In school, we are taught our letters and numbers. We learn how to count, add, subtract, multiply, and divide. And many of us continue on into Algebra, Geometry, and even Trigonometry, and Calculus. However, very few high school and even college graduates ever take a course on Personal Finance.
Personal finance involves all of the financial decisions and activities of an individual or household, this includes earning, saving, investing, and of course, spending.
I remember my mom explaining to me how to write out a check. My parents also helped me open my first bank account and supported me to go out and get my first job. And I remember my mom always using some form of software like Turbo Tax to file their annual taxes, so that is what I’ve always done as well.
But, for the most part, the details of how to personally manage my money well, I’ve had to figure out entirely on my own. And if I were a betting woman, I would place my money on the likelihood that you never received a whole lot of personal finance instruction or advice as well, at least before it was too late.
And maybe it’s just assumed that this should be common sense. You spend only as much money as you make, you save for a rainy day, and everything works out smoothly and happily. Except the reality is that 80% of Americans are in debt, the average student leaves college with $25,000 in student loan debt, and over 41% of all households carry some sort of credit card debt with an average balance of over $9,000. It seems to me that whether people claim it is common sense or not, we might have a personal finance problem in this country.
Why Do You Need to Have a Budget?
The number one rule and tip for managing your personal finances well (or even business finances for that matter) is to create and live by a budget. I know, budget often sounds like a bad word. Budgets are no fun. You don’t want to be “that friend” who lives on a budget and never has any money to do fun things.
But the reality is that budgets, by nature, aren’t bad things, nor are they excessively restrictive or fun “ruiners”. Budgets simply look at the money that you have and tell that money where to go. It can go to all of the fun stuff you want or all of the boring stuff you need or a blend of both. And if you don’t have enough money to spread out to all of the things you desire in your budget, this can help to inform you in decision making (Should I get a different job? Do I need a second job? Can we eat takeout 6 nights a week?)
Budgets help you to actually see what money you have. They help to expose excessive spending and bad financial habits. And budgets help you to create a plan for spending, for the future, and for emergencies.
What are the Options for Creating and Using a Budget?
Budgets can be as simple or complex as you want them to be. I’ve kept my budget in a spiral notebook, an Excel spreadsheet, the envelope method, and I’ve used several different budgeting software applications including Mint, Quicken, and YNAB (You Need a Budget).
I do not claim to be a personal finance expert and I will never tell you that I’ve got this budgeting thing down perfectly. However, I (we) have been using YNAB for our household budget (and more recently for my blog budget as well) for the past several years and it has truly changed our financial life.
Everything isn’t sunshine and roses, we don’t have millions of dollars socked away in a variety of investment accounts, but I rarely feel stressed about our money and I can’t even remember the last time my husband and I had an argument about money. Sure, we’d love to have more of it, we are still working our way out of debt, and we have big dreams for our future that will take a lot of work, but we are actively making progress in all of these areas and I attribute a huge part of this to the fact that we use YNAB for our budget. I thought I’d do a little YNAB review to help you determine if YNAB would be a good option for your budget.
How Does YNAB Work?
YNAB isn’t just budgeting software, I feel like it’s a way of life. Yep, that probably sounds a little bit like overkill, but it’s true. You may have heard of “Dave Ramsey-ers” or those crazy envelope people. Well, my friend, there are also YNAB-ers and we are a passionate gang. It’s not just about filling in numbers on an app.
YNAB offers classes, a blog, support and forums, and a podcast, all designed to help you get a better handle on your personal finances.
The online classes are short, informative, and interactive. They teach you how to use the software, pay off debt, build savings, cut spending, or handle unique financial challenges. Most of the Podcast episodes are less than 5 minutes long and they each teach a short financial lesson that can help you begin to think differently about your money and spending decisions. YNAB isn’t just there to help you track your income and expenses, they actually want to help you improve your life.
The Four Rules
Everything with YNAB works around 4 simple financial rules. You follow the four rules to “stop living paycheck to paycheck, get out of debt, and save more money”.
Rule #1 – Give Every Dollar a Job
One of the biggest pieces that makes YNAB so much better than other budget options that I’ve tried is that you only budget for the money you currently have. I can’t tell you how much this has changed my life. It sounds so simple. But if you look at instructions for most budgets, they usually start with your monthly income, then you plan everything out from there. But we don’t get paid monthly. In fact, we receive at least five different income deposits into our bank account every month. And, although we both work in salaried positions now, this hasn’t always been the case. My husband has always worked excessive amounts of overtime, so trying to plan a budget at the beginning of the month was a nightmare when his income could fluctuate by literally thousands of dollars.
With YNAB, you only budget for the money that is currently in your hot little hands (or bank accounts). There is no planning for future dollars, you only get to plan for today’s dollars. When you run out of today’s dollars you are done with rule 1 until you get more dollars.
Rule #2 – Embrace Your True Expenses
This is the very rule that has completely changed my financial life. In the past, I would budget for all the of the things we needed in each month. Gas, groceries, mortgage payment, childcare, etc. I’d be cruising along just fine until Christmas comes, and then I’d realize our choices are either we get to eat or get Christmas presents, because all year we spent what we earned each month and didn’t think about Christmas.
Or in my more responsible years, I might actually plan for Christmas and tuck a little money in the savings account for that. But I would always, always forget some big expense that only comes up once a year and then I’d be screwed. Think things like license plate renewals, car insurance payments, HOA fees, Amazon/Costco/Xbox Live memberships, annual visits to the vet for your pets, etc. We do have a lot of regularly occurring monthly expenses, but there are also tons of smaller annual or quarterly expenses that are so easily forgotten.
With YNAB, you plan this out from the beginning. You map out all of the things you’ll need to spend money on throughout the year and then pay yourself a little bit each month. This means we have a Christmas budget that gets at least $100 a month, even in February. We have a license plate budget that gets $15 a month. And, because I am addicted to running races, we have a race budget category that always gets a minimum of $20 added to it each month so I always have the flexibility to sign up for a last minute 5k with a friend.
Rule #3 – Roll with the Punches
You get your paycheck and give your dollars a job. Everything is going along smoothly until your daughter decides to audition for a play. When she gets cast into a role, they also break the news to you that you have to pay $40 to be a part of the cast (true story). Well, that wasn’t in the budget. There are no dollars assigned to the “acting fund” category, you didn’t even know you needed an acting fund category. No worries, rule 3 says you just roll with the punches and deal with what life hands you. You reassign some dollars from one job to the new job of “budding actress support”.
Your budget will never be perfect. Gas prices will rise unexpectedly, you’ll need to go out to eat more than expected, school bills will appear out of nowhere, and your car will break down. All throughout the month, you’ll probably have to do some job reassignments. Sometimes these are easy decisions, no fancy Biggby drinks this week, and sometimes these are harder decisions like little Sally can’t sign up for 17 sports this year, she has to pick 3 because we need to send more money to the new car fund instead.
Rule #4 – Age Your Money/Live on Last Month’s Income
Here is where we break out of the paycheck to paycheck cycle and live at least one month ahead. This makes your budgeting world a lot easier because you can plan your entire month’s expenses well in advance. This way there’s no waiting until the last minute when you get paid to send that bill that was due yesterday. The money is there and all jobs are assigned before day one of each month, so you just let it ride and roll with the punches as needed.
Over 8 out of 10 Americans live paycheck to paycheck. This means that one small little blip, an unexpected injury, job loss, or major expense can mess up everything. Living paycheck to paycheck is stressful and difficult. YNAB can help you begin to stash money away that will allow you to live ahead of your income to ease your anxiety and stress.
Features of YNAB
Here’s the quick and dirty rundown of what you will find when using YNAB.
- You can easily connect your bank and credit card accounts to your YNAB account so that your transactions are automatically synced.
- They have a mobile app you can use to run your full budget. Log your transactions, check your category balances, or even review your spending reports.
- As I mentioned before, they have a variety of online courses and educational options to help you win with your personal finances.
- Within the software you can set up goals for some or all of your spending categories and the app will keep track of your progress within these goals.
- YNAB offers a variety of reports that allow you to quickly review your income, spending, net worth, and review your average expenses to help you make better decisions.
- They also have help documents, forums, and incredible customer support staff to help guide you all along the way.
Are there any Downsides to Using YNAB?
I love YNAB and as I’ve said, I’ve been successfully using YNAB for many years. There are only a few things that I can think of that would be considered cons when it comes to using YNAB for your budget.
The first is that YNAB is not free. It is a business and they make money and operate by charging you to use their software. This means you don’t have to worry about annoying ads within your budget trying to get you to buy things you don’t need. But it also means you have to budget a few bucks a month for your budget software. In my opinion, it is well worth the cost ($6.99/month, after an initial 34-day free trial).
YNAB is not fully automated. If you are looking for a completely hands-off budget this may not be the best option for you. While transactions will sync from your bank you do have to go in and approve them to make sure that they are assigned to the correct budget category. And you’ll need to log into the app whenever you get a paycheck to follow rule 2 and give your dollars some jobs.
Having a budget that is simple and easy to use, but that does involve you to actually manage it throughout the month is actually a good thing, I think. It helps you to keep your spending decisions at the front of your mind once in a while to make sure that you are being a wise steward of your money, but without the stress of worrying if you’ll have enough or where it’s going to come from.
How Do You Budget Your Money?
What budgeting software or option are you currently using? Does it work well for you? Do you have any great budgeting tips or tricks you have learned that have helped you improve your finances? Please share in the comments.
Today’s Action Step
Take a few moments to reflect on your current budgeting system. Do you have a way to budget? Do you follow and use your budget? If so, is it working for you? Are there changes you need to make to improve the way you budget or manage your personal finances? Begin making a plan to take steps to improve your finances today.
If you want to give YNAB a try they offer a completely free (no credit card required) 34-day trial so you can try it out for an entire month to see if it works for you. Just click this link to get started.
I use YNAB to budget for our household and my blog. However, I use Quicken Self-Employed to manage the Accounting side of things. I highly recommend Quicken Self-Employed if you are operating your own business.