Credit cards in an envelope budget

The rule: a card purchase is spent when you make it

When you buy $85 of groceries on a card, nothing leaves your checking account yet. Envelope budgeting treats it as spent anyway: the $85 comes out of Groceries, just as if you'd paid cash. The cash is still in your account, so it moves to a category for the card's payment. That category always holds what you've charged, and paying the bill means using money you already set aside.

That's the whole idea. You never have to wonder whether you can afford the statement, because each purchase was paid for from a category when you made it.

A month with one card

Say you have $3,000 in checking, a Visa with nothing owed, and these three categories. During the month you put one purchase in each on the Visa:

The Visa says you owe $675, and the Visa payment category holds exactly $675, so the bill is covered. The budget still adds up: the $3,000 in checking is the $275 left in these three categories, plus the $675 set aside for the Visa, plus $2,050 in your other categories or not yet assigned.

Paying the card

When the statement comes, pay it from checking. A card payment is a transfer between two of your own accounts, not spending: the spending was counted when you bought things. So the payment has no spending category. It lowers the card's payment category instead.

After paying $675, checking holds $2,325, the Visa owes nothing, and the Visa payment category is back to $0.

When the statement and the payment category don't match

They usually won't, and that's fine. A statement closes on a fixed day, and you keep using the card after it. Say the statement closed on the 20th with $540 on it, and you charged another $135 after that. The payment category holds $675: the $540 on the statement plus $135 that will be on the next one. Pay at least the $540 by the due date. Paying all $675 is fine too.

If you already carry a balance

Debt from before you started budgeting isn't covered by any category: that money was spent before it had a job. So the card's payment category starts at zero while the card shows what you owe. The budget is telling the truth. None of your cash is set aside for that debt yet.

Handle it in three parts:

1. Stop it growing. Pay for every new purchase on the card from a category with money in it, as above. The payment category then covers the new spending, and the old balance stops getting bigger.
2. Pay it down on purpose. Each month, assign an extra amount to the card's payment category, on top of what new spending puts there. Then pay the card what the category holds. The extra comes from money you haven't assigned, or from categories you cut back while the card is paid off.
3. Budget for the interest. While you carry a balance, the card charges interest, and on most cards new purchases lose their interest-free period too. Record each interest charge as spending from a category such as Card interest, and give that category money, so the interest is paid for instead of becoming more debt. Some people stop using the card until it's paid off and pay by debit card instead.

Example: $2,400 of old debt, $300 extra a month

A Mastercard owes $2,400 when you start budgeting, at 24% a year, which is 2% a month. Each month you assign $300 extra to its payment category, and fund a Card interest category for the interest. New purchases come from their own categories, so they don't change the old balance. Interest here is simplified to 2% of the balance at the start of each month; real cards work it out daily, so your statements will differ a little.

Eight months and $216 of interest. Each month you pay the card three things: the new spending already in the payment category, that month's interest, and the $300. At $150 extra a month, the same debt takes 16 months and about $408 of interest, nearly twice as much.

Getting off the credit card float

Plenty of people pay their card in full every month and still live a month behind. October's purchases go on the card, and November's paycheck pays the bill. That's the float: the card is lending you a month of spending, interest-free if your card gives you a grace period and you pay the full balance. It works until a paycheck is late or a big bill lands in the wrong month.

An envelope budget shows the float plainly. Say you start budgeting on October 20 with a $1,200 card balance from October's spending, due November 15. From today, every purchase moves money into the card's payment category as you make it. The $1,200 you'd already spent has nothing behind it, so the payment category is $1,200 short.

You don't have to fix it in one go. Keep paying the full statement balance from your paycheck as before, so no interest is charged, and assign an extra $300 a month to the card's payment category. The extra has to come from somewhere real, such as a smaller dining out category or money you'd otherwise save; moving it between categories doesn't create cash.

By February the payment category holds the whole balance whenever the statement arrives. Each paycheck now pays for the month ahead instead of the month behind, and a late paycheck no longer means a missed card payment. If you have savings you're happy to use, assigning the $1,200 from them gets you there at once.

Overspending on a card

Say Dining out has $50 left and you put an $80 dinner on the card. Only $50 can move to the payment category, because that's all the category had. The other $30 isn't covered by anything: it's new debt. The card says you owe $80 more; the payment category holds $50 more.

Fix it like any overspending: move $30 into Dining out from a category with money to spare. The full $80 then sits in the payment category. If you leave it, Dining out starts next month at zero, and the $30 stays on the card with nothing set aside for it, just like a balance you started with. More on overspending.

Refunds and returns

A refund on the card goes back to the category the purchase came from. The payment category goes down by the same amount, since you now owe less.

In UrBudget

• A payment category for each card. Add an account of type Credit card (or Line of credit) and UrBudget makes a category with the card's name in a Credit Card Payments group. Enter what you owe as a negative opening balance. The payment category starts at 0.00, and debt you already have doesn't lower Unassigned.
• Spending moves money for you. Record a purchase on the card with a category, and the part that category can cover moves to the card's payment category. Select the payment category's Activity amount to open the card's transactions for the month.
• Paying the card. In your checking account, add a transaction and pick Transfer: Visa (your card's name) as the payee. The payment category goes down by what you pay.
• Paying down old debt. Type the extra amount in the payment category's Assigned column, or select its Available amount and take money from another category. To be reminded every month, give it a Monthly funding target of, say, 300.00.
• Card overspending is marked. A category overspent on a card shows its Available amount in red with a card icon. Select it to cover the shortfall from another category.
• Quick assign. Underfunded, applied to all your categories, covers overspending first, then the targets due soonest, then credit card payments, and never assigns more than Unassigned holds.

• What to do when you overspend
• Zero-based budgeting, explained
• Debt payoff calculator: snowball vs avalanche
• Getting started with envelope budgeting