How to Do Credit Cards in YNAB

And Ultimately Be Debt-Free ...

To truly understand how credit cards work in YNAB, let’s start at the beginning: 15th century Italy (I just like to be thorough).

In case you weren’t lucky enough to study accounting in school, like I did, in 1494, Luca Pacioli published an encyclopedia of math that included a description of double-entry bookkeeping—a system developed by Venetian merchants to track their business activities.

The double-entry method forces you to balance your books. Or, in other words, assets must always equal debt plus equity. This revolutionized the way people did business by highlighting what sold, what didn’t sell, and bringing attention to where they could make better decisions for a more profitable business.

Flash-Forward to Now

YNAB’s treatment of credit cards is based on the concept of double-entry. To help you understand how it works, let’s take a closer look at that equation:

Assets = Debt + Equity

We break down “Equity” just a little bit further, into income minus expenses, and it looks like this:

Assets = Debt + Income – Expenses

What This Means in Dollars

So, if I have $100 in income, no debt, and no expenses, then I have $100 in assets. It looks like this:

Assets = Debt + Income – Expenses
$100 = $0 + $100 – $0
or, $100 = $100

If I spend $50, then my assets go down by $50, like this:

Assets = Debt + Income – Expenses
$50 = $0 + $100 – $50
or, $50 = $50

If I borrow $50 to buy something new—maybe I want some avocados, and they’re really expensive—my debt would increase by $50, but I’d also be spending $50. My assets won’t change at all:

Assets = Debt + Income – Expenses
$100 = $50 + $100 – $50
or, $100 = $100

And That’s How Credit Cards Work …

The last example, where I borrowed money to buy avocados, is exactly how credit cards work. Every time you swipe your credit card, you incur a simultaneous debt and expense. The inflow of borrowed money (debt) is immediately cancelled out by your purchase (expense). Your assets remain untouched.

When you set up a new account in YNAB, it automatically recognizes credit cards so that your budget remains in balance. If you charge $50, YNAB accounts for it so that you don’t accidentally spend the same $50, again.

Cash Is Key

As you know, the first rule of YNABing is “Give Every Dollar A Job”. If you have $100 dollars, and you need to spend $50 on groceries, we want to show that in the budget. We also give the remaining $50 a job (and we show that in the budget, too!). Obviously, the $100 is still in your checking account, but we have a plan for where we’ll spend those dollars.

So, focusing on that cash, let’s say you spend your $50 of grocery money, but you pay with your credit card. Your credit card balance went up by $50, and the cash is still in your bank account.

To accurately reflect the situation, YNAB simply moves the dollars that you allocated to groceries over to the credit card payment category. The dollars are still in your bank account, so they should still be in your budget—but now they have been reassigned from grocery money to money for your next credit card payment.

But What About Credit Card Interest?

Now, some of you may be asking, “OK, I get that, but my credit card company charges interest. How do I handle that?”

Interest is the fee that your credit card company charges you for extra time to pay off debt. Pretty much the only good thing about interest, is that it might motivate you to pay off your debt faster to avoid the extra charge.

As with any expense, you need to budget for interest payments. To do this, set up an “Interest” category in YNAB. If you don’t know exactly how much the interest will be, budget a little more than you expect.

Then, when interest hits your credit card balance, record it in your credit card account, just like any other expense. Instead of buying groceries (or something fun), you’re buying more time to pay off your debt.

Eyes on the Prize

The faster you pay off your credit card, the less interest you’ll pay, so be aggressive! YNAB is designed to help, that’s why our software handles credit cards this way—we want to help you focus on budgeting your cash, and avoid going further into debt, so that you can finally be debt-free!

Want More Help With Credit Cards?

I hope that made sense. If not, check out YNAB’s free online class, Master Credit Cards With Your Budget, where our teachers go into more details and answer your individual questions.



If you can’t wait until next week for more whiteboard wisdom, subscribe to our YouTube channel. If you have a question or an idea you’d like us to address in a future Whiteboard Wednesday episode, we’d love to hear from you: [email protected]