YNAB You Need A Budget

[malisab]

I hadn't given this sort of thing much thought until recently. I'm now trying to fine-tune my payments so as to make the most interest and pay the least interest.

I've long enjoyed that I can sit down and pay all my monthly bills at once, but now I'm realizing that it's not necessarily in my best interest to do so. I'm sure there are people on here that have this down to a science. I have had my house, car and student loan payments due near the beginning of the month. I got my credit cards set up so that they were all due around the middle of the month. The utility-type bills, I've never even tried to maneuver them around. And while I've never been very behind on them, I've often paid the ones due near the end of the month at the beginning of the following month. It just worked out better for me when I used to send checks and I carried that on with me when I started paying everything online. But the fact that I now want to NOT be behind on anything, even a few days, has led me to 'get ahead' on those. The other thing that has made this more apparent and easy for me is the way that ING 'receives' most of these bills for me and I can just click to send it when it's due. I can "pay" the bill when I get it and they'll "send it" at the appropriate time for that particular obligation. So I can still sit down and "pay my bills" on the first, but the cable payment doesn't go out until the 21st and the phone payment doesn't go out until the 27th. So piddly as it is, I'm getting interest during that time period when I would have normally either paid those both behind a few days (so technically, I could have been earning more money the old way) or paid them the beginning of the month because that's when it was easy for me.

Here's my thinking...PLEASE tell me whether I'm right or wrong.

House payment, car payment, student loans: (I think of these as amortization-schedule-type loans.)These I'm best paying as much as I can as soon as I can because the amount of interest is charged based on the balance at whatever time is specified. Balance goes down sooner, interest is calculated on a lower amount.

Credit cards: (Revolving credit.) Same as above, but I think of it separately in my mind.

Utilities: (in the broad sense) Gas, electric, phone, cell, cable...probably forgetting a few...not looking at my budget. These are expenses that aren't based on when you pay, so best to wait until the last day possible.

I've read about bi-weekly mortgage payments and I get that if your balance goes down sooner your interest will be calculated on that lower amount. I've thought that that doesn't really make sense in my situation because I get paid near the end of the month and pay bills near the beginning of the following month. It wouldn't make sense to delay half a payment to make it bi weekly. That would mostly be of benefit to people who get paid throughout the month and/or those who have end up with the occasional 3 paycheck month. Right? I can't see how it would be a good thing in my book, other than you'd end up paying an extra payment here and there because the bi-weekly-ness of it creates some 3 house payment months too that way. Sure it would be nice to give the mortgage company an extra 1/2 mortgage payment every three months, but that's what it amounts to, right? (other than the already mentioned benefit of paying more smaller amounts faster and therefore lowering the balance on which the interest is calculated faster).

TIA

[Patzer]

House payment, car payment, student loans: (I think of these as amortization-schedule-type loans.)These I'm best paying as much as I can as soon as I can because the amount of interest is charged based on the balance at whatever time is specified. Balance goes down sooner, interest is calculated on a lower amount.

Correct for the car, probably correct for the student loans, probably incorrect for the mortgage. Car loans and probably student loans work the way you're thinking. Mortgages in the US typically calculate a month's worth of interest no matter which day your payment is received, as long as you aren't late. The exception was when I made the final payment to retire the mortgage; for that one payment, they figured interest to the day the payment was received.

Credit cards: (Revolving credit.)

Interest is computed based on average daily balance. Paying earlier helps you, but making bigger payments helps you more. This is subject to the warning that you still need to make at least the minimum payment in each bill cycle. There have been people hit with late payment fees because the payment was too early, resulting in two payments during one bill cycle and no payments the following bill cycle.

Utilities: (in the broad sense) Gas, electric, phone, cell, cable...probably forgetting a few...not looking at my budget. These are expenses that aren't based on when you pay, so best to wait until the last day possible.

Correct. You might want to leave yourself an extra day or two in case something is slower than expected, but there's no need to pay two weeks early.

I've read about bi-weekly mortgage payments and I get that if your balance goes down sooner your interest will be calculated on that lower amount. I've thought that that doesn't really make sense in my situation because I get paid near the end of the month and pay bills near the beginning of the following month. I

I don't know whether bi-weekly mortgages calculate interest bi-weekly instead of monthly like traditional mortgages, calculate it daily like credit cards, or still calculate it monthly like traditional mortgage. I've run the analysis based on interest calculated daily for a variety of interest rates. The bottom line (assuming daily interest calculation) is that paying earlier helps a little, but the major driver is that you end up making 13 months of payments during the course of a year. If the bi-weekly program charges a small fee to be set up, you're better off just paying extra principal with your regular monthly mortgage payment. But if you still have credit card debt, paying extra on the cards helps you more than paying extra on the mortgage.

Patzer

[malisab]

House payment, car payment, student loans: (I think of these as amortization-schedule-type loans.)These I'm best paying as much as I can as soon as I can because the amount of interest is charged based on the balance at whatever time is specified. Balance goes down sooner, interest is calculated on a lower amount.

Correct for the car, probably correct for the student loans, probably incorrect for the mortgage. Car loans and probably student loans work the way you're thinking. Mortgages in the US typically calculate a month's worth of interest no matter which day your payment is received, as long as you aren't late. The exception was when I made the final payment to retire the mortgage; for that one payment, they figured interest to the day the payment was received.

Interesting.

So car payment, send out on the 1st. Student loan auto debits on the 10th to save 1/4% interest, but when I 'graduate' to giving that extra money...the sooner the better.

Home loan is due on the 1st, late on the 16th. No financial benefit to rush to pay on the 1st. I wouldn't flirt with being late, but being the biggest payment, I could hold on to it for a few more days.

Credit cards: (Revolving credit.)

Interest is computed based on average daily balance. Paying earlier helps you, but making bigger payments helps you more. This is subject to the warning that you still need to make at least the minimum payment in each bill cycle. There have been people hit with late payment fees because the payment was too early, resulting in two payments during one bill cycle and no payments the following bill cycle.

The few that are left all close the cycle on the 21st - 25th and are due the in the teens. Paying on or around the first is good.

Utilities: (in the broad sense) Gas, electric, phone, cell, cable...probably forgetting a few...not looking at my budget. These are expenses that aren't based on when you pay, so best to wait until the last day possible.

Correct. You might want to leave yourself an extra day or two in case something is slower than expected, but there's no need to pay two weeks early.

Right.

I've read about bi-weekly mortgage payments and I get that if your balance goes down sooner your interest will be calculated on that lower amount. I've thought that that doesn't really make sense in my situation because I get paid near the end of the month and pay bills near the beginning of the following month. I

I don't know whether bi-weekly mortgages calculate interest bi-weekly instead of monthly like traditional mortgages, calculate it daily like credit cards, or still calculate it monthly like traditional mortgage. I've run the analysis based on interest calculated daily for a variety of interest rates. The bottom line (assuming daily interest calculation) is that paying earlier helps a little, but the major driver is that you end up making 13 months of payments during the course of a year. If the bi-weekly program charges a small fee to be set up, you're better off just paying extra principal with your regular monthly mortgage payment. But if you still have credit card debt, paying extra on the cards helps you more than paying extra on the mortgage.

Patzer

Understood. I've got a long way to go before I start paying extra on the mortgage. The exception being that I hope to refinance at a (substantially) lower rate and keep paying the same amount I've been paying. I know at that point if I still have credit card debt (and a car payment and student loans) that the most financially beneficial thing to do is throw it at those, but for psychological reasons I may choose to do it differently. If I continue to have the focus I've had on financial matters, maybe I'll feel okay that I can just put the difference into a snowball in the most financially logical matter, but if I'm at all questioning my focus/responsibility, better to pay it towards the mortgage than bright and shiny things I probably don't need.

Thanks so much for 'talking this through' with me. I hope it benefits others too.

[malisab]

Credit cards: (Revolving credit.)

Interest is computed based on average daily balance. Paying earlier helps you, but making bigger payments helps you more. This is subject to the warning that you still need to make at least the minimum payment in each bill cycle. There have been people hit with late payment fees because the payment was too early, resulting in two payments during one bill cycle and no payments the following bill cycle.

As I was rearranging the dates that my bills are paid, I realized that there's a caveat to this.

If it's an old debt being paid down, you pay it ASAP to keep the average daily balance down.

If it's a paid-in-full each month card, you pay it close to the due date, right?

[J.Mann]

Credit cards: (Revolving credit.)

Interest is computed based on average daily balance. Paying earlier helps you, but making bigger payments helps you more. This is subject to the warning that you still need to make at least the minimum payment in each bill cycle. There have been people hit with late payment fees because the payment was too early, resulting in two payments during one bill cycle and no payments the following bill cycle.

As I was rearranging the dates that my bills are paid, I realized that there's a caveat to this.

If it's an old debt being paid down, you pay it ASAP to keep the average daily balance down.

If it's a paid-in-full each month card, you pay it close to the due date, right?

correct.

I have my paid-in-full cards setup with their website to where they are automatically paid in full on the due date, and I don't have to worry about it. Since I categorize the transactions in YNAB, the money is there, and when they pull it out on the due date, is when I quit earning extra interest.

[malisab]

I have my paid-in-full cards setup with their website to where they are automatically paid in full on the due date, and I don't have to worry about it. Since I categorize the transactions in YNAB, the money is there, and when they pull it out on the due date, is when I quit earning extra interest.

Thanks.

I used to do that before things got out of control. I aspire to get back to that.

[princessschreffler]

If mortgage is due on the 1st, even if they don't charge extra until the 18th, I would STILL pay by the 1st. 1) Its good will when something inevitably happens and a payment gets there late "Oh, I see your payment is always here on time, I believe you this was totally out of your hands" and 2) it gives them no excuse -- when your paymet is late, it is late. Even if there is no penalty yet, it is still a late payment. And having a history of late payments can bite you when it comes to house stuff.

[xraymd]

The CC is at 14%, the cars are around 5%. I'd think...pay more on the higher interest debt more quickly. However, because of the way the cars are amortized...is that always the case? I was shocked at how much of my car payment was interest. I'd already thrown the bulk of the extra money for the month at the CC, but I still threw a little extra at the older car that we want to get paid down more quickly (designating principal only payment). I'm thinking that next month...I may want to reverse that distribution.

Greetings, Malisa, to know what best to do regarding extra paydown, it would be necessary to know how the car loans are structured. If they follow the rule of 78 (a good Wikipedia article is available on this), then your interest is front-loaded and you pretty much cannot avoid paying it even if you tried to pay extra principal on the loan, as I understand it. I won't swear to this assertion, though, and rule of 78 has fallen out of favor as a financing method (it is not fair to the consumer) so it would be worth determining if your car loans are actually simple interest, in which case paying extra principal could well reduce the overall amount of interest you will ultimately pay.

That said, though, the real question is the interest RATE differential between 14% on the credit card and 5% on the car loans. Dollar for dollar, your credit cards have much higher interest-generating velocity than do your car loans. Even if the total amount on the car loans is bigger, there is a disproportionate interest growth on the monies owed on your credit card, and you will ultimately owe less interest altogether if you shed the credit card debt first. Paying extra principal on the card as early in the cycle as possible will make that happen.

On another forum (Motley Fool), I wrote a post a few years ago comparing the generation of interest to a mold infestation. No matter how small the area of mildew is of your credit card, if it grows at a 14% rate a year (that is a 1.17% rate a month), it may well overgrow compared to the 5% growth rate of a bigger area of mold (your car loans) which generate interest at 0.42% a month. So wipe out the fastest growth soonest, and you contain the infestation quickest (less interest to have to pay per dollar if the most expensive dollars to service are taken out of circulation fastest).

xraymd

[malisab]

I deleted the post prior to xraymd's because I figured out why the interest was so high on the car...we delayed the first payment.

So yes, CC first.

[bookman413]

The way I would look at this is to calculate the maximum benefit you can get from changing your payment scheme. If every day a charge stays on your credit card account means a dollar charge, then moving the payment back 10 days is a 10 dollar savings or (I like to do this as well) $120 per year. Then decide whether that amount of savings is worth whatever shenanigans you have to go through to move the payment.

I would go down each of your payments and apply a similar analysis, case by case, and decide per line item how you are going to pay.

Once it gets down to a certain level of savings though, I value simplicity in billpaying over saving a small amount of money.

[bookman413]

If mortgage is due on the 1st, even if they don't charge extra until the 18th, I would STILL pay by the 1st. 1) Its good will when something inevitably happens and a payment gets there late "Oh, I see your payment is always here on time, I believe you this was totally out of your hands" and 2) it gives them no excuse -- when your paymet is late, it is late. Even if there is no penalty yet, it is still a late payment. And having a history of late payments can bite you when it comes to house stuff.

To a degree, I agree with this,. Also, applying my method of calculating your maximum benefit from changing a payment scheme, it is relevant to know that delaying payment for 18 days roughly amounts to an annual savings of 18/30 times your monthly mortgage payment amount times the rate you earn on your money, which I'm guessing is below 2% So. For every 100,000 at 2%, that's $108 per year. Weigh the $108 per year against the potential loss of goodwill and decide whether it's worth it. I would at least consider moving the payment back to the 10th so that you are not scraping the penalty range. In that case you are talking about a $55 savings over the year. If that seems worth it to you, then do what you are gonna do. But always consider the costs and benefits. And one of the costs might be not only financial but in peace of mind.

I have to say though, in this day and age, with automated payments and electronic checking and such, as long as you schedule a payment several days before its due date there is no reason it will ever, EVER, be late.

With my credit card debts, before they were paid off, if the billing cycle ended on the 18th I had a payment scheduled to go to them on the 20th. One day padding in between the billing cycle end date and the date I submitted payment to them to be sure the payment got credited to the correct month., but basically paid up as soon as the bill arrived (actually, I was getting paper statements so I wouldn't even get the bill till a week after it had already been paid).