If you’ve done any budgeting in the past, it’s most likely been of the traditional sort. A traditional budget is characterized by a list of categories, each with an assigned amount of money you plan to spend in that category. Your budget is based on your projected income for the month, which hopefully is more than the total of all the expenses.
Essentially, a traditional budget is a plan of how you will spend the money that you hope to get that month.
We have failed dismally every time we’ve tried to live by a budget of this sort. These budgets are a chore, and the most frequent emotion they engender is a sort of lingering guilt. Our actual spending never quite matched our budgeted amounts and we constantly felt like we had failed and should have been better at projecting our expenses or our income. We sometimes found ourselves gerrymandering purchases into unnatural budget categories, as if the budget were an unchangeable fact we had to conform to. We avoided reviewing the budget together, and eventually, just stopped using it completely. It didn’t matter if the actual budgeting tool were a sheet of paper, a spreadsheet, or a program like Quicken or Mint, it was always a bad experience.
With a traditional budget there were no built-in restraints or safeguards to ensure that our spending followed our budget. There were no checks to ensure that our spending money had even been earned yet. The rigidity of traditional budgeting methods left us feeling like failures at worst, and unenthusiastic participants at best.
Moving Away From Traditional Budgeting
The best thing that ever happened to our budget was to move away from the traditional budgeting model and adopt the YNAB budget methodology. We actually love budgeting now, and can’t wait for our end-of-the-month budgeting date. Because I really believe that it is the most effective way, I’m going to lead you through starting your fresh budget in this non-traditional, yet intuitive process. If you’ve never budgeted before, you won’t know the difference. If you have budgeted, you’ll probably wonder why you never thought to budget like this before.
Most traditional budgeting software and philosophies look backwards at what happened. They analyze where your money went after it’s too late to do anything about it. YNAB, on the other hand, looks forward. You assign your real, actual money to categories before you spend it.
Another change from many of the modern budgeting programs is that YNAB does not link to your financial accounts. Any numbers you have in YNAB come from you entering them. This goes for account balances, as well as individual transactions. You’ll see that this manual entry gives awareness and accountability that will bring success.
I know many readers have recently purchased the YNAB software and are eager to start using it. Even if you don’t have YNAB software, you can still apply YNAB’s budgeting rules and methodology to your own spreadsheet. You can also get a free trial of YNAB.
Fund Your Budget
When you start your budget in YNAB, you’ll add your checking account balance (YNAB doesn’t link to your accounts). You can find the balance of all of your accounts on the left. Since you’re just starting out, all the money will go into the “available to budget” number at the top of the month’s column. In the future, each time you enter income, you will see money appear at the top of your budget, ready to be budgeted.
In the above example we have just entered our checking account which has a current balance of $1,350. That money goes straight up to the top of the month column since it is “available to budget.”
Budget the Money You Have
The first of the four rules in the YNAB method is to give every dollar a job. Instead of just being a lump of money in your checking account, your money will be earmarked for a specific category. Don’t worry, you’ll be able to change your allocations when you need to (we’ll talk about this next week). You’ll budget down to zero, meaning every dollar in your checking account will have a specific “job” or category that it is assigned to. It’s like a virtual envelope system.
Giving every dollar a job also means that you are only budgeting money that you already have. You’re dealing with money that actually exists, not money that you hope materializes this month. Your budget is a real live animal. It means something!
Start by allocating the money you have in your checking account right now. Decide what you need that money to accomplish before you get paid again. Maybe you’ll need to get groceries and gas, and pay the electric bill before your next paycheck. Maybe there’s a rent payment, groceries, and a wedding gift to purchase. Allocate how much money you think you’ll need to each purchase category. If you have a big payment due later in the month, like rent or a mortgage payment, you will probably want to allocate part of the money you have to that category. You’ll have to prioritize your categories (i.e. fund your “rent” category before your “fun” category).
In the example above, we have allocated all the money that was “available to budget” into the various categories (long highlighted rectangle) where we plan to spend it. Notice that even though our “available to budget” is $0, all of our money is still in our checking account (left side) because we haven’t spent it yet.
Maybe you aren’t living paycheck-to-paycheck, so some of the money in your checking account is earmarked for your emergency fund or your life insurance premiums. That’s great. Just put that money in the appropriate category and it will be accounted for and there to use when you need it.
Each time you get paid, you will allocate money to your various categories. In order to stop the paycheck-to-paycheck cycle, you’ll want to start setting aside money to build up a “buffer” that will allow you to live on last month’s income. When you have a month’s worth of income saved up, you can budget the entire next month using the sum you saved while you direct all your income during the current month to the following month. Your “available to budget” money will be based on the money you earned the month before. It is a wonderfully freeing feeling to have a buffer. I know that for some of you, your 6-month goal is to start living on last month’s income. That is great! I can’t recommend it highly enough.
Spend According to Your Category Balances
With YNAB’s philosophy, you spend according to the balance in your budget categories. Before making a purchase, check your category balances and make sure that there is sufficient money in the category to cover the purchase. Each time you spend money, record your expenditures either on the mobile app or on your desktop.
Each budget account (checking account, savings account, credit card, etc) will have its own register of transactions. To record spending or income, click on the account on the left side to pull up the register, which looks like this:
Click on “add new transaction” to add spending or income to the account. You will add a category to each entry.
Since you’ll be adding a category to all of your spending transactions, the expense will be subtracted from the category balance in the budget view (see below). Your category balance will show the real “live” amount of money you have available.
In the “outflows” column (highlighted in yellow), you can see the spending we’ve done. The “balance” category (highlighted in orange) is the column we want to consult before spending money. It shows us what funds we have available in that category. Our spending is also reflected in the checking account balance on the left.
Even if you’re using a credit card to pay for the expense, you will still spend according to the category balances. Then, when your credit card bill comes, you can be absolutely certain that the money will be sitting in the bank waiting for you to apply it to the credit card. Using our YNAB budget has taken the stress away from using credit cards for us and left only the benefits.
Safety and Simplicity
There is no need to open specific accounts for special budget goals. You don’t have to fret that your new car savings and your property tax money lives together with your grocery money and utility expenses in your checking account. Your special savings categories are not in danger of being spent because you will no longer consult your checking account before making purchases. Instead you’ll look at the category balances before deciding to make a purchase. As long as you spend according to your categories and track your expenses, you can trust that your money will be safe from accidental (or intentional spending) without having to move your money around between accounts.
Challenge– Day 7
Set up a budget either in your own spreadsheet or YNAB using the categories you outlined yesterday. Use the money you have right now to fund your budget, starting with the most urgent categories. Do your best to spend according to your category balances. Be prepared to continue funding categories when you get paid again.
- The Best Thing that Ever Happened to Our Budget: Why we switched from Mint to YNAB
- Budgeting Every Penny: Zero-based Budgeting with YNAB
- Living on Last Month’s Income
- Using Credit Cards with YNAB
Thanks to the great folks at YNAB, I have a copy of the software available to give away! As you’ll see below, there are a couple of ways to enter. The giveaway will end on Jan 30th. The winner will be notified by email and will have 48 hours to respond.
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