You Need A Budget

About a month ago I stumbled across an online budgeting software called You Need A Budget (YNAB). Some Facebook friends had a little discussion online about it and it intrigued me so I downloaded the one-week free trial. Turns out it was pretty sweet. So I bought it. Here’s how it works.

The core principle that the program is based on is this: your budget for next month is funded by the money you make this month. This way, you know exactly how much money you have to budget and you can give every dollar a job. All too often people make their budget paycheck to paycheck (we did before we started using this program). Not that everybody that does this is scraping every last penny to get by, but it’s most common for people to budget the money they get in each paycheck for that upcoming two weeks until their paycheck. What is awesome about this finance strategy is that it eliminates any ambiguity of how much money you have to budget; what you made in November will fund your budget for December. It also allows you to assign every single dollar to a specific budget category: bills, rent/mortgage, groceries, etc. That way you see exactly where your money goes and where you overspend and underspend and you can adjust accordingly. Super great.

At this point, you might be asking, “If the money that you make this month goes towards next month’s budget, how are you supposed to start this program? Just not spend money for one month?” I asked the same question when I first researched this program. Obviously the answer is no. What is done is that you can enter in all the assets and debts you have to your name: checking/savings accounts, credit cards and lines of credit, mortgages, etc., and choose off of accounts you want to have your budget based. SCREEN SHOT TIME:

If you enlarge this picture, you can see how the main budget screen is set up. On the left column you’ve got all your accounts and assets listed, and then the main portion is your budget for November, December and January. I have no totals listed in any of these categories yet, but we’ll get there. So if you’re just starting the program, the goal is to take all the money you have in your checking account currently and budget it. Put every last dollar towards a category, so that your Available to Budget total is $0.00. The point of giving every dollar a job or a category is that it makes it easier to spend only what you actually need to spend rather than making impulse purchases, going out to eat every meal, so on and so on. And as you go through the month of November, all your paychecks will be put towards December’s budget rather than getting spent right away.

What’s great about this software and this financial strategy in general is that it accounts for real life. Not many people have one month’s salary just lying around so odds are you’ll probably overspend for the month you start. That’s alright, because the program will automatically take what you overspend out of next month’s budget, automatically adjusting your total buffer amount. Nifty huh?

Here is what the account screen looks like:

Enlarged, you can see it’s very flexible, and looks very much like most online banking applications provided by banks. You can add/edit dates, payee names, and you can put memo notes on transactions. Super important as well, you can do split transactions. So you go to Wal-Mart, spend $75 on groceries and then realize your vacuum cleaner is broken and you need to get a new bottle of Ibuprofin. No problem, when you enter the transactions, you can actually split it up so $75 goes towards groceries, the vacuum amount goes towards misc or whatever, and the meds can go towards meds. This allows you to really see where your money is being spent.

Back to the budget. Much like the overspending function, if you underspend in a category, the program carries that remaining balance over to next month’s budget. This way, if you have $50 budgeted towards car repairs each month, but you don’t have any car repairs, your amount in that category will grow each month. If five months down the line you have car trouble (and you haven’t readjusted that category’s balance to another category), you can use the $250 you have saved up to put towards the car. That’s what I love about this program. It encourages us to ease spending as much as possible so that when unexpected things crop up, we’ve got money to cover it.

So here is the budget screen again but with categories filled in. A few cool things to notice. Up in the top center, under the November ’11 tab, you can see that it shows how much income we had for this month, and how much we budgeted below. I budgeted all of it except $10, which the program will put towards next month’s buffer total unless I budget it somewhere. If I don’t, it will be there for me to budget for next month. Another thing to note is that I underspent in both the groceries and restaurants categories, and the remaining $20 in each category has been carried over to the corresponding category for next month. For December, you can see that our starting buffer is the $500 I made in November plus the $10 I didn’t budget from November, and I have $510 available to budget that I haven’t put into any categories. Good stuff.

So that’s the program. There are a lot of features I haven’t really touched yet, like credit accounts or investment accounts, and the ability to download transaction history from your bank. There is also a great online community for users who want tips on how to get the most out of the software, how to budget intelligently, how to handle debt, etc. Lots of great resources that I haven’t checked out.

Criticisms? The main critique I have is that it is pretty labor-intensive. I read some reviews that said the transaction downloading feature from your bank website didn’t not work as well as desired, so it was important to double check things or just add them in manually. For me personally, I enjoy the time I spend entering in totals and making sure everything balances correctly. I would also say, personal finance is important enough in our human life that people shouldn’t complain about it being too much work to balance their checkbook. It’s not as hard as it might seem. Just yesterday my boss at the bank gave me an update on my balance sheet: for the last three months, my drawer has balanced perfectly every day I’ve worked. Toot, toot.

So check it the program out at their website. You can download a week-long trial version of the software, and at the end of the week they offer you a trial extension. You actually get to choose how long your trial extension is; I asked for two weeks and they said no problem. You should try for longer!

-Jon

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