You Need A Budget

I’ve noticed that my YNAB post from 2011 has been getting quite a few views in the last couple weeks, so I figured it’d be a great time to write an updated version. In the last 3 years, YNAB has released a mobile app and a whole new desktop version, and in those 3 years I’ve learned so much from using the software. About personal investing and day to day finances, but also in a very real sense, how to be an active participant in my financial well-being. I can’t recommend this software and financial methodology enough, and I want to briefly break down what about it I find so awesome.


YNAB stands for You Need A Budget (this is a referral link to the site, same as the link I post at the end), and while I’m not in love with this product name (sorry, Jesse), it clearly communicates what the company and product is about. The methodology is anchored by The Budget, and it asserts that without a budget, you can’t gain financial independence.

This might initially turn people off, but it’s YNAB’s whole concept of The Budget that is different than what you’ve ever seen before. Before YNAB, the word “budget” made me think of strict and rigid checkbook balancing, diligent reconciliation down to the penny every day, with zero flexibility on what or where you spend your money. It sounded miserable. YNAB is the cure for the misunderstood budget.

The YNAB methodology has four rulesynab four rules

  1. Give Every Dollar A Job
  2. Save For A Rainy Day
  3. Roll With The Punches
  4. Live On Last Month’s Income

1. Give Every Dollar A Job

The main idea here is to make sure your money is working for you, and working exactly as you want it. Even if you quit reading after this rule, you’d gain a whole lot of value out of this rule. Every dollar you own is like an employee in the company of You. If you don’t give every employee a job, you aren’t gaining the most efficiency out of your workforce. Some employees are taking too many breaks, or going home early, or too many are focused on one project. Following this rule basically means assigning every single one of your employees/dollars into a budget category, like rent/mortgage, car payments, groceries, fun money, Christmas presents, retirement, etc. Once every dollar is assigned to a category, you know where they all are and that they are all doing what you want.

2. Save For A Rainy Day

This rule is about being more forward-thinking in terms of your financial life, but in a slightly short term way. Car insurance bills are a perfect example of this. Most people pay their car insurance premiums every six months. If you aren’t using this rule, the month this ~$500 bill comes due is going to be stressful, because out of nowhere you’ve got to find $500 in your budget that you normally don’t have to put towards insurance. With this rule, you see this bill coming down the road six months out and split it up accordingly. $85 once a month for 6 months is a lot better than $500 all at once.

And that’s the beauty of this rule: “rainy day” expenses no longer cause you the same amount of stress because you’re mindful of them and have been preparing for them. This can include expenses you know are coming (car insurance) to expenses that aren’t as regular (car repair). Last month, I unexpectedly had to buy new tires for the Kia, get the power steering fixed, and replace the wipers and a brakelight. All in a freakin’ month. It put us out about $700. And I didn’t break a sweat because I’d been putting money in the car repair category, getting ready in the event that something like last month would eventually occur.

3. Roll With The Punches

This is where I think YNAB really shines. This rule is designed to keep you from giving up on your budget due to burn-out or perception of failure. Using a traditional budget strategy, when I spend more money than my budget says I’m “supposed to” on eating out or clothing or car repair or whatever, I feel like a failure because my budget is rigid and inflexible. The solution to traditional budgeting is always, “If only I had more money…” Unfortunately, more money doesn’t solve money management problems (which the makers of YNAB thankfully understand).

With YNAB, if you spend more on gas than you expected this month, that’s fine. You’ve got some options. You can either move some money from another category (ex: I drove more than I expected and didn’t buy any new clothes, so I’ll move some money from “Clothing” to “Gas”) or you can leave your category amounts the same, and YNAB will deduct the amount you overspent from the next month’s amount of money to budget. That way, you don’t start next month with a big red X of where you’ve overspent. You start that month clean, with a fixed amount of money that you’ve got to do your jobs again. It’s like a clean slate, which offers you a huge amount of freedom in how you use your money.

4. Live On Last Month’s Income

I’m realizing I like each of YNAB’s rules more than the last. So after you’ve got into the habit of Rules 1-3, you can work on what YNABers call The Buffer. The Buffer is when you’ve got enough money saved that you can start spending last month’s paychecks this month, rather than spending this month’s paychecks this month. This can be confusing, but think of it as NOT living paycheck to paycheck. Reaching The Buffer means that while you’re working/living/spending/earning money in the month of February, the money that you’re spending is what you already earned in January, and the money that you’re currently getting paid in February will sit in your checking account until you’re ready to spend it in March. Then, in March, while you’re spending what you earned in February, you’re earning money that will go towards April. Make sense? Your checking account is always one month ahead.

What this translates to is a truly unbelievable amount of financial freedom. When you get your February cell phone bill, you don’t have to wait for your next paycheck to take care of it. Since you’re spending what you already earned in January, you can knock that bill out immediately. All the strategic calendar planning of when you can pay certain bills based on this month’s paychecks can be thrown out the window. Your bills, your groceries, your fun money, it’s all been earned, and you can spend it as you need. It’s fantastic.

My previous post on YNAB included screenshots, and a much more in-depth explanation of how the software worked. I want to ease up on that, and let the YNAB site walk you through that. I want to stress that every question and doubt I had about the software was immediately alleviated once I started to use it. They’ve already thought of everything. The software is really easy to use, and with the introduction of their mobile app, tracking your spending is so simple.

Do you have a lot of debt? YNAB is set up to deal with it in your budget. Do you have accounts at several different banks, and your finances are kind of all over the place? YNAB has ways to deal with every kind of weird account you can possibly think of, and it will also provide a centralized place where you can keep track of everything.

On top of that, the software offers more reports than you could ever want. Whether you’re a budgeting newbie or a long-time CPA, the reporting function offers an easy way to look at your financial life from many different angles. It’s been a great way for us to analyze our spending and identify gaps and roadblocks on our way towards financial success.

Aside from the awesome desktop software and mobile app, YNAB offers tons of free online classes on getting started, making your budget work, how to handle credit cards, etc. Along with that, a few months back, I joined an email course (basically just emails sent to you that you can read at your leisure) on personal investing that was given by Jesse, YNAB’s founder. It was incredibly informative and broke down the previously scary/intimidating subject in an easy to understand way. It gave me the confidence to dip my toe into the personal investing waters.

And there’s tons of support online, blogs, discussion forums, help topics, direct staff contact, and it’s all free.

At the core though, this is why I think everybody should use YNAB (aside from a killer methodology and a product that backs it up): YNAB is created by people who want you to succeed financially. And it shows, through the amount of support given, to the care shown in the design of the product itself, to the interactions between staff and customers. They’ve fostered this awesome community of people who want to look at their finances differently, and you can really feel that as you start to get involved.

I’ve been using YNAB for two and a half years now, and it is the tool that completely changed my family’s financial outlook and situation. I’ve spent a lot of money in my life, and without a doubt, YNAB is one of the best $60 I’ve ever spent. I could show you screenshots and walk you through the software itself, but YNAB’s website does such a fantastic, accessible job that I’ll let you go to them for a closer look.

The link below will take you to a place where you can try a full-featured 34 day demo before you buy it. Full disclosure, if you purchase YNAB through the link below, you’ll save $6 and I get $6. Just a little perk for the both of us.

Buy YNAB and save $6!

Even if you don’t use that link, seriously, try YNAB. You won’t regret it. As Jesse tags each podcast and blog post: “Follow YNAB’s four rules and you will win financially. You have not budgeted like this.”

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