Budgeting is the foundation of building a wonderful and stable financial life. But I don’t like the way budgeting is usually taught, when it is taught at all. Forecasting and rigidity are common problems that you may have encountered in trying to budget. Envelope Budgeting is something I have recommended before, and I mentioned YNAB (You Need A Budget) as my software of choice to implement envelope budgeting. Let’s dig into YNAB, see what it can give us.
You can read the rest of the series here:
- What is YNAB
- What is the Purpose of Your Money?
- What Are True Expenses?
- Make Your Budget Fit Your Life (not the other way around)
- Aging Your Money
I have used YNAB personally for over three years, and in that time, I’ve completely turned around my life. We paid off my and my husband’s student loans, car loans, paid off our credit cards, and have stopped using them as a crutch. I credit that in large part to how YNAB works. In a nutshell, YNAB is a philosophy that is supported by software. There are four “rules”, more like guidelines, that the software helps you follow.
The four YNAB rules
The four rules are:
- Give Every Dollar a Job
- Embrace Your True Expenses
- Roll With The Punches
- Live on Last Month’s Income
If you work with these rules, you will find your financial life starts making sense, and you can start spending according to your values and goals, because you will have clarity on your whole situation. I will go through all four of these rules in brief here, but I plan on writing articles on each of the rules in the future.
Give Every Dollar a Job
This fundamental rule is why YNAB is an envelope budgeting system. Every time you receive money, you give it a job, which in YNAB you do by putting the money in categories you have set up. These categories are like the envelopes you would use if you were working in a cash system.
It is important to give every dollar a job, because then everything has a purpose. When you allocate $300 for groceries, you know what the purpose is for that $300. Also it keeps you from allocating more then one job for your dollars. If, for example, you have your $1200 rent payment in the rent category, you know you can pay it without worrying about it affecting your grocery category. It is extremely powerful to be able to spend from a category without having to worry that your other plans will get affected.
Embrace Your True Expenses
Have you ever had a bill come up that comes up every six months, and been surprised by it? Maybe you even had to tighten your belt on other expenses to be able to pay for it? Or had an unexpected car breakdown that completely wrecked your finances for months? With YNAB, you can make room for all your expenses, whether they be frequent and a regular amount, or infrequent and a surprising amount. You can break down those expenses to smaller monthly chunks that will have a much smaller affect on your budget, and you’ll be ready for any kind of expense you may have.
Roll with the Punches
I tell my clients, this is my favorite rule! This is truly what sets YNAB apart from other programs for me. This rule means that when your life or your priorities change, your budget changes with it, instead of shaming you for not “sticking to your budget”. When you have something unexpected happen, and you need to spend more in a category, that’s just fine! Just find the money in other categories and move it to the category that needed it. No guilt, no shame, just your budget moving with you
Live on Last Month’s Income
Living on Last Month’s Income means that when you start a new month, you have all the money you need to fully budget that month. It means that you are always working one month ahead.
Why would we do this? It does a couple things. One is it simplifies monthly budgeting. Instead of budgeting every time you get paid, you can budget all at once, on the first of the month. Second, it means you don’t have to “time” your bills. Because all bills are given a job on the first of the month, you can conceivably pay any bill at any time in the month. In fact, you could pay them all on the first, if you wanted to. These two main things lead to one amazing thing - it reduces financial stress. Can you imagine not worrying about your bills and when they are paid? It is an amazing feeling.
Another benefit of Living on Last Month’s Income is that you have an automatic one-month emergency fund. If, for example, you lose your job, you have a full month breathing space to strategize, and work to get a new job. And when you look for a job with less stress, you will do a better job interviewing!
I encourage you to sign up with YNAB. You can try it for 34 days free, and thereafter it is $6.99/mo, billed annually. I also provide local and remote Money Coaching, to help you align your money habits with your values and goals. And stay tuned for my articles expanding on YNAB’s Four Rules!