Here’s another post from “the archives”. I.E. – A couple of good posts I wrote back in 2017 on my old business website. Today, someone asked me a question about why I don’t use mint.com. I may or may not have responded with “Mint.com is for plebs. YNAB is where it’s at!”. Then I remembered that I’ve written about this before. So I dug up the post and here it is! Enjoy!
– Chad Hassler Jan 27, 2020
Technology has integrated itself into most areas of life including personal finance. Though even with all this new fangled technology, many still struggle to get a handle on their money. One of the areas most feared in personal finance is the use of credit cards – more accurately, the debt that one gets when they use one. I used to have the same fear.
Something changed this year. I’ve been using You Need a Budgetor YNAB for a few years, and this year I’ve developed a strategy that allows me to use my credit card and (as long as I follow the plan) never get into trouble. The following post will teach you how to do the same.
The Ups and Downs of Credit Cards
Credit cards weren’t a part of my upbringing. Debit cards provided everything I needed in a payment solution: they were accepted everywhere and I didn’t have to carry cash. Fast forward 10 years – my wife and I were carrying over $5,000 of credit card debt. How is that possible? Moving into a new house that you immediately gut down to the studs and rebuild will do it. In our minds, it was necessary. It was also stupid.
I’m happy to report that we’re no longer in that kind of credit card debt. Now our card balances are paid off each month which means we don’t pay interest penalties anymore.
We didn’t get here overnight. We’ve spent the last 5 years figuring out how best to use the dollars we earn. For a long time, that meant not touching our credit cards at all. Then we dipped our toe in the water with a few more house projects and again found ourselves with thousands of dollars of credit card debt.
We had to try something different. I had heard the name You Need a Budget for years. User’s raved about the app’s brilliance. Nothing I was doing was coming close to working, so I gave it a shot. Over time, things started to turn around for us. We focused down our credit card debt and swore them off for good. I’ve been using YNAB for the last 3 years and I’m happy to report a positive net-worth and more importantly, a real handle on our family finances.
Now that I had the finances under control, I wanted to figure out how we could use our credit cards and all of their benefits. And I wanted to do it without paying the penalties that up until this point, were always part of the deal.
Why You Should Use a Credit Card
So why switch? Points. There’s a rewards card out there for practically anything. Some cards offer cash back, others offer gift cards or some other kind of retailer specific rewards system. Personally, I have a Best Buy Credit Card and an Apple Rewards Barclay Card. Those two reward systems work for me. I’m a tech nerd and I love most Apple products. Both of these cards offer ways for me to get money off the gadgets and software I most want to buy. Also, it feels good to at least pretend that I’m outsmarting a credit card company. I like the little financial game that I’m going to outline for you here.
What card you use is totally up to you. It doesn’t matter what the interest rate on your card is because if you do this right, you are never going to pay interest…EVER. I would avoid using anything that costs you money, like a card with an annual fee, unless the benefits financially outweigh that cost.
Why would a credit card company (CCC) set up a points system? Won’t they lose money? That’s a big fat “no” on two fronts. For one thing, when you use that card, the merchant pays an extra processing fee on top of the standard % the merchant has already agreed to pay. That fee is collected by the CCC. Additionally, the CCC is banking (forgive the pun) on you being stupid and paying interest charges – something that pays them a heck of a lot more than they lose by giving you points.
That’s why this system needs to be followed to the letter. The gist of the system is to use your credit card for everything and then pay the balance off each month. This sounds simple in theory. But if you’ve ever tried something like that before, you find out just how fast that plan can blow up in your face (see stupidity outlined in The and Downs of Credit Cards) If you don’t budget your money before you spend it, you’ll always, always, always, spend more than you have. If you set up your system correctly, you can take advantage of credit card rewards risk-free.
Note: There are additional benefits to credit cards like the ability to effortlessly dispute charges, credit score reports, and much more. Some debit products offer similar functionality but usually with a lot more hassle. If I’m a victim of credit card fraud, one phone gets that transaction removed from my account. If the fraud occurred with my debit card, it may take a few days to get the matter cleared up and get my money back.
What You Need to Implement This Plan
The following things need to be true in your own personal financial situation in order to safely and effectively use this system. If you’re not in a stable financial position, I highly recommend you sign up for YNAB and follow their method with cash only until you’ve met the following requirements.
- You have no credit card debt that is actively accruing interest charges. Promotional interest-free balances are fine as long as they are current and on track to be paid before the promotion ends. If you have any other credit card debt that is costing you money get it paid ASAP, then return to this article.
- You have at least $1000 in cash reserves, i.e. – a quick and dirty emergency fund. Ideally, you should have 3-6 months of living expenses saved (hint: YNAB is designed to get you there), but that is not a requirement to start using this method. You can use this method as you build towards that 3-6 months of expense mark.
- You have signed up for YNAB and are an active user. This method will not work for most people without YNAB. Yes, you could do it in a spreadsheet. But, like most habit/process changes, the less work on your part, the more likely you are to stick with it.
YNAB Setup and Process
If you haven’t already, head over to You Need A Budget and create an account. YNAB gives you a free 34-day trial of the software which allows you to see the power of their method and this one at no cost. The annual cost for YNAB is $55/year and is, as you’ll see once you see this method in it’s entirety, completely worth it.
Note: I won’t be going over the entire YNAB methodology in this post. Please refer to their method
Connect Your Accounts
In order for this to work, you’ll need all of your active spending accounts hooked up to YNAB. This means your checking and savings accounts from your bank or credit union as well as all of your credit card accounts. YNAB has the ability to connect to most major institutions and automatically import transaction history.
DO the Budget
Now that all of your accounts are connected, the real fun begins. Note your To Be Budgeted number at the top of the page and start budgeting. Simply type a dollar amount in the budgeted column next to the category of your choosing. Because you have at least $1000 saved for your quick and dirty emergency fund, make sure you budget that before anything else. In my budget, I call it a Buffer Fund. Next, budget for the bills that you know need to be paid between today and your next paycheck. From there, fill in all of your incidental expenses like groceries and supples, transportation costs, etc.
Note: If you don’t like the pre-defined names for YNAB categories, you can change them. For instance, I use the category Groceries/Supplies for everything from toilet paper to mayonnaise. The simpler, the better. Remember, you can always make it more complex later.
You should have budgeted down to $0.00 in your To Be Budgeted balance at the top of the page. If not, go back and give every dollar a job per the YNAB way.
Set Every Single Bill to Auto-Pay Using Your Preferred Credit Card
Do you sit down once or twice a month to pay bills? If you meet the requirements laid our earlier in the post, you don’t have to do that anymore. With everything we’re supposed to keep track of these days, do you really want to risk a late fee because you just forgot? Maybe you’re perfect and you would never forget to pay a bill. Fine. Would you like to reclaim 2-4 hours a month? I would and I have because every single account or service I have is paid automatically, without my intervention. I actually used to do this with my checking account, before I switched to using credit for everything. Even if using credit isn’t for you, if you have a buffer fund built into your budget, put everything on Autopay and never worry about missing a payment again. Time is money, after all.
Bonus: Merchants love this and will often offer some kind of reward for setting up Autopay on your account. They know they’re going to get their money and you get a reward. It’s a win-win.
Note: Certain accounts cannot be paid with a credit card. Things like your mortgage, student loans, and certain utilities will only let you pay by bank transfer. Even though you can’t take advantage of credit card rewards here, you should still set these accounts to Autopay out of your primary checking account.
Use Your Credit Card for All Purchases Wherever Possible
Take all your other cards and tuck them in the back of your wallet or the bottom of your purse. You don’t need them. You’re going to make every purchase with one card. Even if you have two different rewards cards, pick one and use it until you’ve received all the rewards you were after. Add this card to your phone for Apple Pay or Android/Samsung Pay. There’s a small bonus to this. Since you’re going to be paying with your phone everywhere you can, you’ll already have your phone out which makes it a lot easer to:
Enter Every Transaction into YNAB Immediately
This is where the rubber meets the road. It is not enough to simply reconcile your budget once a week. Unless you actively track your spending, you won’t know when a category (think: envelope) has run out of money. You will still import your transactions once a week and reconcile, but most, if not all of those transactions will have already been entered by hand and will simply match up with the transactions you import. Then it’s just a matter of approving those transactions – a process that only takes a couple of minutes.
YNAB: Where the Magic Happens
If you’re just using cash with YNAB, entering a transaction against a category simply deducts the amount from the budgeted column. However, if you use a credit card and you enter a transaction against a category, YNAB transfers the funds from that category to the category that represents your credit card!
This is huge. YNAB automatically collects the funds from your spendable categories and holds them in your credit card category until it’s time to pay the bill. Hopefully you’re seeing the power of this feature. If you do it right, the amount of money in that credit card category will always cover your credit card bill which means you never pay interest.
Yes, in simple terms, this entire system is Use your credit card for everything and pay the balance in full every month. The difference is, this system actually makes it incredibly easy to pull that off and not screw up!
What to Do When You Screw Up
Remember that buffer fund? It’s there for a reason. What’s the reason? Well, you’re a human being and you’re going to screw up. The buffer fund accounts for the fact that you’re not a robot and allows you to fix small screw-ups along the way instead of uncovering a giant screw-up at the end of the month – one that you may not easily recover from. Here’s how it works:
Let’s assume you have a cash-only (read: checking account and debit card) budget in YNAB. If you overspend in a category, meaning you spent more than you budgeted, the balance in that category goes red negative.
Per the YNAB way, you roll with the punches and add money to that category to bring the total out of the red. Where do you get the extra money to bring that category out of the negative? That’s right. The buffer fund.
The same principle applies when using a credit card for rewards instead of your debit card with one small difference: when you overspend in a category with credit, the balance in that category goes orange negative
When you add money from the buffer fund, YNAB again works it’s magic, brings the balance out of the negative and moves the amount that was in orange to the corresponding credit card category.
Bottom line: Use your buffer fund to protect you against screw-ups. No negative categories allowed!
How to Know You’re Doing it Right
- You never look at your actual bank balance to see how much money you have available to spend. This is the most asinine way to manage your personal finances. Instead, you look at the corresponding category on your YNAB mobile app. You know that category is reflecting the correct amount because you:
- Keep YNAB up to date. This literally takes a few minutes each day. Like cleaning your house or brushing your teeth, a daily habit of keeping your personal finances clean makes everything easier. I used to catch the budget up once every two weeks. NEVER AGAIN! I’ll gladly take 3 minutes a day to keep everything in line over wasting hours upon hours in front of the computer trying to reconcile two weeks worth of transactions.
Wrapping up: Use the tool the right way and your work becomes nearly effortless
Tools alone are completely worthless. Tools used improperly are only worth a bit more than that. When you use a tool the right way, you can produce fantastic results with far less effort. This principle is used in cooking. The worst thing a chef can have is a dull knife. They want that knife razor-sharp so that the knife does the work of cutting instead of the chef.
Using YNAB and credit cards is no different. They are tools. The tools matter, but only insomuch as they are used correctly. So keep your knife sharp and keep an eye on your money. If you do it right, you’ll be reaping credit card rewards for the rest of your life and paying nothing for it.