How to Budget with YNAB (Part 3)

This is the 3rd (and last) in a series of articles on how my wife and I manage our family’s budget using YNAB. Check out Part 1 and Part 2 if you need to catch up!

In Part 2, I dove into the real meat of budgeting: categorizing and prioritizing expenses. I also talked about something pretty counter-intuitive for a lot of folks: how to think about when you should be spending MORE money on the things you really care about.

In Part 3, I’m going to close out with how to create your first month’s budget and some examples of how I use YNAB on a daily, monthly and annual basis to manage our finances.

Creating Your First Budget

Phew! Ok, you’ve connected your accounts, created your Budget Category Groups and populated those groups with your Expense Categories. Depending on what transaction data has been pulled-in, you can start to categorize those transactions. YNAB will learn how you categorize your expenses and in my experience does a pretty good job of auto-categorizing expenses as they come in.

When you click “Budget” in the top left menu, you come to the Budget view. It will default to the current month, but you can go backwards and forward using the arrows next to the Month/Year display at the top of the page. You should see a Budget Category Group called “Credit Card Payments” at the top. Leave this alone for now. Below that are BCGs that you’ll be working with on a regular basis.

At this point, I encourage you to check-out the following YNAB resources for setting up your first budget:

• Quick Start (Docs)
• Budgeting (Docs)
• Budgeting (Video)

I’ll say this: DO NOT let this initial step discourage you. It can be frustrating to make guesses about how much you’ll spend on things, only to find out over the course of time that you’re wrong. But the more time that goes by, the more data you get about your spending, and now I’m at the point where I have 2 ½ years of data telling me that my wife and I spend on average $391.86 on lunch and coffee. Holy vanilla latte, Batman!

Daily Tasks

Now that all of this setup is (mostly) behind you, let me explain how I actually use YNAB. There are two things I do on an almost daily basis:

Categorize and Approve Transactions

Super self explanatory. The mobile app sends me a single daily push notification if there are new transactions to categorize. This is literally a task I do first thing in the morning when I’m still in bed, right after I check my email and Twitter replies.

Categories are often set correctly, but sometimes I have to correct them or set them in the first place. Once the categories are all correct, I will approve them.

In the example above, here’s what I did for each of these 4 transactions:

1. Approved
2. Re-categorized to be Donation
3. Re-categorized to be Home Improvement
4. Categorized as a split between Donation and Kids Expenses

Fund Budget Overages

Sometimes, despite your best efforts, you go over budget in a category. This is totally OK (docs, video), and the mobile app makes it incredibly simple to cover the overage.

You can either fund the overage from money sitting in your “To Be Budgeted” bucket or, for ultra disciplined folks, you can fund the overage from another one of your expense categories, thus decreasing the amount you can spend there this month. It’s kind of like “oh shit, I got a parking ticket. I guess I won’t buy that jacket after all”.

Monthly Tasks

I have a Google Calendar event set to this first Saturday morning of each month so that I can sit down with some coffee and run through these tasks. I probably spend anywhere from 15–45 minutes on them, depending on whether I find something interesting to look into or not.

Resolve Remaining Overspends

If the current month is January, I’ll go back to last month (December) and resolve the remaining overspent categories. I want every category to be either at zero or with a positive (carryover) dollar value.

Review Spending

This is where YNAB really starts to shine: analysis. The whole point of budgeting is to recognize that money is a scarce resource and to figure out, iteratively and over time, how to spend your money on the things that matter.

First of all, I’m appalled we spent $565.88 on coffee and lunch last month. WTF. Second of all, I can see how that compares to my lifetime average and potentially look into what happened. This is either where you learn something and 1) alter your behavior or 2) realize that this is a natural (sometimes seasonal) fluctuation in your spending.

Set Next Month’s Budget

Finally, you’re ready to set the month’s budget. It’s pretty similar to creating your first month’s budget, but over time as you accrue more and more spending data, you’ll be able to leverage the Quick Budget buttons you see in the image above.

One shortcut I learned was checking a Budget Group Category, which cascades the check down through all the expense categories and then clicking on (for example) “Budgeted Last Month” on the right-hand side. For expenses where your budgeting isn’t going to change month-to-month, this is awesome.

Annual Tasks

Following yet another over-hyped New Year’s Eve, I’ll start thinking about sitting down for the better part of a day to look back on our family’s finances from the previous year. Honestly you can spend as little as an hour or as much as a weekend here. It just depends on how much you dig into the numbers and how interested you are in analyzing your behavior. I find it incredibly fun, but YMMV. Here are a few basic task I strongly recommend.

Reconcile Accounts

Ok, look. Other people will tell you to do this more often than once a year. Feel free to! But I have found that the auto-import process to be really good. The docs do I really good job of walking you through the process. Do this as often as you feel comfortable with. But you’ve got to do it, or you will get a nasty surprise when YNAB and your actual cash balances get out of sync.

Review Expense Reports

THIS. THIS. THIS is where YNAB shines. I can spend hours in these reports. Here is a view of my family’s spending in 2018.

This is why I put so much effort into defining Budget Category Groups that were both broad enough to encompass similar things (i.e. donating to charity and purchasing gifts falling under Giving) and specific enough to reason about. YNAB’s default “True Expenses” budget category group never resonated with me, because it lumped too many different things together and made it hard me to understand why our spending was going up or down.

Review Income Reports

Under “Income v Expense”, you can see a much more detailed view of spending as well as your sources of income. Let’s focus on the Income section:

To understand how this table is generated you have to understand that all transactions have a “payee” column. When you spend cash, this column is generally the business charging your credit card (i.e. FRED-MEYER #0122). When you receive cash the value of the column is set to something indicating how you got paid. Perhaps it’s a direct deposit from your job, in which case the value might be “YOUR COMPANY DIRECT DEPOSIT 1/4/2019 xyz”.

The point here is that all income transactions get grouped by payee and listed in that table. And if the value in the payee field is slightly different for the same kind of transaction (paychecks) they will all get listed separately in that table, which is annoying.

Although it’s tedious, there are usually many less credits to your accounts than debits, so it’s not too painful to go through them. Once you do that, you’ll have this nice table that shows you income grouped by source, which could end up looking like this:

• Paychecks from job
• Interest earned
• Credit card rewards
• Side hustle income

You get the point. And it’s really powerful to see the income grouped this way and to see how it changes (grows, hopefully) over time. Just seeing “earned interest” broken out like that makes me want to be smarter about putting money into our savings account instead of leaving it in checking.

💡 TIP Edit the payee fields for similar transactions and give them the same value. That way they will be grouped together in the “Income v Expenses” report and you’ll have a super clear idea of where your income is coming from.

Year to Year

Finally, once you have more than 2 years of data, you can start tracking your high level spending over year to year. Here’s an example of looking at how some of our spending changed from 2017 to 2018.

You can see that we “failed” to reduce essential spending, but after looking into it I found out why. You can also see we “succeeded” in reducing spending in a few categories. I’m tracking all of this data in a Google Spreadsheet, and it’s really motivating to see where we’re doing well and where we could do better.

Wrapping It Up

I mentioned in the beginning that YNAB has helped our family increase our income and increase the amount of money we spend on things we truly love and find fulfilling. In this series of articles we covered several important concepts that enable these goals:

1. Creating meaningful expense categories and prioritizing them.
2. Understanding whether you should strive to spend more or less on a given expense category.
3. Taking some time daily, monthly and annually to organize the data, review your progress and make adjustments.

I know this is a lot of information to take in. If you still have questions, here are some resources that I hope you find helpful:

• YNAB Subreddit
• YNAB Guides
• Leave a comment below
• Hit me up on Twitter

If you decide to sign-up for YNAB, please consider using this referral link and we’ll both get one free month of YNAB. Thanks for reading!