Budgeting! Before I graduated college without much sense of financial knowledge. Just the basics really. Don’t spend more than what you have. Anticipate purchases in the future so you’re ready for them. You know, that kind of stuff. But then things changed.
A little over two years ago, I purchased a new program called You Need A Budget (or YNAB, for short), and since then, it has revolutionized the way I view the world. YNAB is a budgeting startup aimed towards helping you “Gain Total Control of Your Money” through the four budgeting principles that influences the way the software is designed.
- Give Every Dollar a Job
- Save for a Rainy Day
- Roll With the Punches
- Live on Last Month’s Income
With these four principles in mind, you can go ahead, set up your budget for each month, and start tracking every transaction you make! By tracking each transaction you make, you begin to understand where your money is going and begin to plan out how to meet your financial goals.
In this blog post, I will be outlining some areas I apply to my own monthly budget. I will not be revealing my monthly income, but the numbers thrown around will be accurate or at least proportional towards the idea behind them.
Give Every Dollar a Job - I really liked this theme, and every other YNABer I’ve met agrees with this one in particular. Essentially, every dollar and penny you mark as income should be assigned a job. To put it in more simple terms, give the dollar a reason to be in your bank! YNAB accomplishes this by getting you to allocate money into different budget categories. For instance, I have a couple of broad categories: Essential Monthly, Non-Essentials Monthly, Every Day Expenses, Online Presence, Rainy Day Funds, Monthly Donations, Monthly Savings, Savings Goals, and Debt. Each broad categorization has several subcategories within them, which is where the true value lies. For instance, Online Presence contains areas for Branding, Equipment, Website/Online Services, and Tournament categories. Each category in your budget has a specific amount allocated to it each month, and it’s your goal not to spend more than that on that kind of purchase that month. So for Tournaments each month, I save $100 to be able to fund my ongoing StarCraft II Tournament, and for Online Presence for Fuel (under Non-Essentials Monthly) I set aside another $100 for any gas I have to purchase and for groceries, I set aside $125 every month. You get the idea.
Setting aside money you’re allocating in each budget has many benefits. First, it puts a tangible amount of money for each particular kind of purchase, meaning that if your checking account shows you have $1.5k in it, you can’t just spend $1.5k on alcohol. Realistically, you have bills and other areas you want to spend that money, so maybe in the end, you only have $150 to spend. Notice how the perspective changes with that viewpoint. Also, when you set aside money in a category (Say, Korea under Savings Goals), you will begin to accumulate money in that category (since you’re not spending that money) and before you know it, that $250 you’re saving every month is now $3k saved up over a year! Funny how savings work! Just another year and I’ll have almost $6k to spend on my upcoming trip to Korea!
The advantage, like stated, is that it turns your bank account into a more realistic number, so that $3k in your bank isn’t $3k you would spend going out to eat at restaurants. After bills and spending in other areas, that number may be $75 or $150. You decide! The point is, you’re much more inclined to spend money if it looks like you have more money than you actually do! YNAB helps put it into perspective by forcing you to break down and prioritize where your money is allocated to help you spend money on the things that you want to spend them on.
Save for a Rainy Day - Here’s a concept we’ve all heard multiple times! Save money! Why? Why should I not spend this money on a new video game? Why shouldn’t I go purchase a new TV? Simply put, accidents happen.
Have you found yourself in a car accident? If you haven’t lucky for you, but if you have like me, it costs a ton of money for car repairs, dealing with insurance agents, dealing with other parties involved with the accident, and more. So what happens if you don’t have money at that time? It’s stressful! Where are you going to get the money to pay the copayment? How are you going to make up for lost income because you can’t work while you’re at the car shop dealing with your car repairs? It causes a ton of unnecessary stress that you haven’t planned in the first place!
So here’s an idea? What if we set aside a little bit of money each month in anticipation for the event to occur? Sure, it may not solve every problem, but instead of waiting for a paycheck to just be cashed in and spent right away, forcing you to be cashless for another pay cycle, why not have the money set aside already, and then when it happens, you just simply pay, without worrying about going into the hole, and then all you have to do is worry about the other stressors in this situation? It makes a lot of sense, and it improves the car accident experience.
It may not even be a car accident! What if you lost your job through an unfortunate set of events? Having an emergency fund that has enough money to last you for 3 - 6 months will keep you on your feet as you continue job searching. No longer are you wondering if you’re going to be able to pay the next bill. You now have some buffer time to find a new source of income before you run out of money! YNAB can help you do that by assigning some of your hard earned dollars the job for these situations. For me, I have Car Maintenance (set aside $100 every month), Unexpected costs ($50 each month), and Medical ($75 each month). Setting aside this money reassures me that in the event of an income shortfall or huge expense, my financial goals won’t be impacted as much and that I don’t have to worry about going into the hole for these kinds of situations.
Roll with the Punches - Okay, so nobody's perfect, and YNAB is set up that maybe you estimated that you would need $100 for groceries, but only spent $75 that month. Then, that $25 will rollover to next month, so when you set aside another $100, you now have $125 total available in that category of spending.
Or let’s say you set aside $50 for going out to lunch with coworkers, and at the end of the month, you spent $90. Instead of punishing yourself for overspending, you now see that action and know that next time, you either allocate more money towards that category, or find ways to not spend that much money in that category. The point is, every transaction you do has a cost associated to it, and depending on how you categorize it depends on your priorities. YNAB is set up to roll with the punches, allowing you to customize your budget allocations differently each month if you wish.
The biggest thing is awareness, and YNAB provides that awareness so that next month, maybe you won’t buy that extra Latte.
Live on Last Month’s Income - A big thing about Financial Security is the ability to have a peace of mind that when you spend money, you won’t be going into the red. YNAB puts this into a good perspective for all users, stating that you should be only spending money from Last Month’s Income. But what does this mean?
- It means budgeting out the next month using only last month’s income.
- It means not spending more money than what you have set in your budget.
- It means not having to worry about waiting for the next paycheck in order to pay your bills.
I have many friends who cannot pay their bills when they come in until the next paycheck. It stresses them out and when that check comes in, they see it leave their hands just as fast as it comes. This is so demoralizing. I see Facebook Statuses about this all the time and people get into this cycle where their money is not truly theirs.
By living off of the income made the previous month, you no longer have to worry about going into the red with each purchase. You can just pay your bill the day it comes. You can realistically know how much money you’ve made and work with that money.
But what if I have not made it to the point where I can live off of last month’s income? Well, start taking steps towards it! Set aside some money each day to get yourself there. It may take some time, but once you have yourself completely set up, you will see a peace of mind that can only be described as relieving. Money loses its control over you and you begin to feel like your money is going the way you want it to go, to increase your life pleasures and to avoid potential pain points.
Conclusion - So, YNAB is the bomb. I absolutely love it. It taught me how to look at money more realistically, it taught me how to forecast budget, it taught me how to work with my money manually, and it taught me the importance of keeping track of your finances. Your finances can make and break a person’s life, so why not make it help you? It does have a sticker price of $60, but there are ways you can get discounts on it. See the next section for more on that. In the end, I fully endorse this software, and I live and swear by it. It has enabled me to be able to fund my own StarCraft II tournaments, to save up for a big trip to Korea in 2016, to set aside money for a rainy day, and more!
If you ever want to talk to me about your finances, I would love to hear your ideas on money, personal finances, frugality, and other related topics! We all make different amount of money each year and have different priorities, so perspectives are everything! The more you talk about it with others, the more you can find ways to hit your financial goals!
Further Resources - There are many resources you can access regarding YNAB, all helpful in their own way.
30 Day Free Trial - Need I say more?
Steam’s Summer and Christmas Sale, YNAB usually goes on sale for at least 50% off
You can take Free Online Classes to learn more about finances and possibly win a free lifetime license for YNAB
YNAB has an Android and iPhone app to help you track your spending on the go
YNAB uses Dropbox account to sync your data between devices.
YNAB provides basic reports to help you understand where your money is going.
/r/YNAB is a great resource to discuss money with the YNAB community
Have you ever read a job posting by YNAB? Seriously, who doesn’t want to work for them after reading one?