How to Budget with YNAB (Part 1)
This is the 1st in a series of articles on how my wife and I manage our family’s budget using YNAB.
Everyone comes to the realization that they need to better manage their money a different way. For me, I realized in late 2016 that my wife and I were going to quit our jobs in June 2017 and spend the summer traveling with our two kids.
Our previous financial strategy boiled down to “spend less than we make”, which I’d guess is what 95% of folks do. Without steady W-2 income this wasn’t going to work anymore, so I started to analyze our income and spending and eventually discovered a budgeting tool called YNAB (short for You Need a Budget).
In the 2+ years that my wife and I have been using YNAB, we have:
- Increased our income by being smarter about things like credit card rewards, earned interest and other forms of income generation.
- Gotten much better at planning for expected and unexpected future expenses.
- Increase our spending on the things we really care about, like reading, travel and giving.
The purpose of these articles is to function as companion documents to the truly excellent resources that YNAB provides. I’m not going to explain how to use features or execute basic tasks, instead I’m going to focus on sharing some of my personal philosophies on managing money and a few best practices that have made using YNAB feel less like a chore and much more fun.
What is YNAB?
You might be wondering how YNAB is different than Mint or other expense-tracking tools. To me, it boils down to 3 budgeting principles that they espouse and, importantly, bake into the workflows of their product.
Give every dollar a job
Most expense tracking tools serve to categorize your spending and paint a picture of what happened in the past. YNAB is much more interested in helping you plan for the future, and it does this by helping you aggregate your cash positions (across potentially multiple accounts) and put each of those dollars to work, whether it’s paying for this month’s coffee or next year’s kitchen remodel.
Embrace your true expenses
Many attempts at budgeting fail because it can be frustrating to plan for (and budget) for expenses that happen irregularly: replacing an appliance, going on vacation, etc. Even things that feel regular, like grocery shopping, can exhibit pretty wild variance month to month. YNAB encourages you to think about how much you spend on these expenses on average over time, and to break these costs down into monthly amounts that you include in your budget.
Roll with the punches
And finally, no budget is ever “perfect” or “finished”. It’s a living document that you can and should change over time. Don’t get down on yourself if you didn’t predict every possible expense that could come up or you didn’t nail the $456.19 that you were going to spend on groceries this month. The point of a budget isn’t to be “right”, it’s to give you a clear view into your finances and enable you to make the best possible decisions.
Our Financial Situation
As I mentioned, my wife and I both quit our jobs in June 2017 in anticipation of starting our own businesses later in the Fall. I had worked at a software startup that had successful gone public, so we had some limited financial runway to pursue our ideas. We had also gotten much more aggressive about cutting expenses and increasing our savings rate while we were still working.
💡 TIP If you’re interested in learning more about spending less without sacrificing the things you really care about, I highly encourage you spend some time reading up on FIRE. It’s a rabbit hole, but had a huge impact on how our family thinks about money.
Our plan for getting through the rest of the year involved a combination of drawing down these savings and selling stocks. YNAB really shined here because we had both lumpy income and lumpy expenses (the cost of traveling all summer). I was able to easily set aside cash for our travel and budget our regular monthly expenses well into the future, knowing which month we would exhaust our current cash accounts and need to either sell stock or borrow money.
Let’s Get Started
Sign-up for YNAB
YNAB is an online service, just like Netflix. It has a 1 month free trial, and then costs $7/month.
If you like, sign-up for YNAB with this referral link and we both get one free month of YNAB.
Once you create your account, install the mobile application. It’s great and I spend the majority of my YNAB time using it.
Connect Budget Accounts
After you’ve signed-up, connect your Budget Accounts (docs, video). Budget Accounts are financial accounts that 1) you hold cash in or 2) are a source of credit. So definitely add your checking accounts, savings accounts and credit cards.
💡 TIP If you’re uncomfortable proving YNAB with your financial account credentials, you don’t have to set-up a live connection. You can still create the accounts and manually update the transaction info.
Pooling Your Cash
I can’t stress how important it is to connect all your cash accounts. A common practice is to designate certain account for certain purposes. For example, money for “paying bills” is in Checking Account A and money for “savings” is in Savings Account B. This method of using the account that cash lives in as a designation about what the cash is for is really limiting for two reasons:
- The number of accounts you have defines the number of “goals” you can define.
- You need to actually move money between accounts to alter the funding of these goals.
YNAB treats all liquid cash as the same, no matter what account it sits in. This way you can define any number of goals and changing their funding levels is as simple as tweaking the values on a web form.
Reconcile Your Accounts
After you’ve connected your cash and credit Budget accounts, please take a minute to reconcile them. For some reason, YNAB does not always import the starting balances for the accounts that you connect.
Luckily, reconciliation is incredibly easy. For each account, just compare the balance in YNAB to the balance you see when you log-in to the account. If it’s the same, you’re golden. If it’s different, just click “NO” and then tell YNAB what the actual balance is. You will then be able to make a manual adjustment to get your YNAB and real-life balances synced up.
Understanding Credit Cards
If you are not an expert in double-entry bookkeeping, you may find yourself confused by how the “Credit Card Payments” section works. YNAB makes an effort to explain this in the docs, but I still find that people that I talk to find it confusing at first.
Let’s break down the three dollar values associated with my AMEX credit card from the screenshot above and talk through what each of them means:
- This value is the balance of the credit card. If you log-in to your credit card account, this value should match what you see there. This number should always be negative (unless you accidentally overpay your credit card).
- This value is the total of transactions for the month minus the total amount of payments this month to the credit card company.
- This value is the amount of budgeted cash set aside to pay off transactions associated with this card. This number may be less than the value from (1), which simply means you don’t have enough cash to pay off your entire balance.
What about Tracking Accounts?
Tracking Accounts do not play a role in your budget and serve mostly to help people track assets that contribute to their net worth (home, car, retirement accounts, etc). If you don’t care about this, don’t create any Tracking Accounts. You can read more about Budget vs. Tracking accounts here.
Let’s Review
In Part 1 we talked about:
- Why we needed help better managing our finances
- What YNAB’s principles for budgeting are
- How to get YNAB set-up to import transactions from your financial accounts.
In Part 2, I’ll dive into the real meat of budgeting: categorizing and prioritizing expenses. Beyond these basic ideas, I’m also going to talk about something pretty counter-intuitive for a lot of folks: how to think about when you should be spending MORE money on things. Seriously!
