The 4-Step YNAB Method
Managing personal finance is something I know a lot of people dread to think about. Whether they are employed, self-employed or unemployed makes no difference. Budgeting is budgeting, and it scares the heck out of them.
So much so that some people I know (I’m looking at you, mum) try their very best to not look at their bank account or finances at all, and hope for the best when they do spend money.
In my experience, I’ve always lived paycheck to paycheck, and while I had a rough idea of how much money I had available to me, I was never able to stick to a budget of any kind. So as a student, I found myself nearly £2000 in overdraft with my bank because they offered it to me as an interest-free credit facility which was labelled as ‘available funds’.
Unfortunately, this is a very common story among the student population. It’s a life lesson that we, students that give into temptation, have to learn from as we leave university.
I consider myself lucky, my overdraft was interest-free generously for a full year after graduation. Even now there is only interest on a credit balance between £1–2K, a threshold I’ve managed to cross recently with the help of a mindset shift in budgeting.
How I Used to “Budget”
Put your hand up if this sounds a little bit, or a lot, like you.
When I got paid, I made sure that my prioritised expenses, like rent and bills, were paid within the first few days, sometimes on the same day. I assumed then that everything left over was “spending money”. A vague term for money that was sitting in my account just waiting to be spent on eating out, movies and books.
What I never really accounted for were all the subscriptions, actual grocery shopping, transport around town, you know… “the little things”.
But those “little things” would always add up. Before I knew it, I was down to my last bit of cash in my overdraft before the next payday, which would usually be around a week or a few days later.
My wake up call was when I got an email from my bank telling me that the clock had begun to count down the days for when they were going to start charging me interest on the overdraft. I knew that if I didn’t make a real dent in this debt, I would be in trouble trying to play catch up for years.
I know £2000 isn’t a lot for some people, but to me, it was enough to give me a fair bit of anxiety and kick my butt into thinking like a real adult for once about money.
My Attitude Towards Budgeting Changed
I knew then that something had to change. I’m quite handy with spreadsheets, so I decided to try to make my own budget spreadsheet, imaginatively titled “My Monthly Budget”.
It had categories of spending in it like most budget designs I had seen floating around. I gave each group an educated guess of how much I would need for the month in each box. I made sure I had my income labelled against my expenses so that I wasn’t planning to spend more than I would earn, and that was that.
The trouble I had with this method, was that I had a lot of trouble sticking to the amount I had labelled for each category, including paying back the overdraft. Life would happen, things would change, and my budget wasn’t able to accommodate the changes. I also wasn’t thinking about annual-type costs either, like money for Christmas time which snuck up quickly.
That’s When I Discovered the YNAB Method.
The YNAB (You Need A Budget) Method raised a brow at first. These folks were making all sorts of promises, but I’m also a real sucker for personal development stuff. I felt that this would be a real chance to develop myself into being a better money person.
To keep it relatively brief, the YNAB Method has four rules, as follows:
1) Give Every Dollar (in my case, pound) a Job
The first rule, to me, felt kind of familiar but at the same time, mind-blowing. It felt familiar because that’s what I thought I was doing before, but my mindset was all wrong. Previously, I was thinking too far into the future. I was categorising money that I didn’t have on the idea that I would know where my money would be going. As well as if I knew what I was going to get every month, which wasn’t right either.
Rule 1 is different because it asks you to only work with what money you already have. That’s the reason they say you can start this style of budgeting at any point in your pay cycle.
2) Embrace Your True Expenses
Rule two is, I imagine, probably the most helpful for a lot of people. I don’t drive, and for now, I also don’t have any significant annual expenses, so no yearly car insurance bills and such. But I am using it to think about the gift-giving period.
Rule two is there because it helps you to break down those big annual or just less frequent expenses into more manageable monthly chunks. But it’s also meant for saving for rainy days too.
The idea is that you think about your “true expenses”, and you then make them regularly so when the time rolls around, you have money ready to send on its merry way.
3) Roll With The Punches
Rule number 3 is a favourite amongst other YNAB-ers. The problem that they, and I, experienced in previous attempts to budget was that the budget felt set in stone. So when something came along that scuppered the budget, it felt like failing.
With YNAB, if something does come along, like a higher than average gas bill or a sale on a cute jacket, you can consult your budget and adjust to fit the new expense in.
What you’re able to do with YNAB is take money from other parts of the budget and put it towards the new expense (add money to a budget category). This might seem pretty straightforward because it is. The difference here is that you are actively deciding on the consequence of the new expense instead of just hoping you can afford it.
The essential part is that the bottom line is still the same, and you’re still working with money that you actually have at that moment.
4) Age Your Money
This is where the real financial freedom comes in to play. Rule four means to end the paycheck to paycheck cycle. To stop the stress of needing that next pay because you’ve got things on the burner waiting for money to come in.
At first, this rule confused me a little. I thought that budgeting into the future was something that was supposed to be avoided according to the first rule. Except this one works by eventually taking the money that you’re earning at that time and using it for the next months or future expenses — getting ahead.
They say that the sweet spot for the age of money is around 30 days, so basically getting a month ahead. Some people, like seasonal workers, may want to be able to get further ahead than that. Still, on average, a month ahead is pretty good.
In practice, this is done by making sure that you’re not overspending on what you have earned and following the first three rules. What starts to happen is that you’ll get some money “left to budget”. Then what you can do with this money is put it towards next months expenses, and that’s how you eventually get ahead.
It’s not going to happen straight away, you’ve got to be patient with it, but it’ll happen.
Having this mindset shift in budgeting; away from:
“This is my average monthly earnings, this is where my money should be going.”
“This is the money that I actually have, what job do I want this money to do”.
I’ve been able to get a handle on my financial situation.
I’ve just over halved my overdraft balance since December 2019. I’ve included a goal on my budget to pay it all off by this December (the handy software works out the monthly amount needed to complete a goal).
Now I’m not saying that you absolutely need the YNAB software package to do this style of budgeting. In fact, I reckon I could probably whip up a spreadsheet in Excel that works the same, it just won’t look as pretty, and it’d be a lot of work.
The essential part is the method, the four rules, that should help you lead you on your way into financial freedom.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.