If you use a credit card, tell me if this spending pattern sounds familiar: You buy things with your card, then wait for your next paycheck to be able to pay it off. Or, you receive your credit card statement and spend the next ~30 days accumulating money to pay it, all while continuing to spend as usual and adding to your balance.
Buy Now, Pay Later
Why is this a problem? You may be successfully avoiding interest fees, so it doesn't feel like an issue. But what's happening is you're constantly using credit to float yourself buying power until you get the money. This cycle leaves you at risk that could easily plunge you (further) into debt. In the riskiest of scenarios, you could be waiting on money that you'll be paid next month to pay off purchases made on credit last month. Where does that leave you for the current month? What if something unexpected happens?
The Credit Card Float Got Us, Too
We were in this position before using YNAB. It started off fine- we'd always be able to earn enough to pay off the full balance we'd accrued that month even though it drained our account for a while. Then, things would pop up (as they always do) or we'd overspend what we estimated. Well, now we couldn't pay off the full balance...but it was alright because we could still cover the statement balance and successfully avoid interest. Our head remained above water, but the waves were coming.
The holidays came around (as they do every year), and we hadn't really been able to set money aside for them because we were always trying to ensure we could pay our statement balance, and efforts to spend less were sabotaged by a car repair or something. That's okay, we'll just spend less next month to make up for it, we thought. Except it didn't happen. And eventually we couldn't make our statement balance. We couldn't out-earn the problem. A portion of the balance carried over, and the interest charge came. The water was now over our head.
The cycle of cashflow we had gotten ourselves into had us trapped. We were essentially living a month behind and not only was it proving difficult to recover, but falling further. To be clear, there isn't a problem with credit cards- we still use them today for as much of our spending as possible (rewards!). The issue was that as soon as we could no longer make the choice of paying for a purchase with cash or credit, that was when we were actually in debt but we refused to see it that way because for so long we had avoided paying interest. This interest avoidance not only swept the problem under the rug, but also shackled us to a singular set of actions (direct all money to the credit card) at the cost of being able to do other important things such as saving for those one-off or "unexpected" expenses, let alone fun things to we wanted to build towards like vacations and home remodeling.
A Healthier Cashflow Habit
YNAB clued us into this problem, but it was rough at first. You see, with YNAB we're wanting to live cash forward instead of behind. That means we not only estimate what our monthly outlay will be, but we actually have the cash available to dedicate to those things as we go. It shifts how we use our credit card from floating our ability to spend until we get the cash to using it essentially like a debit card (albeit one that protects against fraud and gives you points). Using it like a debit card means that each purchase is backed by cash available so you can pay off the card at any time you choose without having to wait for the cash to come in. Getting totally off the float meant being able to do that and also having enough cash left over for the rest of the month's anticipated spending needs.
In YNAB, you'll feel this pain if you pay your credit card and then you're left with zilch in your account. You can't live cash forward in that scenario, and you rely on credit. So there was lots of red and orange in our YNAB budget as indications of this systemic problem we had.
The solution for us was to bring over money from our savings to 1) get our existing credit card balance equal to funds available, plus 2) add more funds to our spending categories for upcoming expenditures so each subsequent credit purchase would already be associated with available funds to pay the card when ready.
Credit cards allow us to promise money without yet having to part with it; but if we can set that money aside as we go, we're able to pretend it's already gone. This keeps the proverbial water at a much more manageable depth to not only allow us the flexibility to change our financial actions and plans if needed but also less stress and energy spent worrying about being able to make our next payment. By using YNAB, we were able to see more easily how to enable this and the impact in our budget without having to keep track of it in our head as we looked at our bank account.
How To Stop Riding The Credit Card Float
The solution isn't always as simple or easy for everyone. We were fortunate to have savings available to use (more on the purpose of savings in another post!) to get us out of that hole without it further perpetuating itself and get on a better track budgeting with YNAB, but that may not be a possibility for others . So how else can you break the cycle of dependency that is the credit card float? Here's some additional options you can employ (or combine!), all of which include some amount of pain but will help you get to where you want to be:
Reduce your spending. Depending on how much you're able to cut back, this is a "slowly-but-surely" approach. The effect of not spending as much will mean you eventually have more and more of each paycheck leftover to use towards getting ahead.
Stop using the credit card for now. This will force you to acclimate towards the mindset of parting with your cash immediately with each purchase, but could be difficult to enact depending on your current circumstances.
Don't pay the credit card in full. This means paying some interest in the short term but what it will immediately provide is the ability to build up cash in your account to dedicate towards upcoming spending. Set aside the minimum payment, then as you're able to get your other categories funded you can decide how you want to chip away at the rest of the balance.
You Need a Budget, and I'm a Budget Coach!
It can feel unsettling, but if you're like us you'll eventually find that something has to change. YNAB has redefined for us what it means to budget. Certified through YNAB, Budget Better is here to help coach and guide you through it, answer questions, and support your budgeting journey as you strive to be more in charge of your financial life that facilitates how to better enjoy your actual life. Schedule your free intro call with me today and we'll talk about how to make it happen!