Stick to $0 to be budgeted or pay-off debt and be in the red?
We're 15 days into our YNAB journey and we've got about $10k in credit card debt. We're about 10 days away from starting to pay interest on it.
Right now I've got two options. Put $4k towards it (because I have that in my bank account and have worked out cashflow) or do I only put $1k on it because that's all I have in "to be budgeted" in YNAB?
The reason why I'm asking is that I really want to work at this 'get ahead' concept and only spend money I have, but it will delay paying off the card by about a month and result in interest charges.
What would you do?
Honestly, I have learned this lesson so many times the hard way. Last March/April we were in a similar predicament. I am so thankful that I didn't pay the credit card all at once as usual because life changed on a dime. I had just started the YNAB Bootcamp and decided to follow their advice and keep budgeting for future expenses. I didn't want to incur any more debt so I bit the bullet and figured I would begin paying interest on the card. I set up a minimum payment plan in the budget, then found a CC with no transfer fee and no interest for 15 months. I transferred as much as I could to that card and then as our situation turned for the better, started throwing money toward the old card. By taking things slow, we have significantly increased the amount of money in our checking account, prevented more debt and have almost completely paid off the zero interest card as well as the original one. In fact, I could pay off the zero interest card but I am forcing myself to pay it off $132.50 a month to teach myself the lesson to plan for the future first. We also went from Age of Money 10 days to 52 days in 8 months.
I understand the temptation to send as much money to the credit card company as you can so that you reduce your overall interest payments.
You've said that you've worked out the cash flow. I assume you realise that this means you will have to keep using the credit card for spending because you no longer have cash in the bank? The only spending capacity you have is on the credit card you are trying to pay off. By the time next month comes around and you need to pay the next credit card bill, you'll be in exactly the same position.
It's much cleaner to only budget to the credit card payment category what you can afford after you have loaded up your other categories with what you need for the month. This may mean sending less to the card company and incurring more interest but it will be real.
What you are proposing to do is a form of "riding the credit card float". Search the forums on that topic and you will find lots of opinions and advice!!
I'm not saying you definitely shouldn't do it (although YNAB purists will be horrified!!) but you need to be aware that you are creating fake money in YNAB and you need to carefully manage cash flow every month.
If all you have available in your TBB is $1000 for that credit card, then that's your answer if you want to prevent more debt. Having $4k in your bank account is not the same as having $4k available to spend. Please read and re-read that last sentence multiple times.
If you know your interest rate, what will that interest charge actually be if you delay in paying that card off by a month? Is it really so high a fee that it's worth draining $4k from your liquid funds in order to pay it off? With the information you've provided here, that doesn't sound like it's the case. Especially if you have to turn right back around and use the credit card until you receive new income because you no longer have cash on hand for your monthly expenses...
Sometimes you have to incur a bit of interest to smooth our your financial future. It sounds like you are working towards a couple of goals, and getting ahead and paying off the debt are two of them. They don't have to be mutually exclusive.
Personally, having done what you're contemplating in my own past - I regretted it almost immediately. If you have the $1k, I'd send it as the payment - that is still a significant amount to reduce! You can always look at some lower priority categories (i.e. "wants" not "needs") and move those funds to your credit card payment category to make a larger payment, but I would advise against draining your account and leaving the rest of your budget in the red.
For the sake of clarity, you may wish to ride the float on a different credit card up to a maximum of one month behind. All CC purchases are put on this card, and the payment category for this one will go to $0 after you pay the STATEMENT balance. It is very obvious if you are slipping. That's ALWAYS the danger when riding the float. You also develop the good habits since ALL purchases are budgeted purchases (otherwise, you'd be slipping).
Initially, an entire month's worth of budgeted purchases can be reallocated from this "float" card to the card with the larger debt. Interest will be incurred on whatever balance remains. Budget as you are able toward the debt card and make the payments for the entire available amount until it's at $0. The switch to budgeting to the float card until that's at paid-in-full status.
With this approach, all categories (and TBB) are non-negative, meaning you're not missing any money out of other categories. The bit of interest you pay is the price of clarity and avoidance of cash-flow issues.
Thanks to everyone who replied.
I talked to my wife last night and we both agreed we're all in and doing the TBB amount and live with a bit of interest (it should only be around $100 over a month or two) and get ahead.
Getting ahead won't take long, we've just had some big expenses in the last few months which has grown the debt, in the last two weeks with YNAB we've actually reduced our spending by about 40%.
I asked for this feedback on here because as you can imagine breaking a cycle of money in - pay off card after doing it for so long is a very different approach. I was happy my wife was keen to do what felt right too, we're committed to this!