You need a budget, yes you do. In this series of posts I will show you how to get hold of your finances by using YNAB, an online budgeting tool.
You Need a Budget (YNAB)
Yes you do. You need a budget. Everyone needs a budget. It is a shame that budgeting sounds so negative. It is about restraining yourself right? No, that’s not how I see budgets. Using a budget helps you to free yourself financially. You achieve that by prioritising, and giving your money a goal. YNAB calls this “give every dollar (or euro) a job”. In this series I will explain how budgeting with YNAB works, and how it helped me to optimise my personal finances down to the cent.
This post will be both about YNAB in general, as well as a bout Rule 1, give every dollar a job.
Sign Up For An Account
Creating an account is super easy! You just visit ynab.com and sign up for the 34 free days of YNAB. Yes, you read that correctly. The first 34 days are completely free.
After you’ve created your account you can directly start building your budget. You give it a name and select some settings (date and currency formatting). You will then enter the following screen:
This is the main screen in YNAB. Here you can see your budget. As you can see, the program already created some categories for you.
I don’t really like these categories, so I’ll delete all of them. You can do this by clicking the main category and clicking delete.
Do this for all main categories until your screen is empty. Then we’ll start adding some real categories. By clicking on the plus sign of category group, you can create a new group. I will create three new ones to start with: Immediate Obligations, Fund Reservations, Discretionary Spending.
Under Immediate Obligations you’ll create the following sub categories: Rent/Mortgage, Insurance, Utilities, Groceries.
For Fund Reservations create Financial Buffer, Replacement of Electronics.
Under Discretionary Spending: Vacation, Cloths, Eating Out.
You now have a couple of categories. They’re probably not complete for your own budget, but it’ll give you some ideas to start.
Now we’ll add some accounts. Without accounts, you cannot budget.
The first accounts we’ll add are the checking and saving account.
Later on, you can add accounts as you wish. For example, you can have debt accounts (credit card, mortgage, student loan), bank accounts, investment accounts, crypto currency wallets, your real estate, your retirement accounts.
Creating an account can be done by clicking the link “Add Account”. You will get a popup to connect to a bank. Unfortunately, currently no European banks are supported. So you will skip this. Then you can enter your account details manually. You’ll need a few things. The name (checking account), Account Type (Checkings), and balance (1,500). Then also create your savings account (Savings, 3,500).
You now have two accounts on the left including their balances. Also you’ll see an amount to be budgeted of 5,000 euros.
Rule 1 is to give every euro a job. That is what we’re going to do now. Because your immediate obligations are… immediate, we’ll add the correct euro amounts to them first.
Add 800 euros to Rent by clicking the 0.00 in the “Budgeted” column. Then do the same for Insurance (200), Utilities (100), Groceries (200). You’ve now got 3,700 left to budget.
Say you want to spend 1,200 euros per year on vacations. Then you’d have to budget 100 euros per month to make sure you have enough money ready every year. Besides that, we budget 150 for Cloths and 100 for Eating Out. We’re left with 3,350 euros. Then we’ll add 3,000 to the Financial Buffer and 350 to the category for Replacement of Electronics.
You’ve given every euro a job!
Record Your Spending
Now we will record our spending for a month in YNAB. All transactions will be entered into the right categories. After a month your salary is put in. You will also enter that as a transaction, under category To Be Budgeted. Let’s say your net salary is 2,000 euros.
Most of your immediate obligations have been spent (except for 5 euros in the groceries budget). You have not spent money on vacations, 75 euros on clothing, and 80 euros on eating out.
The 2,000 you received must be given a job again. Rule 1 is give every euro a job. Again, under Immediate Obligations enter 800 for Rent, 200 for Insurance, 100 for Energy, and 195 for Groceries. The reason for the groceries is that you think you need 200 every month. It doesn’t make sense to budget 200 euros, instead you will budget until the category balance reaches 200.
For vacations, you will put in another 100 so that the balance will be 200. Cloths is a category that you might save up in, perhaps for a new winter coat or a three piece suit. Even though you’ve only spent 75 out of 150 euros you will budget another 150 euros. The balance will be 225. For eating out you will only budget an additional 80 euros this month. It doesn’t make sense to save up a lot here.