Step by Step Guide to Using YNAB to Pay Off Debt

Hi, everyone.  This is Lara Hammock from the Marble Jar channel and in today's video, I'll show you a step by step process on how you can use YNAB to pay down debt, including credit card debt.

This video is for folks who have already set up a budget in YNAB and have been using it, but haven't quite figured out how to make it work for them to start paying down debt.  I'm going to walk you through my step by step process to setting up YNAB to start this process.  I will say at the outset that there are lots of ways to do this in YNAB -- this is just one option.

1. Commit to No New Debt - you need to make a commitment to yourself to not accumulate new debt.  Do whatever you can to stay on your budget and spend less than you bring in.  I know sometimes this isn't possible -- life happens -- but this commitment is important to stop the bleeding before you can start moving forward.  Next, 
2. List Your Debts - The next step is to make a giant list of all your debts, how much you owe, what the monthly fee is, and your interest rate.   This includes all debt with the exception of your mortgage if you have one.  So, student loans, auto loans, credit card debt, personal loans, and lines of credit.  Here is a link to a worksheet that you can use for this (https://docs.google.com/document/d/1dktNhq0GfgZCN0VXATiDs9iky2xyGxI_EKLSwsVhgJo/edit).  Now you want to put these in the order that you plan to pay them off.  I would suggest smallest amount to largest (otherwise known as snowball).  You can also do biggest interest rate to smallest (that's known as avalanche).  The reason I suggest snowball is that those quick initial wins of paying off smaller debts give you confidence and motivation to keep going.  It works best with human psychology.  Once you have this list in the right order, it is going to be important to you as a marker of where you started in this process.  I'm going to use this list of debts as an example for this video.  Next step,
3. Add to Tracking - So, now you are going to add each of these debts as a tracking account.  This will become your debt payment road map.  Let's walk through the different kinds of debt you might have. 
• Linked Debt
• Click on Add Account and Choose Linked.  I would always choose Linked if you can.  Linked means that YNAB will interact directly with that financial institution and automatically pull in whatever fees, interest, and payments that happen.  If you don't want your account linked or you that option isn't available for some reason, you will have to update this account manually each month when they post fees and payments to keep it up to date.  It's not terrible, but it's more up-keep for you and I would avoid it if possible.
• Hit Linked, Add a New Connection and enter your login credentials for that financial institution.  You should then be presented with a list of accounts to choose from.  Once you choose one, YNAB will add that account to your list here to the left.  You should note that YNAB doesn't ask you whether you want the account to appear in tracking or in your On Budget list.  It automatically puts debt accounts in as tracking accounts. 
• Unlinked Debt
• If you can't or don't want to link your debt accounts, you can put it in as an Unlinked account.  Hit "Add Account" choose Unlinked, under "Select Account Type" make sure you put it in as a "Liability" under the Tracking Accounts section.  Then give it a nickname like "Student Loan 1" and enter the amount that you owe.  As I said, you'll have to maintain this account when you get statements or at the end of the month to put in the transactions for fees, interest, and payments.  Let's talk about
• Credit Card Debt
• We went over the fact that YNAB automatically puts in most debt accounts as tracking, right?  That is true, except for Credit Cards and Lines of Credit.  YNAB automatically puts those kinds of accounts in as On Budget accounts.  The reason is that it assumes if you are adding that kind of account, you are still spending on it.  However, if you are entering a NEW credit card debt account, you can instruct YNAB to put it in the right place.  Go through the process to link the credit card account and on the screen that allows you to pick “What kind of account are you adding?” Choose Tracking Liability.  
• But what if you already entered your credit card account and YNAB has it in your On Budget accounts?  Can you switch accounts from On Budget to Tracking.  In a word, NO -- YNAB does not allow you to do this without totally messing up your budget.  So, you'll need to leave any credit cards and line of credit debts On Budget as you pay them off.  We'll talk about marking them properly in a second.  In the meantime, you need to look back at Step 1, which is where you committed to creating no new debt and STOP charging ANYTHING on this credit card -- even if you promise yourself you will pay it off at the end of the month.  Why?  First off, if you are running a balance, the credit card will start charging you interest IMMEDIATELY on those new charges rather than giving you a grace period like if you weren't running a balance.  The second reason is that psychologically, if you are just thinking about this like a normal credit card, you are NOT thinking about this account as debt that needs to be paid off.  I would suggest stopping all charges on this card, and putting everything you would normally charge on a debit card for your main checking account.  OR, if you absolutely need to, open a new credit card that you commit to paying off at the end of each month -- and stick to it.  Okay, now that you have all of your debts in YNAB either as Tracking accounts or On Budget, you are going to 
4. Set up Monthly Fees - There are two parts to paying off debt.  You have to keep up with all of the monthly fees -- just to make sure your debt isn't getting any bigger AND you need to start paying down the principle of your debt, one debt at a time.  You may already have this set up, but in case you don't, you need to create a group in your budget for Debt Payments.  Now, add one line item for every debt that you have.  In the item description, put in the amount of the minimum monthly fee and the day of the month that it is normally due.  Remember, if you have a credit card On Budget, YNAB automatically creates a line item for that card and listed it under a group called Credit Card Payments.  You can't move this, so just put this close to your Debt Payments group.  At the start of every month, you are going to budget for each of these monthly fee amounts just like you do your electricity bill.  And yes, you should move your car payment into this list — it is a debt that you want you pay off, after all.  Next,
5. Set up Debt Pay Off - Now, add one more line to this list.  You are going to call it Debt Pay Off.  You may already have an amount that you have carved out of your monthly budget to throw at debt -- if so, that's great!  Go ahead and put that in just like a regular budget payment.  If not, I'm going to show you how to squeeze your budget at the end of every month to scrape whatever is left over into paying off debt.  
6. Number/Order Debts - Now you are going to put your debts in the order you want to pay them off.  Remember, you might have a couple of accounts On Budget and the rest in Tracking, so I would suggest changing the account names to reflect the order -- something like "DEBT 1 - Chase CC".  Once you are finished, your accounts should look something like this.  
7. Scrape Extra Money to Debt - As I said before, it's best to have a set amount that you will be throwing at debt each month already carved out of your budget.  But even if you aren't at that place yet, at the end of the month, you should be able to scrape any money that is left over from your budget to put towards debt.  I like to keep all of my monthly budget items under one big group called Monthly Expenses, but you may have your Budget set up the way the YNAB recommends with Immediate Obligations and True Expenses.  Either way, you need to order these budget items by whether or not they are accumulating funds or not.  What I mean by that is, do you need the money left at the end of the month to roll over to the next month?  Here are some examples of non-accumulating accounts for me: Groceries, Gas, Internet, Cell Phone — these can all go to zero at the end of the month. Some examples of accumulating or sinking items are auto maintenance, household, insurance, kids activities, Xmas, and charity.  You get the idea.  So, you want to order your budget items so that anything that is going to zero at the end of the month is on top.  Then, you can either have them split into different groups -- or if you are like me, you just need an indication of where the sinking items begin like this.  Now, at the end of the month, after you have done all of your budget and account maintenance in YNAB —and funded at least half of the next month’s budgets — you can scrape money towards debt.  If there is any money left over in the Available column in any of your end of month zero line items, you want to click on it and move it to the Debt Pay Off.  Do that for each of these line items.  Also, once you have budgeted at least one month in advance, if you have anything left in To Be Budgeted, go ahead and move this to Debt Pay Off also.  
8. Pay Off Debt - Now that you have all of this money scraped down,  you can use it to pay off debt.  Look at all your debt accounts, find the first one on your list, and either write a check or transfer the amount of money that is available in your Pay Off Debt budget line.  You are going to do this exercise every single month until that first debt is totally paid off.  Then you can hide the line item for monthly fees for that debt -- since you don't have to pay that anymore, and add that amount to your Pay Off Debt monthly contribution amount.  So, I paid off my first debt.  The monthly payment was $75, which I can now add to the Pay Off Debt line.  You can see how this starts to snowball to help you to pay off the next debt.  Obviously, you will have some months where you won't have much (if anything) to scrape down to debt.  BUT the more you stick with the process and the more progress you make towards your goal, the more motivation you will have to cut expenses, rein in, and have fun paying your loans down.  You can also use the
9. Goal Function - in YNAB.  Take a look at your first debt that you want to pay off.  Say you owe $2,200 in a personal loan.  Go to that budget line "Pay Off Debt" and on the right choose Create Goal.  You will choose one of the Spending goals, either to pay a certain amount each month OR choose By Date and pick a date that you want to pay off your loan.  YNAB will calculate for you how much you should be contributing each month to reach that goal.  Once you have paid off that first debt, redo your goal, this time for the second debt -- adding in the monthly fee that you are saving from the first one.  And so forth until you are Out. Of. Debt.  

Having a plan and a process like this will massively relieve your anxiety about your debt situation.  Once you have a plan, your brain can give up a lot of the stress that it's constantly feeling about how to handle a situation that has felt insurmountable.  Let me know what you think!  Comments are always appreciated and thanks for watching!