YNAB: Getting out of credit card debt and living on last month's income


Did you get started with a YNAB budget?

If you are in the lucky situation, that you were able to implement all of YNAB rules immediately, then this article is not for you.

If you are like many of us, you will have problems to live on last month’s paycheck. And you will have some credit card debt.

Time to do something about it!

In article you will learn:

Why you should give this a try

I had a lot of debts only a few years ago. I lived from paycheck to paycheck.

Granted - my paychecks were nice, but that didn’t make much of a difference. My habits were all wrong. I was naïve about money - a complete financial illiterate.

Today I live on far less, then I made on my first job, without feeling deprived of anything. I am certain that I could live on even less of the money.

All the rest I used to pay down my debt and build a little retirement nest-egg.

I feel far less stressed about money than only a few years ago. That suits me well. Money is just money. It is just a tool.

Living on Last Month’s Income

YNAB’s Rule 4 is to Live on Last Month’s Income.

It means that you use your paycheck from this month one month later.

Living on last months income brings great peace of mind.

Does your paycheck arrive a few days late? Pay your landlord anyway.

Let me teach you how you can do this.

Step 1: Create a new budget category called buffer


Why Buffer?  ”Buffer” is a YNAB term. If you ask for help in the forum everyone will know what you are talking about.

Step 2: Put money into the buffer every month


Step 3: Rinse and repeat

This is pretty important. Keep doing it. It may take some time.

Put every extra dollar you receive into this category. Do not be discouraged if it takes a few months.

Step 4: The “grande finale”

When the buffer is big enough to live one full month of it, you will be done.

At the start of the next month, you enter a negative amount into your buffer category.

When you get your paycheck you make your income available in next month for the first time.


Don’t forget to assign jobs for those 2 months.

You will now be officially better than most people with their finances. This will be an awesome milestone!

How to not collect new debt

Acquiring debt is not about being a bad person. I have been there.

For me, small everyday purchases added up.  I did not use a credit card like every other account - I did not really look at the balance. After all - the rates were “affordable”. Until they weren’t.

The first milestone was to contain the debt.

Step 1: Add all your credit cards as accounts to YNAB

You will notice, that YNAB adds negative balances to the master category Pre-YNAB Debt.

Your job is to eventually get the Pre-YNAB debt to $0

Step 2: Plan for interest payments

Create a category called interest payments.

Have a look at your last credit card statements and budget for the amount.

Squeeze this out from your budget! If you don’t you will have a hard time to get out of the paycheck to paycheck cycle.

Whenever you have to pay interest on one of your cards, add a new transaction into the credit cards category.


Step 3: How to handle annual fees

Just like any other rainy day. Say your annual fee is $30:

30 / 12 = 2.5

Then you would have to plan for $2.5 every month.I recommend to put it in a separate category than interest.

I recommend to put it in a separate category than interest.

Whenever you have to pay a fee you will have budgeted for it and take it out of this category.

Step 4: What to pay the credit card company to not acquire new debt

You pay everything you purchased with the card plus the interest payment plus fees. Or  simpler:

Amount to pay = Current Account Balance - Pre YNAB debt balance

Credit cards already will start to feel like any other account.

How to pay off debt using the “debt snowball” method

Now let’s talk about how to pay off your debt using the debt snowball method.

It is a very smart move to pay down any credit card debt as fast as possible.

There are really no better and safer investments out there!

You get a guaranteed rate of return of the interest rate of your credit card. Which is amazing.

Step 0: Use all the steps that I described in the last section

The debt snowball will only begin to roll if you do not acquire new debt.

Step 1: Identify the smallest debt

You can win fastest with smaller debts. This will help you gain momentum and you will tackle the bigger sums with your newfound confidence.

Step 2: Put as much money as you can into the according “Pre-YNAB debt category”

As I said - there is no better investment than to not have any credit card debt. The interest rates are downright ridiculous.

If you don’t believe me - apply the Rule of 72 and see for yourself what  14% interest really mean.

Step 3: Pay the proper amount to the credit card companies every month

Remember the simple formula?

Amount to pay = Current Account Balance - Pre YNAB debt balance

Step 4: Watch the snowball rolling

Something amazing will happen: The more debt you pay off, the less interest you will have to pay on the debt.

The snowball begins to roll. Very slowly at the start and faster and faster towards the end.


Now you can put the money that you save on the interest towards paying down your debt as well.

“There are no shortcuts when it comes to getting out of debt.”

Dave Ramsey

If you can not squeeze any money out of your budget, try to get a second job, buy a smaller car or have no car.

Do everything you can to get the snowball rolling. Because if you can’t get it rolling you have no way to ever get ahead. I know that this might be hard - but there is really no shortcut. Sorry.

Think about it: The more money you put into this now, the easier and faster you will pay off your debt.

In the end, the snowball would even roll with the money that you save in interest alone.

How to use your credit card responsibly

In the first section, I showed you how to not acquire new debt - a great start.

In the second section I demonstrated, how you can pay off debt using the debt snowball method.

Now that you are through all of this: What does this mean for the use of credit cards?

Simply this: A credit card paid in full each month works just like every other account.

If you pay money with a credit card you register the spending in your budget.

You will pay the balance in full - the money will be there since you budgeted for it.

There is no need to get rid of credit cards or to cut them - if you trust your budget and if you are disciplined enough to follow the rules.

Last words

I hope you take action.

That you won’t have any sleepless nights.

I know this situation is hard - but I believe in you.

You can do this !

Cover photo:  by Images_of_Money under a Creative Commons ( BY ) license