Some Expenses Are Obvious, Others Creep Up On You – Learning To Budget Effectively Through YNAB
I’m fascinated that some of my friends are still operating without a budget. Perhaps their barrier to entry is the mind-numbing thought of limiting oneself to x-dollars and constantly having to beat themselves up for not meeting their specific goals.
I would bet that most successful entrepreneurs have a budget.
The great news is that budgeting no longer has to be so boring… this new method shouldn’t even be called budgeting, it’s more like expense-taming.
The human mind can handle long, complicated computations – but only up to a point. This is why it’s pretty much impossible for the average person to understand what it means to have a net worth of $5,000,000,000 (billion) dollars, or comprehend a government deficit of $4,000,000,000,000 (trillion).
We simply aren’t taught through traditional schooling to work with such high values. As the numbers go up we get a bit of information overload, lose track easily of the value and get overwhelmed with the zeros or the number of transactions.
That’s exactly why we are shocked by a billionaire buying a $2 million Bugatti yet have no problems with a wealthy physician buying a $150k Porsche. The billionaire spent 0.1% of their net worth on that car and the doc spent more than 5% of their net worth on the Porsche. The same disproportionality exists when the billionaire buys a $20 million house and the doctor buys a $2 million house.
TRADITIONAL Budgeting Has Failed Many
With traditional budgeting methodology, such as expense tracking, Mint, or Personal Capital, we are simply adding more stress to our lives, assigning hard-to-achieve goals, often setting ourselves up for failure.
Western dieting techniques fall short for this very same reason.
YNAB, You Need A Budget, has reinvented the wheel on this concept and other budgeting systems are following suit.
You will have a whole new understanding of money, you will no longer think of a budget category as a limitation on how much you can spend on something. Instead this system teaches you how roll with the punches, make changes on the fly but keep the overall goal the same.
A totally new way to budget. It’s rare in our advanced society to come up with new ways of dealing with an old problem. The internet did this for information gathering/sharing. YNAB is doing this for money management.
I’m not making any money off of telling you this so bear with me as I belabor this point.
Since the concept is so intuitive, YNAB can be used to handle very simple personal budgets all the way up to very complex business expenses. It doesn’t take long to learn it and there is plenty of help from the company in form of free live webinars, lectures and a large collection of instructional videos to watch online for free.
I started learning about finance, budgeting and investing for the very first time by hanging out on the YNAB forums. You can access everything I mentioned without even buying the software, it’s the ultimate free test drive before buying.
I looked at the videos, learned the YNAB method, talked to people on the forums and then I signed up. Back then it was a software that had to be purchased and installed, now it’s a web-based design which is much better. I pay $50/year for access to the software and save thousands every month – not a bad deal.
How It Works
YNAB can automatically download transactions from any accounts you have online access to. When you have a paycheck deposited it will show up as money that can be budgeted. And when you purchase something it will show up as an expense that needs to be categorized (you can have it auto-assigned as well).
You assign a portion of your income to each of the categories you created. You start out with the obvious stuff, you assign a certain amount to your <housing> category, then to your <food-grocery>, some to your various monthly bills, some to <entertainment> and some to your <savings> category.
It took me a long time to learn this but you should always pay yourself first. From each windfall or paycheck assign however much you think is appropriate for your future – which means contributing that amount to your savings or investments.
Planning For The Unusual Expenses
Our average monthly expenses don’t really reflect how much we spend in a given year. There are those rare expenses which happen maybe just once a year. It is easy to forget about those and hard to plan for them. That $5k buffer you created just got wiped out because your car needed a transmission rebuild.
My <health> category has $630 in it as of 10/2016 from me contributing about $50/mo for the past few months. Even though I have really good health insurance there are dental expenses and expenses to replace glasses. My visit last week to the optometrist set me back $283. I need a crown by end of this year which should cost me around $300, so I’m going to keep contributing $50/mo to my <health> category to prevent getting blindsided by a large expense.
Example of unknown future expenses are:
- computer replacement
- new sporting equipment
- engine/transmission rebuild
- last-minute travel
- lawyer fees
- speeding tickets
- cell phone replacement or repair
- new copper piping for the basement
- medical license/board re-certification
- medical memberships
- divorce expenses
- drug rehab therapy
- property tax bill
The best way to account for these unknown categories is to estimate their annual cost and assign a little every month so that you have a more realistic sense of what your expenses are.
Swap Money Between Categories – Roll With The Punches
What’s nifty about YNAB is that you assign every single dollar a job. After assigning $500 to <groceries>, $3,000 to your <housing> and another $400 to <entertainment> you may have $3,000 left from your paycheck which you can assign to savings or to any of the less common expenses above.
If you overspend on the groceries then you take a little from <entertainment> and cover it. Take from an elective category and put it towards a necessary category. After a while this becomes a habit and you will learn to stay within the confines of a general budget.
Everything I am saying here happens with probably 2-3 clicks, that’s what’s really incredible… an intuitive interface without having to do any math in your head.
After a couple of months of doing this what becomes clear is where your money is really going. You will also recall how many times you have had to ‘cover’ a specific category and therefore do a better job of predicting a realistic expense next month.
Other habits will form by you covering one category with another. If you keep having to constantly raid your <vacation> or <travel> category for your <gasoline> or <dining out> expenses perhaps you start driving your car less or prepare more meals ahead of time.
Fine-Tuning Your Budget
When I first started budgeting I was spending well over $10k a month. I broke up my <food> expenses into <dining out alone>, <eating with friends>, <groceries>, <alcohol> and <coffee>. The reason I needed to do so is because I didn’t know where the money was going, $1,500/mo went to “food” which wasn’t accurate enough.
I have since whittled down my food expenses quite a bit. I am left with <groceries> and <dining out> as my only “food” categories. I still eat out with friends but add that to my <entertainment> expenses and I’m pretty careful not to let that go out of hand.
The best thing about YNAB for me was that even though I thought I was spending only $5k/mo I was actually spending $8k/mo.
Mentally we don’t always register those ‘occasional’ expenses, which add up, and eat away slowly at our goals.
Every 2 weeks when the paycheck arrives all you have to do is click 1x to get the transactions from your bank. You then click on each category that you have set up and you can enter whatever you think you want/need or click on a window on the right which lists your average spending, last month’s spending or budgeted last month. That’s it… you are done.
You don’t need to enter what you spend, you don’t need to do any math, the web-based software will do it all for you. You can login from any computer anywhere to perform these tasks. It’s important to download the transactions and manually assign them to the respective category – this task makes you aware of where your money is going. You will discover categories that you conveniently forgot about.
The next few months you naturally start getting rid of certain categories. Because you’re monitoring your expenses and you see that you’re still paying $50/mo for that stupid credit-monitoring site then you’ll nix it.
Your YNAB dashboard is this beautiful cockpit showing you all the relevant information, how much money came in, how much money is left over to budget, how much money each category was assigned, how much you’ve already spent per category etc.
Sure, anything you start has a bit of a learning curve, but this is as simple as an iPhone to figure out. The knowledge you gain and the control you will gain over your finances will be priceless.
Know Your Inflow And Outflow
You may have a LOT of money coming in because you make a lot, but it’s very easy for your expenses to completely ruin the power of your income. I am sorry to say that most physicians don’t know their exact dollar figures coming in or going out. They have ideas, but nothing that’s useful and accurate.
I’ve asked several of my friends “What’s your monthly overhead?” and I’ve gotten numbers that for sure are off. We tend to understate our expenses, by quite a lot. YNAB will help demonstrate this to you. But it’s not a rude awaking, it’s an enlightening experience, one that will give you a feeling of control over your finances which you’ve never experienced before.