On the surface, YNAB (The initials stand for “You Need A Budget”) looks like a budgeting website (with companion mobile app) which you can use to track your income and expenses.
In actuality, YNAB is a method. It is a system that helps to reorganise your whole financial world without you realising it.
You actually don’t need the app to practice the method. But it definitely helps.
We will talk about the YNAB method and the YNAB app. We will also talk about how you can build your own model in MS Excel (or google spreadsheets) and apply similar principles.
First though, let me call out the elephant in the room before we go any further.
I always get a bit over-enthusiastic about this method. Learning this method was one of the top ten life-changing events in my life.
However, I do not own any shares in YNAB, I do not know anyone that works there, and I do not use affiliate links. This blog is not a money-making project for me.
Whether you use the web app or not. I will receive no financial benefit, in cash or kind. Any opinions stated here are my own.
In my opinion, if you have computer, a smart phone and internet access, you should get the app. The founder of the YNAB company was the one that came up with the method. The website has a lot of free, useful information on managing finances, and the web app he built is the best way to fit the method smoothly and easily into your life.
However, I will do my best to explain the method here in a way that you can apply it yourself, whether you use the app or not.
Useful Note: If you do get the app, after the free trial period, they don’t divide their subscription into small payments. You will need to pay the full year up front. It was a bit of a surprise to me, but the method itself makes it easy to handle once you expect it.
This posts assumes you have read the previous parts and builds on ideas discussed there. If you haven’t read them you should start here “Prologue “, so that you can follow the discussion.
At this point, we have a list of items we choose to spend money on each month, ranked by their priority to us and a real amount we can put towards each of them every month.
This is what we will apply the YNAB method to. At the core of the YNAB method is it’s four rules.
Rule One: Give every dollar a job
That list of priorities we made in the last part is more like a forecast.
We are basically looking into the future and saying “This is how much money I expect to get every month and these are the things I hope to spend money on.”
YNAB rule one creates an extra layer on the list we have created. The purpose of that extra layer is to turn our forecast of the future, into a plan for the present.
For those of us doing this manually: We will need to rename those amounts on our list to “Target budget”.
Then we need to add three more columns to our list. “Amount budgeted”, “Amount spent” and “Amount available to spend”.
To start with the “Amount budgeted” and “Amount Spent” should all contain zeroes.
The “Amount available to spend” should contain the formula “Amount budgeted” – “Amount Spent”.
For those using the app: The amounts from our list are going to be our “Savings Goals”.
The way it works is, each time we get paid or receive any money, we go back to the list and ask ourselves a question:
“What do I need this money to do for me until I get paid again?”
Then, using the amounts in our “Target Budget” or “Savings Goals” as a guide, we assign that money to different items on the list (under the “Amount Budgeted” column). We do this until every dollar is assigned.
Not until every item is filled, but until every dollar is assigned. Because, once we have assigned all the money we have, we won’t have any money left.
We always only ever do this with money we have, never with money we are expecting in future.
Once completed, the total of “Amount Budgeted” should always be equal to the amount of income we have received in that month so far.
For example, when we start the system, let’s say we have $100 in our bank account and we have ten days left until our next payday.
We then need to go through our list and figure out, “what do I want this money to do before I get paid in the next ten days?” Then assign that $100 to each of those items.
It’s not just about what we want to spend in the next ten days though. We also have those items on the list that we need to put aside money for each month.
So, it might be $20 for ten days groceries.
The phone bill may be due and we need to pay another $50 for that.
Then we want to contribute $20 to the car insurance that is due three months from now.
And the remaining $10 we will put into our birthday gifts category, because our aunt’s birthday is coming up soon.
Once we have done this, the “Amount Available” will show how much money we have available to spend in each category.
Each time we spend money, we will need to add it to the list under “Amount Spent”.
As we do this, the total under “Amount available to spend” should always be equal to our current bank balance.
By following the steps above, the list now becomes a breakdown of our bank balance, split by purpose.
Now, each time we feel like spending money for any purpose, we can go to the list to see how much of our bank balance we have left to spend for that particular purpose.
That will immediately let us know how much we can actually afford to spend on it. While taking all the other things which are important to us into account.
We should never spend more than our “Amount Budgeted” for any item.
Not because it is “bad” or “wrong” or anything like that (remember “You have the Power”), simply because the formulas will fail and start giving us wrong information.
If “Amount Spent” is higher than “Amount Budgeted” then “Amount Available to spend” will be negative. This will mess up the total and mean that ALL the values in “Amount Available to spend” are now meaningless.
We will cover how to deal with cases where we need to spend more than planned under “Rule 3: Roll with the punches” below.
Rule Two: Budget for your true expenses.
This is a beautiful rule.
Remember those “long term” annual expenses we found in “Measure, measure, measure”?
Well, it turns out those were just medium-term expenses.
There are many expenses which we treat as one-time costs, which are actually rather predictable when we zoom out a bit.
For example, Do we own a computer?
Well, it is eventually going to break down. Probably in about 3 to 5 years.
When it does break down, we will need to get money for a new one from somewhere.
Well, we can plan for it.
The price of a computer (let’s say $1000). Divided by 4 years (that’s $250 a year). Then divided by 12 months (slightly less than $21 a month).
So, to be prepared for that “one-time expense” of a new computer, we need to start saving £21 a month from today.
Once we are aware of this rule, we start to see it everywhere!
Fixing and replacing Furniture, Kitchen Appliances, New Car, Roof of our home etc., etc.
The Ynab founder gave a cool example of this on his podcast, talking about his young daughter.
I don’t remember the details well, but it was something like:
She’s currently 3 years old. She will probably want to get married someday. It’s unlikely to happen before the age of 23 though, that’s 20+ years from now.
As parents, he and his wife would like to contribute something to the wedding. Perhaps by buying a wedding dress.
So, assuming a nice wedding dress (in 20 years) would cost about $12,000, they can begin to put aside £50 a month for that.
When she’s ready to get married, the money will be ready. Sitting there waiting to serve it’s purpose.
You may remember that 10% gap between income and expenses, that we discussed in “Measure, measure, measure”?
These “one-time” expenses are a big part of where it usually ends up vanishing. This rule allows us to take control of that gap and prepare for what the future will throw at us.
We don’t need to try to figure out every specific one-time expense to put on our list. Like we have done on the rest of the list, we can just use broad categories. E.g. “Home maintenance”, “Computers and Electronics”, “Furniture” etc.
The important thing is that we are preparing for different types of “unexpected” events.
I didn’t even have to think of those categories myself. The YNAB app comes pre-loaded with quite a few to choose from.
Rule Three: Roll with the punches
This is a subtle but powerful concept.
It is a bit related to what we discussed in “Part 3 – You have the power”.
We are not here to serve our budget. Our budget is here to serve us.
So, let’s say we are halfway through the month, everything on our budget is running swimmingly so far.
Then Uh-oh, our spouse casually mentions that our in-laws will be visiting for a week! There’s no way our usual grocery budget will be enough to feed all that lot!
What do we do?!!?
We simply go to our list and look through the “Amount Available” column.
Since our in-laws are coming, the grocery category has become more expensive and probably also increased in value on our list of priorities (we don’t want our mother-in-law thinking we don’t feed her child properly ☹ ) .
So, we look at items that are of a lower priority than “Looking good to the in-laws” and move some money from the “Amount Budgeted” of the lower priority item into the “Amount Budgeted” of our “Groceries” category.
Voila! We now have more money to spend on groceries.
Sure, we may have had to reduce our “Amount Budgeted” for clothes shopping this month, but that’s okay. Because, in this particular month, groceries were more important than clothes.
It is important when following this rule to always make these decisions and adjustments before we spend the money. So that we are proactively choosing to move that money.
This is another small thing with huge impact.
Deciding in advance gives us the power to determine how we want our world to change.
However, adjusting things after they have already happened, leaves us always trying to catch up.
Another important note:
When following this rule, we cannot reduce our “Amount Budgeted” by more than our “Amount Available”.
Doing this will make our “Amount available” negative on that item, and that will make the whole budget unreliable.
To put it another way;
If we have already spent all our available clothes budget for this month, we can’t then decide to spend that same money on extra groceries.
The money is already gone.
If we try to spend that same money on groceries, then any extra money we spend will actually be coming from somewhere else, not our clothes budget.
And we will have no idea where it is really coming from.
Rule 4: Age your money.
As we begin to follow this method, adjusting our spending so that we are living within our means, and fine tuning our spending so that each dollar adds value to our life.
We will start to sometimes have situations where, after giving every dollar a job for the month, we run out of jobs but still have some extra dollars.
Put another way, we may have fully budgeted for all our priorities this month but may still have some money left un-budgeted.
What do we do with that money? Is it “extra money” available to spend randomly?
Not at all!
Remember, if there is anything of value to us that we want to do (whether it is trips to the cinema, a new xbox game, or a new hairdo) it is already on our priorities list.
Therefore, spending the money on anything else, is like wasting it on something we really don’t care about.
Instead of doing that, since this month’s priorities are fully budgeted for, we can carry that extra money over and start budgeting for next month’s priorities as well.
That begins to achieve something important. It begins to give us breathing room.
We are no longer living from hand to mouth. Running out of money at the end of each month just in time to receive our next salary.
Now, not only are this month’s priorities taken care of, more and more of next month’s priorities are taken care of as well.
We eventually reach a place where we no longer worry about what day payday is. Because, we already know that next month’s bills, maybe even the month after that are already taken care of.
Those of us doing this manually will need to make some more changes to our Excel file:
First, we need to duplicate our list to a new worksheet for each new month.
In each new month, “Target Budget” will be equal to the same “Target Budget” as the previous month.
“Amount Budgeted” and “Amount Spent” will still be equal to zero (until we start budgeting and/or spending for the new month).
For “Amount Available to spend” though, we will need to change the formula to
“Amount Budgeted” – “Amount Spent” + “Amount Available to Spend (from previous month)”
That’s the YNAB method in a nutshell. Go forth and conquer!
In the “Part 5: The forgotten ones” (officially the last part, although there will be an epilogue 🙂 ) we will cover the two most underrated categories.
The full “Getting More Value from Your Money” series
For Further Study
The YNAB Method:
From the YNAB Website. The method explained from the horses mouth. With much nicer diagrams illustrating how it works. 🙂
The YNAB Podcast:
Every week Jesse (YNABs creator) talks about different financial situations and effective ways to deal with them. Highly recommended whether you use the app or not. I recommend starting with the early episodes which are addressed to people just starting.
You can search for YNAB on any podcast player you use, or use this link to find the episodes on Youtube.
Getting Started with YNAB:
If you do get the app, this youtube video gives the best explanation of setting it up and getting started.