Using Credit Cards on a Zero-Based Budget: Credit Cards with YNAB

Does using credit cards on a zero-based budget seem like an impossibility to you?  It did to me at first, too. As it turns out, credit cards work extremely well with our YNAB zero-based budget.  In fact, it's probably the safest way to use a credit card!

Does using credit cards on a zero-based budget seem like an impossibility to you?  It did to me at first, too.  I thought you had to use a cash envelope system to make a zero-based budget work.

As it turns out, credit cards work extremely well with our YNAB zero-based budget.  In fact, it’s probably the safest way to use a credit card!

A Quick Disclaimer

We all know that abstinence is always safest when it comes to credit card use.  If you are uneasy about using credit cards because you’ve been irresponsible in the past, don’t start using them now.  If you are deep in credit card debt, stop reading this and choose one of these awesome articles on debt.

Using Credit Cards

If you’re still reading, I imagine you are like us.  You like the convenience, safety and rewards that a credit card provides.  You pay your credit card in full each month, before it accrues any interest or fees.  You never carry a balance.  You are excited that you can have an awesome, functional budget and still have the perks of credit cards.

You Need a Budget

The budgeting software that forever changed our budgeting is called YNAB (pronounced “why-nab”), short for You Need A Budget.  It’s not just software, but a philosophy and method that will shift your budgeting paradigm.

For more details on how YNAB works, checkout my other articles on how we budget with YNAB (they’ll each open in a new tab):

With YNAB’s method, you only spend money that you have.  As you receive income, you allocate that income to your spending categories.  When you spend, the amount of money available in that category is reduced.  If you always spend according to the money available in each category and record all your transactions (the mobile app makes this really simple), you are spending money that you have.  You’re living within your means.

When you get more income, you can fund more categories.  All the while, you are setting some money aside so that you can eventually “live on last month’s income,” meaning you can budget for the entire month at the beginning of the month because you have a month’s worth of income available to work with.

Why Credit Cards Work With YNAB

Spending according to the balance of the budget categories, rather than the balance of your checking account makes credit card use safe.  You are spending money that you actually have, not money you hope to have by the time the bill is due.  

The budget sees money spent with a credit card as just as gone as cash that left your hand.  It’s gone and can’t be spent again.  However, in reality the money hasn’t gone anywhere.  When the bill comes, the money will be in your checking account waiting for you.

Getting Started

The toughest part is getting started.  I recommend watching the free live classes if you are new to YNAB.  After you’ve got the basics down, there is a class specifically on using credit cards.

In a nutshell, when you start YNAB, you will manually enter your account balances, including credit card balances (the total as of the day you start using YNAB).  Your credit card balances will automatically be lumped into a category called “Pre-YNAB Debt.”  Pre-YNAB Debt represents spending that was done before your YNAB budget, so it isn’t divided into categories like groceries, electric, gas, etc.  It’s just history and accounts for the bill that will be coming soon.

From here on out, spending will be done according to categories and will be “spent” from the budget at the time it is actually spent, not when the money comes out of your checking account.  When you have paid off your Pre-YNAB Debt, you won’t need that category anymore.  All future credit card spending will be accounted for at the category level.

credit cards with YNAB

The first month is tricky, because you’re essentially “paying” for 2 months: what you spent last month on credit and what you are spending this month.  Being careful and intentional about your spending, especially in the beginning, will make for an easier transition into using credit cards with YNAB.  You could even have a no-spend month (or week) to start you out on the right foot.

If you aren’t able to pay your credit card off in one month (maybe that’s part of getting your finances in order), the free YNAB classes will show you how to deal with paying off Pre-YNAB Debt over a longer period.  It’s a great way to get rid of that debt once and for all!  Once you’ve gotten rid of your Pre-YNAB Debt and you’re just paying attention to category balances when you spend, budgeting will be smooth sailing. 

Stress-Free and Safe

Fro me, reading about the YNAB method and understanding this concept on a theoretical level made sense and sounded great.  I could see that YNAB would probably help us to keep better track of our money.  What I didn’t anticipate was the HUGE stress relief it was to be able to pay the credit card bill off each month without worrying how it would affect our account balances and other upcoming obligations.  Even though we have always paid our credit cards off each month, sometimes it meant that at the end of the month, there wasn’t any extra to put toward our student loans or that money would be tight for a while.

There are lots of things I love about YNAB (hence all of the articles listed above), but one of my favorites is the safe and stress-free way that we can use credit cards.  Now I can’t imagine comfortably using a credit card any other way!

Save on YNAB

Maybe it sounds silly, but switching to YNAB has been one of the most valuable things we’ve done in our quest to become debt free.  If you are interested in trying it out, check out the YNAB videos and download the software for a free 34 day trial.   The purchase price is $60, but you’ll  save $6 with my referral link, dropping the total cost to $54.  No monthly or annual fees.  It’s all yours.  As one who is as frugal as they come, I can attest that, for us, YNAB is totally worth the investment!

Linked to One Project at a Time

2014 Garden Report– The Year of Guilt and Gratitude

Our garden is a big part of keeping our food budget down. This year our harvest brought both guilt and gratitude and has taught us something in the process.

Last year at this time I shared my gratitude for our bounteous harvest.  I made a pretty thorough list of what we planted, how it fared, and what we did with it.  Looking back, I’m quite impressed.

In other posts throughout the year, I shared 10 reasons to grow a garden and our our favorite cost effective vegetables to grow.  Canning, freezing, dehydrating, and eating fresh produce from our garden is one of the ways we keep a low grocery budget.

If last year’s garden is summed up with the word “gratitude,” this year’s garden can be summed up with the word “guilt.”

I’ve been dreading this post because I was feeling like a failure.  Like a fraud.  That might sound like a ridiculous worry.  We tell you the details of our finances, so why am I fretting about telling you about the sad state of our garden?  Well, for the sake of keeping it real at Six Figures Under, here’s our 2014 report.

We had good intentions when we planted in the spring.  I bought seeds, including a few varieties we had never tried before.  Seeing the amazing transformation of a tiny seed to a thriving plant is motivating and inspiring.  We planned on making great use of our soon-to-be productive garden.

As the summer wore on, we got busy (and lazy when it came to working out in the sweltering heat).  The only time Mr. SixFiguresUnder is around to help in the garden is on Saturday and sometimes Saturdays fill up quickly.

I was generally faithful about watering, so the garden still grew, weeds and all.  Where we have been huge slackers lately is harvesting.  That’s supposed to be the “fun” part where you reap what you sow, right?  Instead, the fruits of our labors are rotting on the vine!

I have been sick for the past few months, so just keeping everyone fed and in clean clothes has been a major chore.  I am ashamed at how much food is going to waste in our garden. (We were a little over-zealous in planting tomatoes.)  We know that when we bring food in, we have to do something with it, so we don’t harvest until we’re ready to undertake that task.

Even though I feel guilty for not using it all, I am still grateful for what we have been able to use.

  • We have eaten or frozen all of our cantaloupe and watermelon.
  • We have harvested over a year’s-worth of garlic.
  • We used our first planting of carrots in soups (the second planting is going to seed in the ground).
  • We canned 40 quarts of tomato puree, used fresh tomato puree, and ate fresh tomatoes.
  • We harvested, diced and froze around 30 large onions.
  • We froze some green beans and foot-long beans (though most were wasted on the vine).
  • We made cheesy squash a number of times and added zucchini and yellow squash to lots of other dishes.
  • The gophers decided to share our potato harvest, but everything they didn’t eat, we did.  I love home-grown potatoes!
  • Mr. SixFiguresUnder loves Armenian cucumbers, so he enjoyed lots of them in his lunches until the tomato jungle made them somewhat inaccessible.
  • We froze lots of blackberries and raspberries.  I’ve made several razzleberry pies and canned about 7 quarts of razzleberry jam.
  • We are just starting to harvest our sweet potatoes.  This was our first year giving them a try, but it looks like a healthy crop.  Sweet potatoes keep well and are very versatile.
  • Our pumpkins were rather puny this year.  Some of the vines were scorched during a hot spell when I wasn’t diligent at watering.
  • My in-laws have several fruit trees that were productive this year.  We helped thin apples in the summer and the kids have helped pick the fruit.  We’ve had apples, peaches, plums and cherries that they’ve generously shared.

Okay… I’m feeling more gratitude than guilt now.

When I sat down to write about the garden, my mental focus was on the tomatoes and green beans that were rotting on the vine and all the wasted chard and carrots, but after doing a full analysis, I see that the garden has given us (and we’ve been able to use) more than I realized.

I guess that’s why we should regularly count our blessings.  It’s so easy to get bogged down with our failures and focus on guilt.  Taking an inventory of our successes and our blessings can really lighten our burdens and lift our spirits.

How about you?

  • How did your garden do this year? Successes?  Failures?  Experiments?
  • Have you felt your gratitude increase by “counting” your blessings? (If not you should try it!)

Linked to One Project at a Time

Why We Chose Income Based Repayment (IBR) For Our Student Loans

Income Based Repayment (IBR) offers great flexibility which has been key for making serious progress on paying off our student loans.  Is it right for you?

With more than 70% of all students graduating college in debt, choosing a student loan repayment plan is as much a part of the graduation routine as ordering your cap and gown.

I often get email inquiries about the various student loan repayment programs as graduates are trying to plan their future with student debt as their companion.  While I can’t say what plan is right for you, I hope that sharing how we came to our conclusion will help you sort out your own federal student debt repayment options.

Income Based Repayment (IBR) Basics

In order to qualify for Income Based Repayment (IBR), you must have at least a partial financial hardship.  Your loan servicer will look at your income and family size, calculate your discretionary income and compare it to the payment required on the standard 10-year plan.  In an IBR plan:

  • Payments are generally 15% of your discretionary income (10% for new borrowers after July 1, 2014).
  • Payments will never be higher than the payments on a 10-year standard repayment plan.
  • The repayment period is extended to 25 years (20 years for new borrowers after July 1, 2014).  After the repayment period, if there is anything left unpaid on your loan, it will be forgiven.
  • You may be required to pay income tax on the portion of the loan that is forgiven.

Another income-driven repayment plan “Pay As You Earn” is available and has lower payments and fewer years before forgiveness than the original IBR.

We Needed Flexibility

At the end of school, my husband ended up with a JD/MBA and $130,000 of student loan debt.  He had a job lined up working for a small law firm making 30% commission on fees he earned and collected.  The firm would provide office space, front desk staff, malpractice insurance, etc and he would be responsible for finding his own clients and doing the work.  We knew that in the beginning his pay would be low, as he would also be building a business.

We weren’t sure if he would receive straight commission (every paycheck varying) or if his commissioned pay would be regulated by a “draw”, in which each paycheck is the same and the draw amount is adjusted to match his average commission.  In the first scenario, having a big loan payment due with varying monthly paychecks would be extremely stressful.

We Didn’t Care About Forgiveness

IBR does offer loan forgiveness after 25 years, but we simply did not factor that into the decision.  It’s not only difficult to trust that the government-run forgiveness program would still be operating under the same rules 25 years from now, but even if it were, counting on eventual forgiveness could also end up being the more expensive route.

Here’s an illustration.  Let’s say that the the rules stay the same, that Mr. SixFiguresUnder never makes more than he’s making now, and that under IBR, we never had to make a single loan payment because of our income and family size.  After 25 years of 6.55% interest, the total loan amount would be just under $600,000.  If that $600,000 were forgiven, it would count as income to us, and we would owe taxes as if we had earned $639,000 that year. With income that high, our marginal tax rate would be 39.6%, and our total tax bill for the year would be about $200,000!

In reality, we have a choice to pay less than $200,000 now, and be loan free for the next 20 years, or carry the loan, unpaid to the end, hope for forgiveness, and find a $200,000 tax bill waiting for us. Forgiveness becomes less attractive in that light.

Just as importantly for us, we feel a moral obligation to repay money that we borrowed.  If you are interested in the possibility of Public Service Loan Forgiveness, you might want to read about risks and considerations before putting your eggs in that basket.

How It’s Working Out

My husband’s income turned out to be a “draw” which evens out his actual commission into equal payments each month.  This is much nicer to work with than varying paychecks of straight commission. Currently he makes $39,000 pretax.  With our family of five, that put our monthly loan payments at $0.

If you have read our story, you know that we have a huge goal of paying off our student loan debt by the end of 2016.  We’ve made some headway but we have a long way to go.  While we choose to make payments of more than what our payments would be on the standard 10-year plan, having the flexibility offered by IBR has been a major asset.  Instead of having a payment that is automatically spread across all of our loans, we can focus on knocking out one loan at a time.


If you qualify for Income Based Repayment, the flexibility it offers can relieve stress and allow you to lead your own debt repayment.  Once you have that flexibility though, instead of banking on the forgiveness plan, aim for the fast track to paying off your student loans.

Debt Recidivism: Make a Plan to Prevent Getting Back into Debt

"Debt Recidivism" means going back into debt again after successfully getting out of debt.  Make a plan now to prevent relapsing into debt so that debt doesn't have to be your life sentence.

Has your debt made you feel like a prisoner?  Do bills and budgets seem like bars and barbs that prevent you from enjoying life?  Do your options and freedom feel limited because of past poor choices?

While it can be overwhelming and discouraging, debt doesn’t have to be a life sentence. With hard work, dedication, and sacrifice, you can be free again.

Have you planned and dreamed about what your life will be like when you are out of debt?  I know I have!  While it’s fun to look ahead to achieving our goal (that can really motivate us), probably the more important question is “What will you do to stay out of debt?”

What is Recidivism?

Recidivism is a relapse into a previous bad behavior after having received a negative consequence for the behavior or having been treated or trained to stop it.

The idea of recidivism is most often used to describe criminal behavior.  I learned the term in college when I wrote  a research paper about the effect that literacy instruction in prisons had on the recidivism rate.  I had hopes that if prisoners learned to read during their time in jail, they would be less likely to return to jail.  [Don't ask me the details.  My paper is on a ZIP disk somewhere.  That makes me old!]

Why DEBT Recidivism?

Well, it fits doesn’t it?  Debt is a negative behavior.  I bet we’ve all had some negative consequences as a result of our debt.  Some of us have even been “trained” or “treated” to stop debt behaviors.  I’m going to say that “debt recidivism” is going back into debt again after successfully getting out of debt.

While you’re in the trenches working hard and making sacrifices to get out of debt, your first reaction may be “No way am I ever getting myself into this again!”  Will just the memory of our struggles in the trenches be enough to stave off debt in the future?

Maybe, but I’d rather have some other prevention methods in place.

Preventing Debt Recidivism

Hopefully the long road to debt freedom is helping you establish new financial habits. Here are a few methods to help prevent relapsing into debt.

  • Stick with Budgeting

Your budget will change when you’re debt-free (no more payments!), but that doesn’t mean all your other budgeting skills and habits should go out the window too.  Learning to effectively budget and live within your means will keep your financial situation healthy so you don’t lapse back into old habits.

  • Keep it Frugal

With more disposable income than you’ve had in a long time, there will be strong temptations to spend it freely.  Sure, you may be able to budget for a few more luxuries than you did when you were making real sacrifices to pay off your debt, but make each change thoughtfully and with caution.  Like a newly freed prisoner, you’ll have to be careful not to slip back into bad habits.

  • Set a New Goal

Having a big goal for paying off debt has really motivated us to give our all to getting out of debt.  Once the debt is gone, all of that motivation, energy and money(!) need somewhere else to go.  Having a new financial goal in place right away (well, after a modest, paid-for celebration), should prevent you from falling back into irresponsible spending habits.

  • Go Easy on the Celebrating

Once you are released from debt prison, there will be serious cause for rejoicing.  There’s no doubt that you’ll want to celebrate in one way or another.  Decide how you’re going to celebrate, then draw the line.  If you find yourself justifying purchases and spending with something like, “Well, since we’re out of debt now…,” you will quickly get yourself back into a very bad habit.

How About You?

  • What are you doing to prevent relapsing into debt habits?
  • What financial weaknesses to you personally need to guard against?

Linked to Thrifty Thursday