In the first part of my YNAB love story, I talked about how awareness of my spending and preparing for rainy days helped me see my monthly cash flow in a whole new light. I was on cloud nine until reality hit.
Step Three: Facing the Credit Card Float
My third big moment with YNAB left me with egg on my face. This part is especially embarrassing.
I had gotten into the habit of buying groceries and gas on my credit card with money I didn’t have. I told myself I was doing it for the convenience, the (meager) cash rewards, and the technological security. Every month, I paid my statement balance in full. Most of that habit was good. I still use my credit card for groceries and gas because it’s still convenient and secure. The problem was that I was always a month behind. I was riding the credit card float. (I’m not floating anymore.)
If you’ve never heard of the credit card float before, I don’t blame you. I Googled it and found mainly posts about YNAB! (See Additional Resources below.) Essentially, “floating” credit cards is spending now and paying off the balance with next month’s income.1 It’s the opposite of spending using a debit card. Debit cards only allow you to spend money you already have (when they don’t allow overdrafts). The way I was using my credit card allowed me to spend money I didn’t have yet. I was trapped in the cycle. One bad month could have ruined me.
Some months in that cycle were fine. Others were painful (especially when Christmas bills were due in January). The biggest pain of all, though, was when I entered my credit cards in YNAB and had to face the ugly red numbers of Pre-YNAB Debt. I was horrified to realize that, although I had always sworn up and down that I did not have credit card debt, I did. The grace of starting YNAB in May was that I had fairly low balances on my cards (one regular card through my bank and one store card), so I was able to make a mid-cycle payment on each card and eliminate my credit card debt immediately.
This 2-minute video explains the credit card float in detail. Pictures of my shocked face are not included.
Added August 2015: YNAB produces a weekly video series called Whiteboard Wednesday. Jesse Mecham, founder of YNAB, explains the credit card float with a diagram and a friendly face.
Step Four: Less Email and Even More Awareness
The fourth habit change caused by YNAB was small but not insignificant. Ever since I turned eighteen, started college, and began managing my own finances, I have balanced my checkbook monthly. All the financial advice I’d ever encountered admonished me to always stay on top of my checkbook balancing, so I did.
Then came online banking. I could see which transactions had posted to my account and when they cleared on a daily basis. But my old habits didn’t change. I was still waiting four weeks to balance my checkbook. When money was tight, I set up an automatic email from my bank for every outgoing transaction over $10. When money got tighter, I lowered that minimum to $5.
Then came YNAB. As I got into the habit of entering transactions daily and rolling with the punches, I used the reconciliation feature to keep YNAB in sync with my online account balances. Getting that flurry of emails was useful, but it started to feel like overkill when my account always reconciled/balanced perfectly.
It took months for me to realize that it was overkill. I didn’t need those emails anymore because (A) I recorded every direct expense immediately, (B) the scheduled transactions feature entered my bills automatically, and they’ve all been on auto-pay for ages, and (C) I was reconciling/balancing at least once a week.
I stopped the automatic emails. I don’t even read my monthly statements anymore, because I know what they say. YNAB knows, too.
I promised you seven steps, so you know the rest are coming. Stay tuned!
I found three other blog posts online that mention the credit card float. They’re all about YNAB, which shows how useful YNAB is for rescuing floaters like me.
- Jack of All I.T. explains how easily you can be caught in the trap, especially with Christmas and other year-end spending approaching. All of his YNAB posts are down-to-Earth and full of good advice.
- Amanda Pelser was convicted about overspending using credit cards just like I was.
- Kudy at Monetary Musings shares the temptation to spend based on your checking account balance rather than your budget.
- There is another version of the credit card float. It involves taking advantage of the grace period between the day you spend and the day you pay your credit card statement balance. You leave the cash in your checking or savings account so it can grow interest during the grace period, spending it only when the due date arrives. That’s not what I’m talking about here. ↩