the end.*)
The last statement was for the amount $1649.97, which I just paid yesterday and recorded in YNAB.
The current balance on the card is -$1032.40, which is reconciled between YNAB and my actual credit card account.
But the Activity column in my budget shows a budget of -$1423.71. I can't figure out where this is coming from.
I understand that every time I record a credit card transaction, money is taken out of the appropriate envelope -- e.g. Groceries -- and put into the line item for the credit card and that this is the Activity column. But how can the Activity column be more than the actual transactions currently on the card?
Also, I'm confused by the fact that I couldn't budget the amount that I actually paid on the card ($1649.97) which actually put me in the red -- but my bank balance isn't in the red, so why is the budget not reflecting what I actually paid and what's left over? Is that because I'm now essentially budgeting for the NEXT credit card payment?
Thanks for any help on this.
*Incidentally, is it really a good idea to get out of the float by budgeting everything else and paying off the credit card over an extended period? On the rare occasions when I haven't paid off my statement balance, the interest starts rolling in like crazy and it's hard to catch up. Why isn't it a better idea to gradually allocate a bit more than the statement total to the credit card payment? That way there's no interest and you're still paying off the card.
Click on the Activity value and a list of everything contributing to that value will be shown. Purchases will be positive activity to balance the negative activity in the spending category. The amount of cash you hold hasn't changed, so the net effect on the budget must be $0. Since spending is positive activity, payments must be negative activity. The fact the total activity is negative means you made a payment larger than the sum of your expenses.
The Activity is not "more" than the actual transactions on the card. It's less -- by the amount of any payment at the very least, not to mention it's only this month's purchases. Activity and account balance have the opposite polarity on the sign of the number.
Green Nomad said:
Also, I'm confused by the fact that I couldn't budget the amount that I actually paid on the card ($1649.97) which actually put me in the red -- but my bank balance isn't in the red, so why is the budget not reflecting what I actually paid and what's left over?
What do you mean by "put me in the red"? If you mean the TBB is red, that means that you have assigned jobs to more dollars than you actually have. To simplify, say you have $500 and you plan to use that for Groceries, so you budget $500 to groceries, leaving TBB at $0. Then you want to plan to put $200 toward a CC payment (or electric or whatever), so you budget $200 to that category. TBB now shows red -$200 because you can't plan to spend $200 on the CC payment AND $500 on Groceries. You only have $500 total.
This will frequently happen (so much so that they made a Rule about it, #3), and you need to decide which is less important and change the plan (budget) to lower the amount available to that category.
Double-booking yourself is just as bad of an idea in finances as it is in social endeavors. Your spending plan is feasible only when there is no red showing (in TBB or categories).
Green Nomad said:
That way there's no interest and you're still paying off the card.
Personally, I think not paying interest is the smarter approach. Three important facts to understand:
1. YNAB will increase the payment category to cover budgeted purchases. (They should ALL be budgeted.)
2. Anything that you budget to the CC Payment category reduces the float / debt reduction. That is the ONLY way off the float.
3. You are done when the CC Payment category matches the entire account balance (as a positive number). That's the definition of "paid-in-full" status, because you obviously could then pay the account "in full" if you wanted to. (Usually PIF users only pay what's been billed, i.e., the statement balance, and earn interest on the remainder, but some pay the entire account to $0.)
By definition, you cannot afford to pay the statement balance upon receipt because your payment category is lower than the account balance. (The statement balance is the account balance on the closing date.) However, you'll have almost 4 weeks of budgeted purchases before the due date -- which will hopefully sufficiently raise the CC Payment category to enable you to pay the statement balance and avoid interest. Thus, continued use of the card (budget purchases) is critical to riding the float.
When trying to float more than your spending patterns support (or if spending drops off for some reason), you may not get the Payment category high enough by the due date. If you want to avoid interest, you must move funds from elsewhere to make up the difference. On the plus side, doing so is progress toward getting off the float. Failure to increase the Available amount and still paying the statement balance results in a red/overspent payment category -- signaling funds are double-booked (see my earlier post).
In very extreme cases, people will use income that arrives after making the payment to clear that overspending. This is a bit delusional, and they would be wise to acknowledge that planning to use that money elsewhere (in other categories) is silly when they know they always send it to the CC company.
Let me try to give a much simpler example, using my other credit card account -- a store credit card on which I make only occasional purchases.
The opening balance for this card (earlier this month) was $74.67.(entered under outflow).
I made one purchase of supplements for $4.16.
Then I paid the credit card statement balance, which was the same as the opening balance -- $74.64.
These are all the transactions currently on this card.
I've allocated enough money in my supplements budget to cover the other supplements I bought with a different credit card, and also the one for $4.16 on this card.
The line item for this card in my budget shows 0 for budget, -$70.51 for activity and -$70.51 in the available column (which is red).
I don't understand why my activity is so much since my actual outstanding balance after my payment is only $4.16. When I look at the summary for the activity it shows that the -$70.51 activity is made up of +$4.16 budgeted expense and -$74.67 payment. So, the payment is driving me deeper into the hole with the credit card?
I've been using YNAB for about four years now and it took me ages to wrap my head around the way credit card balances and payments work in the current YNAB product. But trust me when I say you'll have a lightbulb moment at some point and it will all make sense!
Here's how I see it ...
When you first set up your credit card account consider this to be... "Stuff that I bought in the past and did not budget for"... ('cos you racked up debt in credit card form 😉).
You could consider the whole opening balance on your credit card as a single item of "OLD STUFF". Which you now need to budget for. Retrospectively.
As well budgeting for any NEW STUFF as you buy it (or before you buy it - no more of this retrospective budgeting stuff, OK?). That's where the term Budgeted Spending comes in.
So YNAB will automatically allocate the money you've budgeted for the NEW STUFF you've bought on the credit card as payment funds. That makes sense, yeah?
But what about that OLD STUFF you bought? If you're paying in full the entire opening balance of OLD STUFF, you need to budget for that entire opening balance amount. Only in this way will YNAB consider you've covered the cost of OLD STUFF and NEW STUFF.
Then when you make a transfer from your savings account to your credit card account (the total of OLD STUFF and NEW STUFF - aka Available Payment amount) will you see the balance in your credit card as zero, and the Available Payment zero.
Hope this helps!
Green Nomad said:
if the credit card expenses are being transferred from other categories that have been budgeted for, why would I need to add a separate budget to the credit card line item?
Not all CC expenses are being transferred (as evidenced by a difference in the top two rows of the Activity detail). If you don't correct that this month, you would need to budget toward the CC category to allow for a larger payment later.
The most common reason is to budget directly to the CC category is to reserve money to pay off the starting balance. None of those purchases moved money because they were made before starting to use YNAB.
There are other situations where you would need to adjust the category as well: purchase reward credit and some approaches to reimbursement are the most common.
Green Nomad said:
So, the total balance on the card -- actual balance -- isn't shown anywhere in the budget, line items?
Correct. The entire budget is the plan for all of your CASH. It has nothing to do with the CC account balance directly. Now, some of that cash may be earmarked to send to the CC (the contents of the CC Payment category), but the amount is up to you to arrange/verify. Exactly as with any category.
YNAB will only arrange for money to be there for budgeted purchases. You have to explicitly arrange (budget for) funds to pay off the opening balance or past month overspending.