Setting Up Your Budget Using the YNAB Methodology

Today we’re going to show you the method of budgeting that totally changed the way we feel about budgeting. It’s a move away from the traditional budgeting that has you feeling like a failure every month.  We want a budget that will empower you to really tell your money what to do instead of the other way around. 

We use YNAB– that’s You Need a Budget– for managing our budget, so that’s what I’m going to show you today, you can apply these same principles to a pencil and paper budget or using a spreadsheet you make yourself. 

Whatever you choose to use whether it’s YNAB, pencil and paper, or your own spreadsheet, this method of budgeting will change your life! That might sound dramatic, but that’s really what it did for us!

What’s different about the YNAB budgeting philosophy?

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

In contrast to traditional budgeting, the budgeting model we recommend and we’re going to walk you through today is a forward-looking budget, which is actually really intuitive. If you’ve never budgeted before,you won’t know the difference. It will just make sense. If you HAVE budgeted in the past, you’ll probably wonder WHY you never thought to do it 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.

Because I really believe that it is the most effective way, I’m going to lead you through starting your fresh budget using YNAB.  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.

Today’s post will be best consumed in video form so I can show you how YNAB really works.  I’ll still go ahead and briefly explain how it works below, but this post will make much more sense to watch rather than read.

Fund Your Budget

When you start your budget in YNAB, you’ll add your accounts to fund your budget.  Add any and all accounts that you spend from (or could potentially spend from).  Think checking accounts, savings accounts, credit cards, cash, etc.

You will have the choice for each account to be “linked” or “unlinked.”  A linked account will automatically import the data from your account like balances and individual transactions.  While it may be convenient to have all of your transactions automatically appear for you, there is real value in doing it yourself. You’ll see that this manual entry gives awareness and accountability that you won’t have when it’s done for you automatically.

Since you’re just starting out, all the money will go into the “To be budgeted” number at the top of the budget.  In the future, each time you enter income, you will see money appear at the top of your budget, ready to be budgeted.

Setting up Budget Categories

YNAB starts you out with lots of category groups and category suggestions.  Go ahead and enter the budget categories you wrote down yesterday. You can divide them into the three areas we discussed: fixed expenses, variable expenses, and periodic expenses.  Or if you prefer the way they are set up by YNAB then go with that. Don’t worry they are easy to change later if you want to add or delete something or move the categories around.

In order to organize our budget in the most helpful way getting started, let’s go ahead and put due dates on the categories that have them. So if the mortgage is due on the 1st of each month, we’ll call this category “Mortgage– 1st.”

Since we’re only budgeting money we HAVE, we might not have enough to fund each category completely right now.  We will have to prioritize, so order your bills according to their due dates so we can fund them in the order of what is coming up the soonest.

Also, we want to set goals for each of our categories where the amount is the same each month.  We aren’t actually assigning money yet, just setting a goal for how much we would like to fund each category with.  This is especially helpful when you’re starting out and don’t have enough money to fully fund each category.  Having the goal will remind you how much you need to come up with before the bill is due.  In actuality you might fund half of your rent with one paycheck and the rest of it with your second paycheck of the month.

Budget the Money You Have

Now that we have money available to budget in our budget and we have our categories all set up, it’s time to fund our budget categories.  We want to tell each of our dollars what to do.

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).

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.

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.

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.  Your category balance will show the real “live” amount of money you have available.

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, on paper, or give YNAB  a try.  You’ll use the categories you outlined yesterday then 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.