Budget. There’s a dirty word. Do you use one? Do you need one? How do you know? The concept of a budget is probably familiar to most people. But the practical application of using one day to day, maybe not so much. Even with a finance background, I wasn’t always super consistent with our family budget.
I’ve read Dave Ramsey before, and implemented the cash envelope system in the past but it just didn’t stick. I started using a budgeting app a couple years ago, but it wasn’t until about 6 months ago, after switching apps, that I saw a monumental shift in our budgeting and finances. I noticed a big difference right away, but wanted to give it a good run before I shared (hence this post). Y’all know I’m not cool enough to have an official sponsorship (although if anyone’s reading, hit me up), I just really love this app!
Now talking about finances can be a little bit sticky, shall we say. Personal finances are, well, personal, and it’s really no one’s business but your own what you do with your money – legalities excluded 😉 Budgets are super specific and dependent on many factors – unique to everyone (or family). So I’m not going to go into depth about how much I budget for different categories each month, because what works for my young family of 6 likely won’t work for you. After all, I used to be young and cool and I grocery shopped once a month and went to the movies every week.
There’s many different ways people think of “budgeting”. Maybe you know your discretionary income (what’s left over after your necessary expenses) and you give yourself freedom with that. Or maybe you budget on paper at the beginning of the year and tuck it away in a drawer. Maybe you have a very detailed excel spreadsheet. Maybe you just keep an eye on your bank balance and make sure it hovers around a certain amount. Maybe you don’t think you need a budget, because you always have enough, or money is of little issue. By all means, if what you’re doing is working for you, then stop reading. But I would first ask – do you know where your money goes? Like, all of it? Do you have goals that never seem to get funded? Are you surprised by one-off (non-monthly) bills? Do you throw Christmas on a credit card and worry about it later?
Here’s another way a budget can be useful. Have you accidentally mentally spent money multiple times? Here’s what I mean. Say you got some money for your birthday and deposit it in your bank account. Yay! You’re out shopping and find a purse you like – cool, I just got birthday money. Then a week later you want a new watch, and hey, I have money from my birthday. And then you find some great earrings on sale you don’t need, but really want – oh that’s all right, I had birthday money. Whoops. That $100 in birthday money ran out halfway through the watch. Or maybe money from a tax refund justified a weekend getaway and some appliance upgrades. When in reality, the refund actually only covered the cost of a new dishwasher or the airline ticket.
I have a Masters in Accounting and honestly cannot recall ever touching on personal budgeting in any formal manner in my education. Which means, give yourself some grace. If you have no idea what you’re doing, or are in over your head, don’t beat yourself up - just start.
Now that you have a bit of background, I’ll spill the tea. The app is called YNAB (You Need A Budget). There’s a great mobile app, but it’s also web-based and works on your PC (with some added features/functionality). There are a few things that set it apart, in my mind, both in principle and functionality. I’m not intending to bash other applications, but I think it’s important to make a couple distinctions. I used Mint in the past (and by use, I mean I had an account and got overwhelmed and ignored it), and I personally know some who use it currently. I believe it does have its advantages, and it can be used in conjunction with YNAB as well. Mint can give you a great overall picture of your finances; however, it looks backwards. It shows you where your money went and where it all sits. Budgeting, in contrast, should look forward: where should your money go?
That brings me to the next major mindset hurdle when it comes to YNAB. Budgeting often uses projections. How much money WILL you have, and what bills or expenses will you need to pay? YNAB functions as a zero-based budget. This means you budget EACH and EVERY dollar you have RIGHT NOW. It may sound confusing, but this is actually the magic of YNAB.
The Rules
I will quickly highlight the 4 rules of YNAB and the way a few key features work, and you can decide for yourself if you want to give it a try. Of course, you can find further explanation of these steps online.
1. Give every dollar a job. As I mentioned, this is MAGIC. It seems silly, really, but it’s incredibly easy to spend money you think you have, when in reality, it’s needed for something else. This rule evokes a scarcity mentality - you could have hundreds or thousands of dollars available, but because you know what “job” they’re supposed to perform, you actually don’t have the money for those new shoes, for example. If you’re familiar with Dave Ramsey – your budget categories act like envelopes.
2. Embrace your true expenses. This is where I think people get the most off-track with their budgeting. They will consider only their monthly bills and day to day expenses. All is well until you’re hit with a bi-annual car insurance bill, or need extensive work on your car. This, often times, is where you use your savings, or put it on a credit card. The savings part is not quite as problematic, if that’s what you intended your savings for. If that savings was intended as a mere safety net buffer however, then you may have a problem.
3. Roll with the punches. This rule gives you flexibility. Things come up or your priorities change and you need to move money around – that’s ok! This rule gives you permission to change your mind, and gives you the flexibility to make your budget work for you – always.
4. Age your money. This is the concept of having the money you need before you need it. Some of this happens by saving for those true expenses. For the monthly expenses, this happens when you have enough money to pay all of this month’s bills (or more) before you receive any income for the month.
Once you’re set up, transactions can be entered manually, or linked to your bank accounts. Each transaction will deduct from money available in that category, and you are prompted to cover any overspending that may arise.
Credit Cards
Most people I know have at least one. Some have great rewards, and I know some people put many household expenses on them to take advantage of rewards programs. If this works for you, great. But what happens if you have a mental “budget” that tells you to keep $200 in your checking account. At the end of the month you’ve got $300, but neglected to account for the $400 in bill payments that auto-pays on your credit card. Then you have a problem, because you’ve not only overspent your mental budget, but in this example you also can’t pay that credit card bill. Overspending on credit cards is all too easy, but I think most people would agree accumulated credit card debt is not ideal.
The way YNAB deals with credit cards can be confusing for some but it is ESSENTIAL if you use them at all. Your money is budgeted to your individual categories (grocery, mortgage, utilities, entertainment, etc). When you pay for something, you choose the appropriate category and payment method. When that payment method is set up as a credit card, YNAB automatically deducts the money from the category and adds it to your credit card line item. This shows as a positive amount available in your budget to pay for the charge when your credit card bill becomes due. This keeps you from accumulating (more) debt on your credit card. You can also set goals to pay off any accumulated balances on your card(s), and you would allocate that amount directly to the card when you have income to do so.
Key Notes and Getting Started
YNAB does not care what account your money is in. It can be in checking, savings, tucked under your mattress, or on a gift card. You allocate ALL those dollars. However, you can choose which accounts you want “on budget” by simply leaving them off entirely, or setting them up as a tracking account. For example, I have an HSA account for medical expenses that is neither tracked nor on budget in YNAB. This can be confusing for new users, particularly with savings accounts. Just because it’s in your “savings” account, does not mean you have to categorize that to a savings category, although you could if you choose. Do whatever makes sense to you, in your mind.
All you’ll need to do is set up an account either through the app or at the website here. Add your accounts and create categories (there is a base set there, but you can modify as you’d like). Be sure to think of all types of expenses, but you can always modify later (I’ve added many categories as I went!). Use your beginning account balances to fund your bills and expenses that must be paid before you are paid next, before moving on and funding other categories.
As I mentioned, I believe this program is beneficial for everyone, no matter your level of income. If your expense categories are funded for the month, you can allocate that money to longer term savings goals (vacations, loan payoffs, new car, etc), or even budget into future month’s expenses. And at the very least, it keeps you from mentally spending your money more than once :)
Disclaimer: there is a bit of a learning curve to the software. They offer a free 34 day trial, and Nick True videos on YouTube are very helpful.
Personal disclaimer: I am not an expert by any means – I simply wanted to share my experience in hopes that it may help some of you.
I hope you’ve found this helpful in some way, and be sure to let me know if you decide to give it a try! If you’re interested in a follow-up post on categories or any other information, let me know!