How to Budget with YNAB (Part 2)
This is the 2nd in a series of articles on how my wife and I manage our family’s budget using YNAB. Check out Part 1 if you need to catch up!
In Part 1 we talked about, why we needed help better managing our finances, what YNAB’s principles for budgeting are and 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. 😍
Set Budget Category Groups
When you create your YNAB account, it will come with a bunch of pre-created Budget Category Groups. A BCG is a bucket that budget categories live in and is primarily useful when you start running reports on your spending. In the screenshot below the BCGs are Immediate Obligations, True Expenses and Quality of Life Goals.
I’m afraid I don’t remember which ones they pre-configure for new accounts, but here are the groups that I am currently using now:
The category groups are fairly self-explanatory, but I’ll cover them in more detail next as we dive into the expense categories. I want to take a minute to discuss two important concepts related to category groups.
Priority
Priority describes what expense take precedence over others. A lower priority number means expenses are more important. For example, if I have to make a choice to pay my taxes or go on a vacation, I’ll pay my taxes. Lower priority expenses tend to be more flexible, too. The mortgage and car payments are what they are, but I can spend less on eating out or buying clothes, if I need to.
When you view your Budget, you’ll notice you can re-order your BCGs by dragging and dropping them. Please make sure they’re ordered from top to bottom in decreasing order of priority. Your priorities might be different than mine, so think about it as you create your Budget Category Groups and Expense Categories. It’s an excellent exercise for really figuring out what you care about.
More is Better
I wish I had a better name for this, but for now it’s “more is better”. This designation lets me know whether I’m trying to increase or decrease the amount I spend on a category group. What a minute, what??? Why would you ever want to spend more money on things, isn’t the point of a budget to spend less?
Budgeting is all about putting your money to work and getting the most bang for your buck. Some expense categories exhibit rapidly diminishing returns, kind of like cotton candy. A little bit is nice, but too much is gross. Other expense categories, exhibit much more positive returns and you actually want to spend more there, within reason. For my family, this includes things like travel, reading and exercise.
Set Expense Categories
Once again, I think that YNAB comes pre-loaded with a bunch of common expense categories. Below I’m going to share mine, but please remember that your YMMV. My expense categories are reflective of the spending for a family of four, living in the Pacific Northwest that likes to go skiing and shopping at used book stores.
Taxes (Spend ↓)
I like to keep track of tax payments that I owe for each tax year. So, I’ve had categories in the past 2016 and 2017 and right now I have an active category for 2018. When you are no longer using a category, you can archive (hide) them. If you’re not the kind of person who owes quarterly estimates or owes tax payments in April, you may not need this Category Group.
Debt Payments (Spend ↓)
Every now and then you might need to borrow money, maybe from a parent or from some other kind of one-off source. These categories track those repayments and, if interest is charged, can also help you track how much that money is costing you.
Savings & Investments (Spend ↑)
Saving and investment money for large, one-off expenses in the future. This is a category where we aspire to spend more, within reason.
Essentials (Spend ↓)
Ok, now we’re getting to the meat of monthly budgeting. These are expenses that belong towards the bottom of Maslow’s Heirarchy of Needs and that you don’t generally have the option of skipping or reducing.
💡 TIP If your spending on a category is irregular (going to Costco once every 3 months, gas bill coming every other month) make sure to embrace your true expenses and budget extra. That way you’ll be setting aside cash for those eventual expenses.
Living (Spend ↓)
These are household expenses that are important, but could be cut or drastically reduced if we needed to save money.
💡 TIP Our family has a financial advisor that we see 2–3 times a year. His name is Sean Owen and he is amazing. If you live in Seattle and don’t have a financial advisor you should ping him.
Kids (Spend ↓)
Categories that are uniquely related to our kids.
Car (Spend ↓)
I like having a Car category group because I like knowing the total cost of ownership of owning a car. Makes you wonder about not owning a car and just using car sharing services for all the same things.
Giving (Spend ↑)
This is obviously a personal choice, but we are going to make a point of being more generous in 2019 with friends, family and organizations we care about, so we’re targeting to spend more.
💡 TIP Keeping track of your Donations during the course of the year makes tax time super easy (if you itemize).
Quality of Life (Spend ↑)
This is another group of categories where we really feel like every $1 we put into something provides us with > $1 in health, happiness and satisfaction. Since your budget is often a zero sum game, every additional dollar you spend here is one less dollar you spend on something less valuable.
Just for Fun (Spend ↓)
These expenses are definitely fun and feel good for a fleeting moment of time, but you hit diminishing returns very quickly.
Guilty Pleasures (Spend ↓)
These are expenses that you might ideally eliminate altogether (make your own lunch, iron your own clothes) but you either don’t have time or you like to indulge in a $6 espresso drink every now and then.
💡 TIP If you withdraw $100 from the ATM, but plan on spending $50 on a specific thing (the rest just being petty cash) you can use this Split feature to track this and minimize the amount falling under “untracked cash”.
Reimbursable
This category exists to capture expense line items that aren’t going to end up landing in your final budget reports. For instance, you might spend $1000 renting a vacation house, but the friends you’re splitting it with are going to cut you a check for half ($500). The $1000 payment you made can be split into two categories: Vacation ($500) and Misc Reimbursable ($500). When you deposit the check from your friends, you can even categorize it as Misc Reimbursable, thus netting that category to zero.
Let’s Review
In Part 2 we talked covered:
- Creating meaningful Budget Category Groups
- Prioritizing those Budget Category Groups
- Understanding when you should spend more vs. less in a given Group
- A rundown of my family’s Expense Categories
We’re going to wrap-up this series in Part 3, with a breakdown of how we use YNAB on a daily, monthly and annual basis including the reports we run and how we track our financial progress over time.
