YNAB You Need A Budget

[heantune]

Just starting to use YNAB 3 as of yesterday. I have read the manual and watched a number of the videos and I think that I understand what I need to do. However, I would like to run a few things past more experienced users to confirm that my setup and thinking is correct before I get too far down the tracks.

Here's an example to illustrate my initial setup and thoughts. (Note: all credit cards are paid off in full each month)

Accounts
1. Visa: current balance $3,000, of which $2,000 is on statement to be paid 3/7, the remaining amount plus any new charges 4/7.
2. Mastercard: current balance $2,000, of which $1,000 is on statement to be paid 3/18, the remaining amount plus new charges 4/18.
3. Current Account: $5,250

Next paychecks on 3/15 and 3/30, etc.

Now to the YNAB 3 setup
1. Three accounts - Current, Visa and Master Card
2. Opening balances for Visa and Master Card are categorized as Income current month, amounts as given above.
3. Current account $5250, next paycheck on 3/15

Amount available to budget for March is: 5250 - 3000 - 2000 = $250

Now I come to budget for the first two weeks of March, until the next paycheck. Say I have bills for $1000 to be paid in the first two weeks. I enter the budget amounts and there are a lot of red numbers. Now I have read a lot about how I should budget everything down to 0, but if I do that then I have hardly covered anything (i.e. $250 out of $1000 of bills.)

So, what is recommended practice here...... let them go negative while I get up to speed through March and into April after which it should all work out, or handle the initial setup of the cards differently? It feels slightly wrong to just start off with a bunch of red numbers

In real reality there is no short term cash flow issue here as the money to pay the actual bills and credit card statements will be in the account at the right time.

Any thoughts or comments are appreciated greatly, thanks
H

[malisab]

So, what is recommended practice here...... let them go negative while I get up to speed through March and into April after which it should all work out, or handle the initial setup of the cards differently? It feels slightly wrong to just start off with a bunch of red numbers

In real reality there is no short term cash flow issue here as the money to pay the actual bills and credit card statements will be in the account at the right time.

Welcome, it sounds like you've got a good grasp of the nuts and bolts of YNAB thus far. The set up sounds good.

In regards to the cashflow and the negative numbers, there's a philosophical difference with when the money is 'spent' between your current thinking and YNAB's rules. That's why there are all the red numbers. You're living off NEXT month's income, not this month's, and not last month's (I think...I'm sure someone will come behind me and tell me if I'm off.) You've spent money in February that you will not be able to repay until April. This is what you've been doing, you've been comfortable (maybe? don't know what brought you to YNAB), and you can decide if you want to continue to operate in the same manner. But it's counter to YNAB's rules (which is not to say that YNAB won't work for you).

Rule 1 - Stop living paycheck to paycheck. The idea is to have the money in your checking account (or somewhere as a 'black' number') to budget for all your expenses for a month at the beginning of the month. Right now, you've got $250 when it appears that your monthly expenses for things charged are in the thousands of dollars a month (don't know if that's for EVERYTHNG...if you pay your bills etc. via CC to get rewards and/or take advantage of the grace period/float) and possibly other expenses as well. If something unforeseeable were to happen and you didn't get a paycheck for some reason (administrative error, job loss, salary reduction), you'd be up a creek.

Rule 2 - Give every dollar a job. Someone's going to have to jump in here and help figure out what to do in your situation. Before your next paycheck, you have $2000 on Visa to repay, so I guess you could budget knowing that before your next paycheck you really have $3250 to work with, but you will be living with negative numbers regularly if you choose to do this. Someone may be able to suggest a workaround, but the negative numbers do adequately reflect where you are. So you'd have to decide which way you're more comfortable...making things 'prettier', or living with red.

Rule 3 - Save for a rainy day. I'm thinking that your remaining available credit is your saving for a rainy day. I know mine was for YEARS (and still is to a degree...but now it's a couple paid off credit cards...it would have been more but Chase has lowered my limit a couple times...I can't wait to not be beholden to them!) You didn't mention what your goals were in seeking out YNAB. I know that my goals when I found it last summer were not the same as they are now. I'm much more ambitious with my financial goals now than I was then. What you choose to do with rule 3 categories will depend on how you choose to move forward. (Do you want to start setting aside money for irregular expenses so that they don't create larger red numbers when they inevitably arrive? etc.)

I'll leave off rule 4, I've rambled long enough.

Welcome. Keep tossing things around here. It's a great bunch of folks.

[heantune]

In regards to the cashflow and the negative numbers, there's a philosophical difference with when the money is 'spent' between your current thinking and YNAB's rules. That's why there are all the red numbers. You're living off NEXT month's income, not this month's, and not last month's (I think...

Interesting... "living off next month's income", I had not been looking at it like that, but that sounds about right. The YNAB principles resonate with me, I operated my finances with a healthy buffer for many, many years without knowing about YNAB. But over the last couple of years I have drifted away from that (new house, lots of spending to get it how we like it, unexpected costs related to that) to where we are now. It "works" at the moment, but we have no idea what we spend, or what we can really afford long term. One mid size to large mishap/issue, and we are up to the edge of disaster..... , maybe over it, this makes me nervous.

My task is to get this under control, so that I know what we spend, and what we are able to spend so that we spend less than we earn, and we have reserves to handle the future.

So any advice is greatly appreciated, especially on implementing Rule 2 over the next month.

Thanks
H

[malisab]

Which resonates with you more, living with red/negatives, or doing more work to find a way to make them go away while you work out of them?

[Patzer]

Here's an example to illustrate my initial setup and thoughts. (Note: all credit cards are paid off in full each month)

Accounts
1. Visa: current balance $3,000, of which $2,000 is on statement to be paid 3/7, the remaining amount plus any new charges 4/7.
2. Mastercard: current balance $2,000, of which $1,000 is on statement to be paid 3/18, the remaining amount plus new charges 4/18.
3. Current Account: $5,250

Next paychecks on 3/15 and 3/30, etc.

Now to the YNAB 3 setup
1. Three accounts - Current, Visa and Master Card
2. Opening balances for Visa and Master Card are categorized as Income current month, amounts as given above.
3. Current account $5250, next paycheck on 3/15

Amount available to budget for March is: 5250 - 3000 - 2000 = $250

Now I come to budget for the first two weeks of March, until the next paycheck. Say I have bills for $1000 to be paid in the first two weeks. I enter the budget amounts and there are a lot of red numbers. Now I have read a lot about how I should budget everything down to 0, but if I do that then I have hardly covered anything (i.e. $250 out of $1000 of bills.)

What this is showing you is that you have already spent $5000 or the $5250 that you have. You hadn't noticed because $5000 of what you've already spent doesn't have to leave your custody just yet. But if something happened to disrupt your future income stream, you'd be in credit card debt instantly, even without spending another penny.

So, what to do about it? From a practical perspective, you want to spend less than you earn for some period of time in order to build a buffer. But right now, you need to use some of the cash that isn't really yours to pay bills, then use cash that you don't yet have to pay for the spending you've already done on the credit cards. That's pretty much what you've been doing so far. But since you want to operate more conservatively, you need a plan to limit and reduce how much you rely on credit card float to run your monthly finances.

Here's a thought for consideration: How about creating a budget category for credit card float? Disable Rule 4 on it, so negative balances will carry forward. Given the numbers shown above, I'd budget -$2000 to it representing the amount currently on the cards that you don't need to pay until April. That will give you breathing room in the budget to live paycheck to paycheck, subject to the need to keep rolling over the credit card float. Work with the resulting $2250 Available, budgeting the $1000 of bills that you have to pay plus whatever normal budgeted spending you expect to have until the next paycheck in mid-March. When the next paycheck arrives on 3/15, enter it as Income:Budgeted This Month, and budget out to the end of March.

The way you get out of the float trap is, you try to budget less than your paycheck (or the initial $2250) to your real budget expenses, and budget whatever is left to the Credit Card Float category. When the Float category gets up to zero, you are no longer dependent on the float to live from month to month. What that means is, if the card issuers changed terms and conditions to your detriment, you could simply pay off the cards and stop using them. From the perspective of what terms and conditions you get on your credit cards, this allows you to negotiate from a position of strength. If a card issuer offers you terms and conditions you don't like, you can switch to a competing card. If all card issuers offer only terms and conditions you don't like, you can simply stop using all the cards and pay with cash, check, or debit.

Once you're out of the float trap, you follow the same financial discipline to build a month's worth of buffer. The only thing that changes is the budget treatment of leftover dollars. Instead of budgeting them to the Float category, you would adjust how you enter your paycheck to a split with the part you need now recorded as Income:Budgeted This Month and the part you don't need yet recorded as Income:Budgeted Next Month. The idea is to be able to budget less than you earn each month, so the split gets shifted more and more toward Income:Budgeted Next Month. When you get to where all of your paycheck is recorded as Income:Budgeted Next Month, you have your buffer.

Patzer

[heantune]

Which resonates with you more, living with red/negatives, or doing more work to find a way to make them go away while you work out of them?

Eliminating the negatives!!!

[malisab]

Which resonates with you more, living with red/negatives, or doing more work to find a way to make them go away while you work out of them?

Eliminating the negatives!!!

Looks like Patzer's got you covered. What a great idea! I had to read it a few times to 'get' it. The negative on the $2000 to budget on the credit card float got by me the first time, but that will get you some money to budget and less negatives. Hopefully, moving forward, there will be less and less.

[heantune]

Patzer,

Thanks for taking the time to craft such a thoughtful and detailed response. I will set this up and see how it goes.

H

[adajmk]

Here's an example to illustrate my initial setup and thoughts. (Note: all credit cards are paid off in full each month)

Accounts
1. Visa: current balance $3,000, of which $2,000 is on statement to be paid 3/7, the remaining amount plus any new charges 4/7.
2. Mastercard: current balance $2,000, of which $1,000 is on statement to be paid 3/18, the remaining amount plus new charges 4/18.
3. Current Account: $5,250

Next paychecks on 3/15 and 3/30, etc.

Now to the YNAB 3 setup
1. Three accounts - Current, Visa and Master Card
2. Opening balances for Visa and Master Card are categorized as Income current month, amounts as given above.
3. Current account $5250, next paycheck on 3/15

Amount available to budget for March is: 5250 - 3000 - 2000 = $250

I just started Ynab in February and had a similar situation with several credit cards. Although we paid off our credit cards in full each month, we definitely tried to use the credit card float each month. Like you, we got to a point that we were taking on so much water that we weren't floating as much. Enter YNAB. Here is how I handled our previous off-budget credit card charges (everything prior to the month we started YNAB):

First I figured out what portion of our credit card balances were due that month. It sounds like you already know this number - Visa = $2,000; Mastercard = $1,000. We then budgeted those amounts in our credit card amounts on the first day of the month we started YNAB (this February) as "income available this month." This worked fine because (like you) we started Ynab on the first day of a new month.

Then we separately budgeted the remaining portions of the credit cards that were due the following month as "Income available Next month" because that is when those charges are actually due. For you that would be the remaining $1,000 on both the Visa and Mastercard. Since you are starting YNAB on the first day of the month, you would then keep all future purchases "On Budget."

This allowed us to use (but not abuse) the float one last time. We are now starting our second month with YNAB with a negative "Income available this month" because of the floating credit card charges. But this method did help us minimize the freak out factor for the wife and I because of the big negative numbers that first month we started YNAB.

Not saying this is better than Patzer's method. In fact, given the time Patzer has spent on these issues, his method is probably better, but I just figured I would put another option out there for you.

BTW - as a new YNAB-er, I would highly recommend spending some time on the forums, reading the journals (especially Patzer's) and taking advantage of the online classes that Erin gives. They are all excellent resources.

Good luck!

[Patzer]

First I figured out what portion of our credit card balances were due that month. It sounds like you already know this number - Visa = $2,000; Mastercard = $1,000. We then budgeted those amounts in our credit card amounts on the first day of the month we started YNAB (this February) as "income available this month." This worked fine because (like you) we started Ynab on the first day of a new month.

Then we separately budgeted the remaining portions of the credit cards that were due the following month as "Income available Next month" because that is when those charges are actually due. For you that would be the remaining $1,000 on both the Visa and Mastercard. Since you are starting YNAB on the first day of the month, you would then keep all future purchases "On Budget."

That should work fine if you can catch up by the second month. It also has the advantage of working even in YNAB Pro; the idea I laid out depends on YNAB 3's function of suspending Rule 4 for a specific category.

Not saying this is better than Patzer's method. In fact, given the time Patzer has spent on these issues, his method is probably better, but I just figured I would put another option out there for you.

Yours is cleaner if the float can be cleared up quickly, because you aren't left with a Float category that you won't need in the future. Mine is better if you need to take several months to work your way out of depending on the float.

To be fair, the idea I laid out isn't solely mine. If Erin, Jesse, or Taylor look at it, they will clearly see how it is related to a credit card system they worked on for adding On Budget/Off Budget software support to YNAB 3. That system didn't make it into the first release of YNAB 3, but the original poster's situation seemed a natural for this type of solution.

Patzer

[adajmk]

Not saying this is better than Patzer's method. In fact, given the time Patzer has spent on these issues, his method is probably better, but I just figured I would put another option out there for you.

Yours is cleaner if the float can be cleared up quickly, because you aren't left with a Float category that you won't need in the future. Mine is better if you need to take several months to work your way out of depending on the float.

Patzer

We handled the first month, but it's not a lot of fun starting the second month with a large red negative number as our buffer. It hasn't been pretty so far, but we are on track to clean up the previous credit card usage during this second month. The best thing is that my wife and I are already starting to think about our money and our finances differently. Now when the wife says "should I pay credit or cash," I am happy to say that it doesn't matter, provided that the purchase is all part of our plan!

That is the beauty of YNAB - it forces you to face your true financial situation and start living on what you earn rather than using financial gimmicks to mask the amount of money you spend.

H - Sorry to hijack your thread, but I hope these comments have been helpful.

[Blue Moon]

I'm new to YNAB (Actually, I'm so new that I'm doing research now, planning how to set up my account when I purchase it in the next few weeks) and I had similar questions regarding credit cards. We do use credit cards monthly for the cash rewards. We spend them for everything we can (utilities included), but we don't make purchases frivolously and we pay off the balance each month. I've always said that the credit cards go, if there ever comes a time when we can't make the payment. The cash rewards pay off Christmas completely, so I intend to continue using them. I have a three months emergency fund, as well, so I'm not living month to month. You're probably asking, "What am I doing with YNAB?" I'm not perfect and I know there are holes in my budget that need plugging. Plus, I'm always open to learning how to improve my financial situation and from what I know, I think YNAB is a great program. Given that information about my plan to continue using credit cards, with no plan to stop, how do I set that up?

[Mudie]

Hi yeartym, welcome to YNAB and the forums.

Given that information about my plan to continue using credit cards, with no plan to stop, how do I set that up?

The short answer is check out the CC videos on the tutorial page here: http://www.youneedabudget.com/support/tutorials/
As well as consider taking the online CC class that you can sign up for here: http://www.youneedabudget.com/support/ynab-coaching/

Aside from that I'll let others fill in the blanks with what worked best for them but may not exactly be covered in the two offerings above.