New spending on your credit card is covered by the money you budget towards your spending categories. Paying off the debt you accumulated before using YNAB starts with budgeting towards the Pre-YNAB Debt on the card.
Once you know what you can afford to budget towards the debt, enter that amount in the Budget Column for the Pre-YNAB Debt category. For example, if you are planning to pay $200 toward your debt on your MasterCard, budget $200 in this Category.
Always make sure you have money Available to Budget before you assign money to Categories. Notice that the category balance decreases by the amount you’ve budgeted. The red balance represents your goal. This is what you want the balance to be, after you make a payment.
Remember, you’re just budgeting at this point. You haven’t made the payment, but you have made a plan to shrink the balance. Each month, budget something to pay down the debt until the red balance disappears. At that point, you can hide the Pre-YNAB Debt category for the card. You only need this category to make sure you are budgeting for and paying off the debt you had when you began using YNAB.
You can still use the card of course, as long as you budget for those expenses and record the spending in that account when it happens.
When the credit card company charges you interest, you should record that as an outflow in your credit card account. It’s an expense, just like any other expense on the card – you are buying the “convenience” of not paying the card in full this month.
We recommend categorizing this expense to the Pre-YNAB debt category since it’s directly related to the debt.
Some people find it helpful to write the word “interest” in the memo field, so they can run a search for the total amount of interest paid.
The benefit of recording interest this way is that you can see the impact of the interest charge on your progress of paying down the debt. We can now see that my original plan of getting my balance down to $370 has been directly affected by the interest charge:
That $200 I’ve budgeted toward the debt is only lowering my balance by $180 because of the $20 interest charge. However, you can use Rule Three to fight back. Look around your budget and see if you can lower another category by $20 and reassign those dollars to the Pre-YNAB debt category.
Some credit cards charge an annual fee. Fortunately, Rule Two exists to help us plan for these expenses.
Example: Your credit card charges you a $60 annual fee. You just started YNAB and the next payment is due in 6 months.
$60 / 6 months = $10 per month
Create a category called Annual Fees and budget $10 each month to that category.
After that first fee is paid, you’ll have 12 months to save for the next one and can budget $5 a month.