Yesterday’s post generated over 6,500 words of comments. As Erin put it in YNAB’s internal chat:
“You smacked the beehive, then dipped yourself in honey and jumped in.”
Indeed I did.
And now for the follow-up.
Rather than extend the debate, let’s walk through an imaginary budget coaching session where the guy and his budgeting coach talk about the consequences of paying for the trip with borrowed money.
I did my best to incorporate points from both sides of yesterday’s debate into the dialog. I’ll be curious to hear whether I covered the bases (if you can power through the 1,300 words of this post).
Guy: “So, I guess I’ll have to put the last $1,000 for that trip on my credit card.”
Coach: “Yeah? Sorry to hear that.”
Guy: “Yeah, well, you see the numbers right there in the budget. I scraped together all I could, picked up extra hours at work – even sold my road bike. I’m still $1,000 short, and I’m not missing that trip.”
Coach: “Fair enough. Let’s make sure you track it correctly in YNAB. You’ve charged the $1,000 to the card. See how it shows up there in ‘Pre-YNAB Debt’? That’s your credit card balance. Now what?”
Guy: “I’ll pay it off fast. I bet I can have it gone in two or three months.”
Coach: “Yeah, maybe. But remember – this trip cost $2,000, and you started planning for it four months ago. You couldn’t save $500 per month to avoid the debt in the first place. Even paying it off in three months will take $333 per month – and we’re not even dealing with the monthly finance charges.”
Guy: “Yeah, I guess you’re right. I’m not sure exactly how much I’ll be able to pay per month. But I definitely want to pay more than the minimum.”
Coach: “Good – if you just paid the minimum every month it would take 9.5 years to pay off the balance, and you’d end up paying over $900 in interest on the original $1,000 loan.”
*Assumes 18% interest with minimum payment of 2.5% of the current balance.
Guy: “I didn’t realize it would be that bad if I just paid the minimum. It adds up fast.”
Coach: “Yes, it does – which is why you’ll want to get rid of it as fast as possible. The only way we can guess what you’ll be able to pay on the credit card is to look at your past budgets and see where the extra payments would fit.”
Guy: “Well, back when I realized this trip was coming up, I started cutting back as much as I could and came up with $1,000 in four months. That’s $250 per month. Seems like I can have this balance gone in four more months.”
Coach: “Yeah…maybe. But where did that $1,000 come from, exactly?”
Guy: “Well, like I said: I cut back on some spending, picked up a as many extra shifts as I could, and sold my bike.”
Coach: “Right – are you sure you’re going to be able to replicate those savings? Is it always that easy to get extra shifts at work, or was it unusually lucky? Do you have another bike to sell? Are you sure you’re going to be okay with the reduced spending in other categories for the next four months?
What about emergencies? Did you have any unexpected expenses in the last four months? If something came up while you’re paying off the credit card, would you still be able to keep up your accelerated payments?”
Guy: “Uh. Well…”
Coach: “Right. That’s the tough part about using credit cards. If you were to save the money in advance, there would be no question. Could you still have an emergency in the next few months? Yes. Might that emergency require the use of your credit card? Yes. Some people might say you shouldn’t take this trip until you have the money set aside AND an emergency fund in place. I’m not going there, but you can see the point, right?”
Guy: “Yeah, but it seems like you’re telling me I shouldn’t take the trip – that it’s a dumb thing to do.”
Coach: “That’s not what I’m saying at all. I’m asking you to walk through the possible consequences. What you’re really doing here is elevating the trip to emergency status. On paper, it seems like things will work out. But you need to be aware of the risks:
First, you’re playing with a loose definition of emergency. If your trip with your friends is an emergency, what else fits the same definition? A night out with co-workers? New skis? A last minute trip to Vegas with your brothers?”
Guy: “I don’t know. I guess I hadn’t really thought about it. I was just going to use the card this one time. I really don’t want to miss this trip.”
Coach: “I hear you. But you probably realize there’s always going to be something you don’t want to miss. A trip, a new toy, new furniture, new car. There’s always going to be something shiny staring you in the face, and there’s always going to be a way to rationalize the purchase. So, where do you draw the line?”
Guy: “I guess I don’t know.”
Coach: “And that’s the second way this can go really badly for you. If you aren’t totally clear on the consequences of casual credit card debt, you find it growing. I know from experience. The credit card you’re using for the trip – do you use it for everyday stuff too?”
Guy: “Yeah, because I get airline miles when I use it. But I pay if off every month.”
Coach: “Every month?”
Guy: “Well, most of the time. I never carry a balance more than a couple of months. If I can’t pay it off right away I usually manage to pick up some overtime to get things back to zero.”
Coach: “Hold on. You mean you have to use your overtime work to pay off your credit card now and then?”
Guy: “Yeah, so? I’ll just do the same thing with this trip. That’s how I know it will work out alright.”
Coach: “It might work out fine. See, you’re already playing the charge-it-up-and-pay-it-off-later game. It’s “working” in the sense that you’re not carrying big balances for long periods of time. But now you’re going to spike the balance with an extra $1,000.
You’re planning to pay it off with overtime pay, but you’re already in the habit of using your overtime pay to zero the card from your everyday use. Do you see how that’s a problem?”
Guy: “You’re saying I’m expecting the ovetime pay to do two jobs: pay off my occasional spending sprees and pay off this trip.”
Coach: “Right. Which means a) you won’t pay off the trip as fast as you thought, and b) any change in your income, or any other emergency, could get you in serious trouble.”
Guy: “You think I should stay home.”
Coach: “I hate credit card debt. I’ve been there. I don’t ever want to go back. But my top priority is having you use your budget to spend consciously. If missing this trip will make you resent your budget to the point you quit on it, I want you to take the trip. If you treat this debt like the emergency it is, and stick with your budget, things will work out fine in the long run.
On the other hand, If you think you’re ready to draw a line in the sand and say no to the credit card balance, I’ll be thrilled. But it’s your money, and your life. I just want you to let your budget work this and all other financial decisions.”
Guy: “I hear you. I’m going to have to think hard about this.”
In my opinion, if Coach had launched into an anti-credit card speech as soon as Guy said he was going to charge the trip, the learning opportunity would have been lost.
How would you have handled the conversation?