Note: This is sort of a long post. If you are short on time, but still want the gist of the situation, skip down to the last paragraph. Then come back and read the rest later when you have time.
Tracking and managing your money is the most important thing you need to do in order to understand your financial situation. When you add planning for your future into the financial equation, a full budget is formed. When you budget your money, your spending habits start to line up with your ideas of how you want to spend your money, instead of wondering where it all went. You will sleep better at night, since you won’t have to worry about how you’re going to pay your bills (since they should be the #1 priority), and you will live a much less stressful life.
Many products exist for tracking your money, such as Microsoft Money, Quicken, etc. A few exist for budgeting, but I am going to focus on one that stands out from the pack – You Need A Budget (YNAB for short).
I was a Quicken user for about 10 years. I liked tracking my expenses, because it helped me understand where I was spending my money. But I always felt like something was missing. Even though I tracked everything I spent, I still didn’t feel like I had a good hold of how I spent my money. I would look at how much money was in my checking account, and make my purchases based off of that.
Little did I know, that was the wrong way to go about life. Out of nowhere, I’d get a bill for 6 months of my car insurance (around $600). Or I’d need new tires, and I didn’t have any money to pay for it (I was living paycheck to paycheck). I knew something just wasn’t working like it should be. I was always looking backwards at my money.
When my wife and I got engaged, we had to go to a class that informed us about a lot of things regarding marriage. One of the topics was budgeting. I never really budgeted my money, because I always thought of budgeting as being the same amount every month, which never seemed to work for me. It seemed like I always spent my money toward different things each month. The key thing they said during that class was that every month is different, and that you need to plan ahead.
I thought that sounded like a great idea to merge our finances, so I decided I was going to start up a spreadsheet to budget our money. I thought I’d start fresh with my categories, so I googled something about it, and accidentally ran across this site: www.youneedabudget.com. I started reading about it, and thought maybe using something like that would be even better. So I started researching a few different companies, and decided to go with YNAB because it was a one time fee (as opposed to a monthly fee of their competitors).
I had no idea what I was getting myself into. I read about a few things on their site, and thought the Four Rules set them apart. I’ll just give you a quick overview of those rules, so you understand how YNAB is different.
Rule 1: Give Every Dollar a Job. You make sure you assign every dollar you make a job. If you plan to spend $50 on eating out, you put $50 of your hard earned money into that category. You owe $100/mo on your credit card statements, so you assign $100 of your income to that category. You do this until you assign every last penny you earn to some category that you have created. You can have as many or as little categories as you want, so it’s extremely flexible. This gives you a great sense of awareness about where you plan on spending your money. Then you just execute your plan throughout the month. It helps keep you on track. This also brings you and your spouse together financially, as you both agree to where you plan on spending your money.
Rule 2: Save for a Rainy Day. Remember that car insurance that threw me off before? Well, this rule helps with that by planning for it ahead of time. Instead of me being out $600 out of nowhere, I just budget $100/mo to my car insurance. When the bill comes due, I just paid it and didn’t think twice about it. Once the six months hit, I had the $600 already allocated toward it. Saving for Christmas is another big expense I budget this way, as mentioned previously. This rule helps balance the stress in your life by planning for those big expenses
Rule 3: Roll With the Punches. Every month is not perfect. Things still come up that you didn’t plan. One of our biggest issues with this is groceries. If we plan to spend $200/mo, we’ll spend $225. If we plan on spending $250, we’ll spend $265. It never fails – there’s always some category you’ll over spend. This rule helps with those situations. If you overspend by $25 on groceries in January, you won’t be $25 short for groceries in February. It’ll spread the $25 across all your income for the next month, so you won’t notice it as much. It still hurts, but not as bad. I actually cheat on this rule a little bit. I have a category I label as Buffer, which allows me to overspend on things. When I overspend, I just take some money out of my Buffer category to replenish it, so I can start the next month fresh. I try my best to not overspend more than what’s in my Buffer category though.
Rule 4: Stop Living Paycheck to Paycheck. This rule really sets the software apart. To use the software at it’s fullest potential, you really need to live off last month’s expenses. This is especially key to people who have variable incomes, as it lets you know exactly how much you have to spend for the month on the first day of the month. It’s still magical even if you have a set income, though. Once you get to this point, your whole outlook changes. I keep forgetting which weeks I get paid, because it doesn’t matter to me. According to me, I get paid on the first of every month, as that’s when my budget switches over. My money builds up throughout the month, but I don’t spend it until the next month. This rule really helps reduce the stress of managing your money. If you have a bill to pay, you just pay it. You don’t have to worry about when you’ll get paid next to make sure you have enough money in your account to cover the bill. Since you are living on last month’s income, you already made the money last month.
YNAB’s four rules really set the software apart. These four rules are built right into the software, so you don’t even really have to think about it. When I used Quicken, I was always looking backwards at my money, and never really got to save much due to that. With YNAB, I’m always looking forward, while still tracking everything that already happened.
With Quicken, I had different savings accounts for different things: one for car payments, one for house payments, etc. But savings accounts are not budgets, and YNAB helps us logically separate our money from the physical location. You just need one checking account, and maybe one savings account (just to earn more interest). Instead of looking at your account to see how much money you have to spend, you look at the category where you want to spend your money.
When I used Quicken, I could tell you exactly how much money was left in my checking account. Now, I couldn’t tell you even within hundreds. I know there’s a few thousand in there, but other than that, I have no idea. But I can tell you exactly how much money we have left to spend on eating out this month. This is a much better way of thinking. It almost gives you a sense of euphoria with your finances. You spend money where you want to spend it. Your spending aligns with your values. It’s magical.
To sum it all up, budgeting your money is a must. YNAB does an incredible job with this task. They keep everything very simple with their software, and incorporate life-changing rules into their application (that’s a good thing!). YNAB is the greatest piece of software I’ve ever used. It’s helped us get on track with our spending, and stop living paycheck to paycheck. Once you taste this way of living, you’ll never want to go back. If you want to sign up for YNAB, click here to save $6 off your purchase (and I get a referral bonus if you sign up).