#73 - You Need A Budget

In part of my ongoing quest to have, you know, money, I recently started using the budget program You Need A Budget (YNAB). I had originally intended to use Mint.com or some other online budget tool but I did some comparison shopping, came across YNAB, and decided to give it a try.

I was impressed with the YNAB Methodology (more on that later). The strong testimonials from current users were convincing. And it did seem to me - at least based on quick comparisons - that where YNAB was different is that it encouraged/required active planning of where my money was going to go. Whereas Mint et. al are more useful for tracking where your money went.

There are four "rules" in YNAB. For my situation the most important (though notated as #2) is Give Every Dollar a Job. What this means is as you get money/income, you plan out your spending - assign money to categories - food, rent, utilities, etc. Typical budget stuff. All the way down to zero. My first month with YNAB I budgeted what I thought were reasonable amounts to various categories only to see them later blown out. Dining out was a big overage for example. But since my budgeted amounts must equal my income (surprise!), I was forced to steal from other categories (affectionately known as 'whack-a-mole' in the YNAB community forums - which are impressively helpful BTW).

This meant pain in those now reduced areas - no new clothes for TK that month! So, the following month when I had a spending impulse, I found myself asking "And where will that money come from?" And I didn't spend. I also can't discount the fact of simply having your inflows and outflows categorized and known. Nothing like objective data to smack you upside the head.

Now inputting transactions in some kind of register is what any good budget program should do. Where YNAB excels is what you do with those savings. Which brings us to Rule #1 - No More Paycheck to Paycheck. The YNAB methodology is built around the concept of building a buffer. Doesn't matter how slowly or quickly, just keep saving until you have 1 month of expenses. At that point live for 1 month on that Buffer. Income earned during that Buffer month is saved towards the following month. For example, my current goal is to have a buffer by August 2009 - meaning my August paychecks will be earmarked for September expenses. Meaning come Sept 1, I will have all the money I will need until October 1st. At which point the cycle repeats.

If I manage to pull this off I cannot tell you what an enormous stress reliever this would be. No more having to time bills with paychecks. No more trying (and occasionally failing) to play "the float" with a check or debit. No more choosing between gas and lunch on the Thursday before payday.

This running a little long, but to summarize the remaining rules. #3 is Save for a Rainy Day. i.e. plan for irregular expenses - known and unknown. For example the quarterly car insurance always leave me scrambling. Not only in making sure it is paid, but then in scrimping until that next pay period. And living paycheck to paycheck is like a knife edge, anything unforeseen or atypical - i.e. this month's wedding gift I need to buy - threatens to collapse the whole financial house of cards. Previous solution - debt. Current solution - fully funded gift category this month in YNAB - oh yeah!

Rule #4 - Roll with Punches - is only truly applicable when living with a buffer but is sound advice. Basically if you do overspend - and you will! - the overage counts against next month's budget as a whole. This allows you to correct overspending before it becomes a trend. And it doesn't necessarily penalize the category where the overspending (sometimes legitimate) took place.

So, I definitely think YNAB is a good program and good budgeting tool. It is pretty easy to use. The methodology does take some faith, but I can see some benefits already. It feels right to me. I probably won't cross this off until The End, so I can keep on track. Look for a progress report soon. Hopefully I'll be buffered by Aug 1.