I don’t claim to be a financial genius. I’ve had my struggles in the past, but now there’s a new-found hope for how I manage my money and it all started with a simple little piece of software called You Need A Budget or YNAB for short. It only does one thing, but it does it really well. They’ve taken the concept of budgeting, with which many people struggle, and they’ve made it embarrassingly easy. In the end, it wasn’t the software that helped me turn a corner, but the YNAB Method. The software helps to keep YNAB’s four simple thoughts front and center in my mind and that has helped me rethink the way that I manage my money.
I’ve been using Quicken since 1995 and was always a little intimidated by it’s budgeting screen. There was my entire year displayed as an empty slate, asking me to tell it where my money was going to go. The main problem was that I didn’t know where I was going to spend my money next month, let alone 12 months from now. Thankfully, the YNAB method of budgeting doesn’t work like this at all.
When I first looked into YNAB I immediately disliked the fact that it doesn’t connect to any bank and automatically download my transactions. That’s something that Quicken had mastered and I always thought that it was a must-have feature in any financial management application I used’¦and therein lay the problem. By downloading my transactions automatically, I found that I was reviewing the money that I spent after the fact rather than making a conscious decisions on whether to spend the money or not in the first place. This was my first hurdle and once it was pointed out to me in a rather blunt way, I realized that I had always made purchasing decisions based on the balance in my account at the time rather than looking at each dollar and deciding where it should go.
That leads me back to the YNAB Method and its four rules:
Rule One: Give Every Dollar a Job
Budget the money that you have; don’t try to budget money you haven’t received yet. When you receive your paycheck, sit down and figure out all of the things that money needs to do between now and your next paycheck. No matter what, put every penny you have into one bucket or another.
Some buckets are for fixed expenses like rent or your car payment; they’re the same every month. Other buckets are mandatory-variable expenses like groceries or gas. Then there are buckets for discretionary expenses like restaurants.
Rule Two: Save for a Rainy Day
Often you’ll have larger expenses that might be several months away so you need to start preparing for them now. For example, if you know your car registration is about $300 and it’s due in December, then make a bucket for it and and put a little money into that bucket each month so you’re not scrambling to pay the bill right before the holidays.
When I started, I put a small amount each month into a bucket called Car Maintenance, mostly because I was still learning to get comfortable with YNAB. About three months in, the oil change light came on in the car and as usual, my first thought was ‘Great, how much is THAT going to cost?!?’. Then I remembered that I had money in a bucket specifically for this. This completely removed the stress that usually came with an unexpected* expense.
Rule Three: Roll With the Punches
It’s highly likely that at some point you’ll spend more money in one category that the amount that you had in that bucket. In the past, this was why budgeting never worked for me. For some reason, I would decide that I was incapable of predicting the future well enough for a budgeting process to work.
Things happen. If I need to spend more money for Groceries than I budgeted it’s not because I’m no good at predicting the future (I mean really, who is?), it’s because my financial priorities have changed between the time I budgeted the money and the time I purchased the groceries. That’s OK, that’s what humans do all the time, we re-prioritize. When this happens just go into YNAB and figure out what bucket gets deprioritized in favor of groceries and move the money around. It’s not a bad thing, it’s just life.
Rule Four: Live on Last Month’s Income
Many people are living paycheck to paycheck. The risk is when the unforeseen happens. Maybe it’s a huge, unexpected car repair bill or you end up owing a large amount on your income tax return. If you’re using the money you earned last month to pay this month’s bills, you’ve got a little extra buffer for the next time Life throws you another curevball.
I’ve been hearing about having a financial buffer my whole life, but how do you build that buffer? Where does it come from? Well, the YNAB team has figured out a process for that as well and it’s really as simple as putting money in a bucket. On each payday, take the time to put dollars toward the expenses between now and next payday. Whatever money is left, put it into a bucket called ‘Buffer’. Now it’s got a job. In the future, it’s going to give you room to breathe.
The Bonus Prize
I think one of the most amazing things about the YNAB process is their mobile app. It give me a quick overview of balance in all of my category buckets as well as each account that’s been set up. When my friends want to go out to each, I can see how much money I have left in my Restaurants bucket with one tap on the phone. This allows me to quickly make spending decisions based on my budgeted priorities rather than my bank balance.
Web Site Resources
The YNAB website is full of help when you need it. They have several free live web classes each week that you can sign up for even before you’ve purchased the product. Classes that cover how to make your budget work, handling credit cards, and building up your buffer. Can’t make a live class? Check out their pre-recorded web casts from earlier live sessions.
All in all, the way I think about money now is completely different than I did in the past. I’ve only been following this process for a short time but I know this is a lifelong change for me. If you need a gentle push to get you over a financial hump, it’s probably because You Need A Budget.