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.  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):

• The Best Thing that Ever Happened to Our Budget: Switching from Mint to YNAB
• Budgeting Every Penny: Zero-Based Budget With YNAB
• Maximizing Our Debt Repayment at the End of the Month
• Why and How We Live on Last Month’s Income
• How Our Budget Handles Unexpected Expenses

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.

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!