Navigating credit cards in YNAB can be a bit tricky, but once you grasp the fundamentals, it becomes much clearer. In this guide, I’ll break down how YNAB handles credit cards, common issues users face, and how a YNAB budget coach can provide personalized support. And explain why there's a picture of planes.
Understanding The Credit Card Flow
Using a credit card in YNAB (and real life!) is like having a layover rather than a nonstop flight for your money. When you make a purchase with cash or a debit card, it’s a direct transaction - one and done, like a nonstop flight. The money leaves your bank account and you’re finished.
However, using a credit card is more like booking a flight with a layover. You start with your purchase (the departure), but the journey isn’t over until you pay the credit card bill (the layover and final destination).
YNAB helps you manage this journey by moving your budgeted money to reflect its new purpose: paying off your credit card.
How YNAB Handles Purchases Made With a Credit Card
When you budget for an expense, in YNAB you're assigning money to a specific category. For example, if you assign $50 for dining out, that money sits in your “Dining Out” category until you make a purchase.
Using a Credit Card:
Make a Purchase: When you buy a $50 meal with your credit card, YNAB deducts the $50 available from your “Dining Out” category.
Money Allocated to Credit Card Payment: In the same action, YNAB moves the $50 used on Dining out to your “Credit Card Payment” category. This ensures the money is set aside to pay your credit card bill when it comes due.
This system ensures that your budgeted funds are ready to cover your credit card expenses, maintaining your budget’s integrity and keeping you on track. See the detailed flow below:
What to Expect in YNAB When You Pay Your Credit Card
When you pay your credit card bill, you’re essentially completing the journey for your money from your initial purchase. Here’s what happens in YNAB:
Payment Transaction: Record the payment from your bank account to your credit card account in YNAB and vice versa. This often needs to be corrected if auto-imported to use the YNAB-generated payment/transfer options from the top of the available payees list.
Money Movement: The money moves from your “Credit Card Payment” category to cover the payment, reflecting that you’ve used the funds. Be sure to check the amount you want to pay is available in this category to avoid going overspent.
This seamless movement helps you stay organized and ensures your budget accurately reflects your spending and payments.
Here's how the flow looks from the YNAB budget screen:
Handling Credit Card Interest, Fees, Cash Back, and Refunds in YNAB
Interest and Fees:
If you incur interest charges, categorize them under a “Credit Card Interest” category. This helps you see the cost of carrying a balance and motivates you to pay off your card in full.
Similar to interest, any fees should be categorized appropriately. For example, an annual fee can go into a “Credit Card Fees” category.
Cash Back Rewards and Returns/Refunds:
When you receive cash back rewards or a refund, those are inflow transactions. You can categorize them as income (Ready To Assign), or directly to a category (i.e. a clothing return back to a clothing category). An inflow transaction on your credit card reduces the amount you owe, so you if you had money set aside in the Credit Card Payment category you can un-assign it from there to free it up for other purposes. To initiate this, categorize the inflow transaction as Ready To Assign. Otherwise, applying the inflow transaction to another category will affect that category's available amount specifically.
Common Issues with Credit Cards in YNAB and How to Address Them
Sometimes people get tripped up as they get used to things or encounter new situations.
1. Confusion About Credit Card Payment Category:
Issue: Users often wonder how this category should be treated since it behaves differently than others.
Explanation: Remember our flight analogy. The money’s purpose has shifted to cover the upcoming bill. It’s a layover before reaching its final destination. You typically only have to assign directly to the credit card payment category when accounting for your initial balance when starting YNAB, paying down debt, or un-assigning for rewards/refunds. If you usually pay your card in full, ensure the amount available in this category matches what YNAB lists as your card balance in the accounts section.
2. Budgeting for Credit Card Expenses:
Issue: Some users don’t budget for credit card expenses, leading to overspending and the potential for debt.
Solution: Always budget for your expenses by assigning money to the category you'll be spending from, even when using a credit card. This ensures you’re spending within your means and prepared to pay off your bill.
3. Handling Credit Card Debt:
Issue: Users with existing credit card debt may struggle to integrate it into YNAB.
Solution: You can create a debt payoff target on the credit card payment category to help guide your payment amounts and assign money directly to the category. Don't forget to account for the interest charge transactions by budgeting for and categorizing them.
4. Understanding Category Assignments, Activity, and Available Amounts:
Issue: Users may get confused about how these terms work in YNAB.
Explanation: “Assigned” is the money you've allocated to that category in that month. “Activity” reflects the transactions mapped to that category that month. You can click the number to show the transactions! “Available” show what’s left to spend after accounting for activity and assignments.
For the credit card payment category, the Activity column is also fed by the other categories when transactions take place, as illustrated by the earlier sequence of pictures, and the Available column represents what you can safely pay towards your card (assuming the rest of your budget is clean).
5. Treating Credit Cards as Extended Purchasing Power:
Issue: Some users view credit cards as a way to extend their purchasing power beyond their budget, and are confronted with this in YNAB by being caught with what to do with the money they have- pay last month's statement or today's expense?
Solution: Remember, credit cards are a payment method, not a source of extra funds and not a bill unto themselves. You might be on the credit card float! Here's how to know and how to stop.
How a YNAB Budget Coach Can Help
Navigating this stuff can be daunting, but as a YNAB budget coach I can offer top notch 1-on-1 support in the following ways:
1. Personalized Guidance:
A coach provides tailored advice based on your unique financial situation. They’ll help you understand YNAB’s credit card functionality and ensure you’re using it effectively.
2. Problem-Solving:
If you’re facing specific issues, a coach can help troubleshoot and provide practical solutions beyond YNAB's own resources. Whether it’s managing credit card debt or clarifying budget behavior, they’re there to assist.
3. Accountability:
Regular check-ins with a coach keeps you accountable and help establish habits. I guide you towards staying on track, suggest adjustments as needed, and celebrate your successes.
4. Education:
A coach can educate you on best practices and advanced techniques. I’ll help you make the most of YNAB’s features and optimize your budgeting process.
5. Support and Encouragement:
Having a coach means you’re not alone on your budgeting journey. I provide support, encouragement, and motivation, helping you achieve your financial goals.
Understanding YNAB’s credit card functionality is crucial for effective budgeting if you have and especially use credit cards. By viewing ongoing usage as a payment method, recognizing how funds get set aside, and managing payments correctly, you can maintain control over your finances and rest easy knowing you're not incurring debt.
If you’re struggling, consider enlisting my help as a YNAB budget coach so you can Budget Better! Check out how we can work together.
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