In past posts I’ve shared how to get in control of your money and how to plan your money for the future and hinted at the best system to help you get there is YNAB. Here I will share with you exactly what YNAB is, how it works and why I love it so much. The name YNAB stands for You Need A Budget and unless you’re already living the dream you probably need to manage your money some how. Many people (myself included) look to productivity blogs such as this typically don’t have amazing money handling skills. I’m a spender. I love technology, video games and gadgets, these are normally expensive items so handling my money was always a problem. I had tried budgeting before, but I could never get it to stick. I would spend an evening creating some average looking spreadsheet with expenses and then allocate an amount to each, but three things wouldn’t work for me:
- I would never open the spreadsheet up again
- The spreadsheet was never accurate
- I hate spreadsheets
I even tried to develop a web-based application to track my expenses for me, but again, I don’t have any finance background so I was never sure if it was doing what it needed to do.
Now I have a wife, two young kids and a mortgage. My wife is a stay-at-home mum so it’s incredibly important that we handle the money we have correctly (no more gadgets… sad). Before YNAB I was living from pay check to pay check, only just scrapping by from month to month. I needed a budget, a system that I could rely on 100% to tell me what I could and couldn’t do. I’ve found the solution to be YNAB. I’m no longer living month to month and I have more control over my money, and I’m already saving for a holiday while paying the mortgage and allowing for car insurance coming up next year!
Getting Started with YNAB
To the Cloud!
You can setup YNAB to store data online in the cloud. This is highly recommended since when you use the iPhone or Android app you’ll want the latest data at your finger tips and this only works if the data is in the cloud. YNAB uses Dropbox, an online file backup/storage tool, to store data in the cloud. So, first head over to Dropbox and sign-up for a free account. Once you’ve got Dropbox setup (it’s super easy) it’s time to install YNAB.
Download and Install
YNAB is a desktop application (though I hear rumours of a web-based app on the horizon) and will run on both Windows and Mac. Head over to youneedabudget.com (affiliate link) and get the 34-day free trial. You can upgrade to the full version later and the fact that it’s a 34-day trial means that you can get a real feel for how the system works from one month to the next. Launch the installer and follow the prompts. During installation you’ll be asked if you wish to use CloudSync – you definitely do. YNAB should have detected that you already have Dropbox installed so just click the big green button to continue.
Once the installation completed you’ll need to tell YNAB about your expense categories. These are the places you will budget income against and track expenses. Each category will sit under a Master Category. So for example, my “Housing” master category has in it categories such as Mortgage, Electricity & Gas, Water, Phone & Internet, etc.
Now that you’ve setup the categories you can setup your accounts. Click on the ‘Add Account’ button to add a bank account. You can setup both on-budget and off-budget accounts. An on-budget account is an account that will be contributing to your expenses. An off-budget account is an account where you want the money in it to be unavailable to expenses. For example, I have my regular bank account, the one where I receive my pay check, as an on-budget account and this is the one that is used for all my expenses. However, I have another account called “Fun Money” that is off budget. I’ll explain a bit more about fun money later.
When you setup an account YNAB will ask you to enter the balance of the account. This allows you to get started with YNAB at any time – you don’t have to wait until the beginning of the month to set it up. Just install and tell YNAB how much you have to work with and budget for the rest of the month.
Don’t import old transactions! YNAB’s focus is on giving you a fresh start. There’s no need to track what’s happened in the past. Just tell YNAB where you are today and go from there.
Finally it’s time to start budgeting. You’ll notice a summary at the top of each month (the current month has a yellow corner). The most important number here is the big green one – Available to Budget. This is your pulse. Using this number it’s time to allocate a slice of it to each of your expense categories.
As you enter an amount in the budgeted field for each expense category the amount remaining in the Available to Budget section will decrease. Of course, the goal is to only budget as much as is available. In fact, it’s even better if you can leave some amount in the available to budget section. Anything left over becomes available to budget in the next month and that is really the goal of YNAB – to live on last month’s income.
Living with the Budget
With your budget filled in your next step is to live within the budget. This is a mindset shift. Think about this: if someone asks you if you want to go out for sushi, instead of looking at your bank balance and seeing say $1000 in there and thinking “woohoo, let’s go eat!”, you look at your budget and see that you have budgeted $10 for eating out this month since you need to put some money away for next months car payment and water bill. You might have to turn your friend away, but you will sleep easier knowing that next month you can pay your car and water straight away, without even having to wait for your pay check to come in!
The best thing I have done, so I can still enjoy the little things, is to create a “fun money” account. I actually opened a new bank account and every week I automatically transfer $40 from my main expenses account to this fun money account. That fun money is mine to do whatever I like with. It’s like giving yourself pocket money. It’s awesome. You can spend that money knowing that you won’t affect the budget in any way because it’s already in the budget and accounted for!
While you can import transaction history files into YNAB (such as those you can download from your bank’s online service), you can also enter and track your budget from your phone. When my wife and I are out at the shops and we need to get some clothes for our kids, as soon as we leave the store I grab the receipt and enter the transaction in to YNAB on my iPhone. Doing this will update the budget on my phone, at home on my laptop and on my wife’s phone. So the next time my wife heads out and spots a nice top for our daughter she can check the budget on her phone and see that we’ve reached our budget limit for kids clothes for the month and then gently put the top back on the rack (and hopefully leave the store).
When I get home and look at the full budget on my laptop I can see the transaction already there. Later in the week when I import the last 7 days of transaction history from the bank, YNAB will recognise the bank transaction as the same one I had entered on the phone and merge them together!
The YNAB Method
To truly get in control of your money with YNAB you’ll need to follow YNAB’s 4 rules. These rules are more than a way of using the application. They are a way of thinking about your money, a mindset. Even if you don’t end up going with YNAB I would strongly recommend you read up on each of these rules. As a quick overview these rules are:
Give every dollar a job
Budget for everything in advance. As early as you can setup the budget for the next month. Think of your money as worker-bees. Each dollar has a specific job to do. For some it will be to take care of the rent or mortgage, for others it will be to fill the car with gas or petrol and others will look after your groceries. When you give every dollar a job you don’t need to worry about finding the cash later, you know it will be there.
Save for a rainy day
There is no such thing as a “normal month”. Every month has some expenses that are out of proportion to other months. You can anticipate most of these in advance. For example, your car insurance is due every year and you know when, so set aside some portion of your monthly income to take care of this. When the time comes to pay the insurance you have the cash already available – it’s been accumulating!
Roll with the punches
Be flexible. Since there’s no such thing as a normal month, you may end up overspending in one category and underspending in another. You should regularly review the budget and tweak budgeted amounts in each category.
Live on last month’s income
The ultimate goal is to stop living month to month. That means that even if you weren’t to get paid this month you will still be able to cover all your expense because of your saving and because you’ve stuck to your budget! The amount left over in “available to budget” carries forward to the next month so eventually this amount will be able to cover all your expenses for the following month! Nice right!?
Get it! You’ll Love it!
It was actually my brother who put me on to YNAB, and I love it. I’ve been using it since January this year and it’s a phenomenal feeling just knowing how your money works, where it goes and how you can control it. So, like I mentioned earlier, go and get yourself started with YNAB (affiliate link) on the 34-day free trial and if you have any question I’d be more than happy to help you out.