I started using YNAB in 2012 and it’s still one of the best budgeting tools I have come across. For someone interested in early financial independence an effective budgeting tool is critical. Budgeting is probably not a necessary exercise if you’re naturally frugal but it seems necessary for the rest of us.
I spent 2006-2012 spending wildly because I never understood budgeting or financial planning. The YNAB software allowed me to control where my dollar were going to go on a granular level. I assigned each dollar a task. And since financial independence was my primary goal, every loose dollar went towards savings and investing.
In this post I’ll talk about choosing expense categories. If your spending is all over the place then you will need to start out with 30+ categories. Once you develop more budgeting skills, you can get away with far fewer categories.
I recently downsized my many categories and happy to report that it has made my budgeting workflow much easier.
I used to hate budgeting because it was mindless chore of keeping track of where I had spent my money. There was no strategizing, no planning, and I rarely saw any good results.
With YNAB I assign each dollar a task and can earn my money on a January and know exactly where that money will go in October. It’s not just the interface which is brilliant but the results. My finances are a whole new beast from 2012 compared to now, 2019.
Choosing expense categories
In the beginning it’s good to have multiple categories so that you can get granular and figure out which category needs a buzz cut. As you improve, you don’t need as many categories because your spending will be optimized.
For example, I no longer own a car and no longer commute into a job. I have therefore gotten rid of all these categories which I used to have:
- car payments
- car insurance
- car wash
- auto mechanic
- public transport
I now have a single [transportation] category which captures my bicycle and public transportation and Uber/Lyft spending. Because the Uber/Lyft is a tiny amount and happens only on occasion, my spending is rather predictable in this category.
Another example might be a cell phone. You would need to account for insurance, monthly plan, and replacement cost. But now that I no longer have a cell phone plan, I no longer have a communications category.
My new categories
Here are my current categories:
- Housing (HOA, insurance, taxes, repairs)
- Groceries (food, household products, clothes)
- Utilities (WiFi, electricity)
- Exercise (racquetball, bouldering, equipment repair)
- Transportation (biking, bus, Uber/Lyft)
- Entertainment (coffee, dining out, travel)
- Investments (savings, investing)
- Business (websites, equipment, podcasting, advertising)
- Taxes (estimated taxes)
Is this a lot? Doesn’t seem too bad compared to what I used to have. Just up until a few weeks ago I had 21 categories. And when I first started budgeting it was 45.
I’ll never be like my friend V. who has 5 spending categories. She is inherently frugal – spending for her takes a lot of effort. I love spending money and budgeting is the only way to curb the habit.