I occasionally loathe my budget. Surprisingly, that’s a good thing.

My parents spent the last three days visiting from Colorado, which of course means my Dad and I spent most of the visit tearing sod out of my back yard to create a home for raspberry, strawberry, and blackberry plants.

(My Dad works circles around me and gets a strange joy from sod removal.)

Tuesday morning we broke from the misery of tearing grass out of the ground, packed the family in the car, and headed for a nearby nursery to pick up a few veggie starts.

On our way to the checkout, my wife reminded me we’ve been planning to buy three elm trees for the back yard.

Sounds great, I said.

Then I looked at the prices.

$50 to $75 per tree. We wanted three. Total: $175.

Break out the iPhone, check the “Household Needs” category. Hm. Already overspent there, and it’s only the 22nd of the month. Check the “Home Repairs and Improvement” category. $150, but the dishwasher needs to be repaired – possibly replaced. Check the “Unpredictables” category. $35 – no help there.

Stupid budget.

I want those trees.

I have plenty in savings.

But those dollars are spoken for.

Stupid budget.

No trees for us. I cursed the budget as we left the Nursery with the Sissy-sounding Name.

My anger didn’t last (of course). The trees’ time will come; the budget saved me from an ill-timed purchase. But my brief budgetary tantrum indicates a healthy budget – and budgeter.

Why?

Because positive change requires tension – tension between the old habit and the new. Tension occasionally erupts into anger.

Ask yourself which budgetary anger level fits you best:

I never rage against my budget. I’d guess you either a) don’t use your budget to stretch yourself and create new habits, or b) have achieved perfect budgeting zen (congrats!).

I occasionally feel the urge to print out my budget so I can crumple it up, throw it away, then donkey kick the trash can. Sounds like you and the budget are doing great things.

My budget stresses and discourages me constantly. This means a) you’re budgeting too restrictively, or b) your needs exceed your income. If its ‘b’, I feel for you. If it’s  ’a', throw the current budget away and start one that acknowledges reality.

It’s not easy to develop the budgeting habit. You’ll find it occasionally annoying, frustrating, and infuriating. In moderate doses, those emotions prove you’re succeeding. Embrace them.

Listen, I realize it’s not the most scintillating headline. I’d love to be able to use something along the lines of “Pics of Britney Spears’ Chihuahua Entering Rehab – Again!” But sometimes we just need to slow down and make sure you’re clear on some of the nitty gritty points of your favorite budgeting software. So stick with me.

Yesterday Jesse and I were discussing different aspects of the YNAB interface, and I mentioned how useful I found the “Monthly Header” – which is what we call the area above each month’s budget. The main feature of the header is ‘Available to Budget’ – the number of dollars in your budget that haven’t yet been assigned to a specific category.

Jesse’s reply was “I’m afraid the header confuses the heck out of most people – they don’t know how we come up with ‘Available to Budget,’ and they don’t know which of their actions affect it.”

Jesse’s comment reminded me that I’d quit YNAB a couple of times due to confusion about ‘Available to Budget.’

If that’s you – if you find ‘Available to Budget’ confusing – I have two pieces of advice:

1. Attend one of our live classes (and/or review the very thorough Quick Start Tutorial).
2. Read on to find out how we determine your ‘Available to Budget.’

Dollars Enter the Budget

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$1,000 enters my budget through my checking account.

‘Available to Budget’ Reflects the Inflow

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The $1,000 inflow takes my checking account balance to $1,000. In the ‘Available to Budget’ area above May’s budget, you’ll see the $1,000 reflected as ‘Income for May’ – which takes my ‘Available to Budget’ to $1,000.

Dollars Are Assigned to Categories

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I assign $900 of the $1,000 to various categories in my budget, leaving me with an ‘Available to Budget’ of $100. Normally, I’d assign every available dollar to one of my categories; I’m only leaving $100 available to budget for the purposes of the tutorial.

See how my checking account balance didn’t change? That’s because account balances only change when money enters or leaves the budget (usually in the form of income or expenses).

Assigning ‘Available to Budget’ dollars simply moves them around within the budget – which is why account balances are unaffected.

You’ll notice I’ve updated some of my category names to show the typical amount for that category as well as the day of the month they bill is due.

Spent Dollars Leave the Budget

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$50 leaves my budget as I pay my home internet bill. I record the transaction on my checking account register.

Current Month’s ‘Available to Budget’ Unaffected By Normal Spending

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The $50 outflow reduces my ‘Internet $50 (21st)’ category balance to $0 and lowers my checking account balance to $950, but does NOT impact my ‘Available to Budget.’

Two Options for Dealing with Overspending

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Another $72 leaves my budget when I pay my electric bill. My checking account balance reflects the outflow, and the ‘Electricity $50 (17th)’ category shows a negative balance of -$22.00 because I’ve overspent in that category.

Here’s the important part: May’s ‘Available to Budget’ number still hasn’t changed. If you click on a negative category balance, YNAB gives you two options for handling overspent money:

• I can subtract it from next month’s ‘Available to Budget’, or…
• I can subtract it from next month’s category balance.

To keep things as simple as possible, I’d recommend choosing the default – subtract the money from next month’s Available to Budget.

This Month’s Decisions Affect Next Month’s ‘Available to Budget’

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Clicking over to my June budget, I can see how June’s ‘Available to Budget’ is impacted by May’s decisions:

I have $100 ‘Not Budgeted in May’ and $22 ‘Overspent in May,’ leaving me with $78 ‘Available to Budget’ in June.

Ideally, I’d like to get June’s ‘Available to Budget’ to $0 – reducing the opportunity for confusion later on.

Cover Overspending with Available Dollars

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My first step is to go back to May’s budget and budget an extra $22 in the category called ‘Electricity $50 (17th).’ This takes my budgeted amount to $72 – which matches my $72 outflow.

Up in the ‘Available to Budget’ area, ‘Budgeted in May’ jumps by $22, which reduces May’s ‘Available to Budget’ to $78 – because I’ve assigned those $22 to cover the overspend in my Electricity category.

If I didn’t have any dollars ‘Available to Budget,’ I’d have either allowed the overspend to roll into June (which is part of a realistic budgeting method), or I’d have taken available dollars from another category to cover the overspend in my Electricity category.

(Again, notice how these moving money within the budget doesn’t affect my checking account balance.)

Click to enlarge.

Going back to June’s ‘Available to Budget’, the ‘Overspent in May’ has gone to zero, and the ‘Not Budgeted in May’ has dropped to $78, leaving June’s ‘Available to Budget’ at $78.

Getting ‘Available to Budget’ to $0

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Because I want to give every dollar in my budget a job, I (arbitrarily) allocate the remaining $78 to my ‘Phone’ category, increasing my ‘Budgeted in May’ to $1,000 and taking May’s ‘Available to Budget’ to $0.

Click to enlarge.

With no unassigned dollars and no overspending in May (and no income yet for June) my June ‘Available to Budget’ also sits at $0.

You’ll also notice how I have positive balances in several categories of June’s budget, but those positive balances don’t affect June’s ‘Available to Budget.’ Why? Because those dollars already received their jobs, and now they’re sitting in their respective categories waiting to be spent.

Hopefully this tutorial gives you some insight into how YNAB determines your ‘Available to Budget’ number.

As always, the education team is ready to support you with free live classes, and your questions are always welcome in the YNAB community forums.

One of the last comments on my post about keeping Monopoly money out of your budget was from Harriet, whom I’d classify as a borderline financial rock star. Read on to get a sense of her situation, then help me help Harriet decide whether she needs YNAB.

I am trying to decide if I should buy this software, and am having trouble understanding how it works. I took the intro class, and I’m still confused.

The deal with us is that we have a year’s living expenses either in the bank or fairly easily accessible.

I have set up all of our regular bills to be paid automatically.

I keep track of all of this in my checkbook, generally recording payments way ahead of the time they are due.

On the rare occasions when the balance runs a little too low in the checking account, I move money from savings to make sure there’s enough there. When I get an unexpected bill (e.g., medical co-pay), I pay it right away. If we want or need to buy something outside of regular expenses, we usually put it on a credit card for convenience (in fact, we use cards for almost everything), but I know the money is there to pay for it, and those CC bills are paid in full each month. I have operated this way for years, well before I got married.

In essence, we ARE paying bills on previous income. We don’t have any debts other than mortgage. Included in the regular expenses are transfers into a savings account, with some of that earmarked for larger expenses later on (contributions to IRAs, home improvements).

My interest in trying YNAB out was to get a better handle on where smaller amounts were going — for eating out and things like that. It’s not that we can’t pay for those things, but I have been feeling like we may be frittering money away without thinking about it.

So is there anything YNAB can do for us that we’re not already doing? Thanks — Harriet

Harriet, your main goal in trying out YNAB was to manage your discretionary spending more effectively, wanting to avoid “frittering away” (great phrase) your hard-earned and hard-saved cash.

Here are three big benefits you’ll enjoy by adding YNAB to your life:

1. The Observer Effect Will Automagically Reduce Your Spending

Have you heard of the observer-expectancy effect? Here’s the gist: people perform better when they’re being watched. In the case of YNAB, we’re using our budget to watch ourselves.

When you establish a spending ceiling for a given category (eating out, for example), your spending in that category will naturally decline simply because you’re watching it. I recently confessed to eating out like a Wild-eyed Burger Demon in 2012, spending over $300 per month at restaurants – often on food I didn’t even like.

Last month (April, 2013), my wife and I spent a total of $70.96 at restaurants. I’m sure our “steady state” spending on restaurants will be as much as double our April amount – but that’s half our historical average. YNAB gets the credit for helping us spend more consciously.

2. Clean Categories Create Consumption with Clear Conscience

My mom (whose transition to YNAB we’ve recently discussed) is loving the program. She (like you, Harriet) has always been financially mindful, but at times she goes to the extreme of feeling like she can’t (or shouldn’t) spend any money – especially on herself.

Thursday night we were chatting about YNAB, and she said “I have $300 in my clothing category, and I can see that everything else is handled, so now I get to go shopping guilt free.”

Right on, mom.

3. Budgeting Your Discretionary Funds Frees Your Mind

Your system works, but I’d wager it requries too much thinking and pen-and-paper reconciliation. Based on your description of pen, paper, and checkbook, you’d find YNAB a breath of fresh air.

Here’s how I use it:

1. Money comes into my life (usually in the form of a paycheck).
2. I assign dollars to jobs (categories) until there all new money is spoken for.
3. I spend money, logging transactions on my phone.
4. I take three to five minutes every couple of days to reconcile my checking and credit card accounts against YNAB, ensuring all is square.

With this workflow in place, I’m shocked at how little time I spend thinking about my expenses, bills, due dates and the like. YNAB lets me think about other things; it’s a major stress reducer.

Overall, Harriet, I’d say you’re doing great. Add YNAB to your workflow and you’ll find yourself spending more consciously and with less anxiety, while reducing mental overhead.

My Mom, the budgeting rock star (no joke), is currently experimenting with a transition from Quicken to YNAB. She’s already signed up for an intro class, but last night we spent a few minutes sharing screens and talking about her first pass with YNAB and the 4 Rules.

Five questions came out of the conversation:

1. How do I manage my car loan on the budget?

You don’t. Make the loan an off-budget account and budget the payent as a normal category and outflow.

(Yes, you technically can manage loans on budget, but it’s messy – with no benefit to your budgeting success.)

2. Is there a difference between a known, infrequent expense and a Rainy Day fund?

Nope. YNAB vernacular throws new folks a little. Traditionally you’d think of saving for a rainy day as something that only refers to unexpected expenses. For YNAB’s purposes, Rainy Day funds refer to any expense that gets paid less frequently than every month.

Your choice of jargon doesn’t help or hurt your ability to live the 4 Rules. Mom has a master category called “Known Infrequent Expenses” (or something to that effect), and another called “Rainy Day Funds.” That’s fine. She’s giving her dollars the right jobs; naming conventions don’t matter much.

3. Do I have too many on-budget accounts?

Okay, Mom didn’t actually ask me this question. Looking at her budget, I said: “Ma, you have too many on-budget accounts.”

Now, I realize having multiple on-budget accounts doesn’t break YNAB or any of the 4 Rules in particular. But it breaks simplicity.

I told her I’d only put accounts on budget if they were directly involved in my monthly outflows and inflows. Turns out she does have money flowing into and out of several accounts at any given time –  but out of habit, not necessity.

In my opinion, working with lots of on-budget accounts creates unnecessary mental overhead, and creates opportunities for mistakes.

I’m a fan of “as few accounts as possible,” so for me it’s:

On Budget:

• Checking
• Credit Card (zeroed monthly)

Off Budget:

• Emergency Fund
• Betterment
• Mortgage
• Student Loan

4. Is it okay to budget a month in advance?

Well…

YNAB isn’t going to boot you off the software if you’re budgeting ahead of the current month.

But you are breaking Rule 1, and as a beginner, the practice of allocating money you don’t have (“forecasting”) is a threat to a successful budgeting habit.

The True YNABer keeps “Available to Budget” at a radiantly green $0.

Okay, but here’s the deal. I use next month as a placeholder for my typical category allocations. Am I breaking Rule 1? The shame of it.

5. Should I create a second budget for the rental properties or manage them in my main “Household” budget?

As far as I’m concerned, this could go either way. The key factor in Mom’s situation is that rental income and expenses flow into her personal bank accounts.

The mix of personal inflow and and outflows with property incomes and outflows told me she should manage the properties on her main budget, and use YNAB’s Payee field and slick reporting features (where you can filter by Payee and export to a spreadsheet) to pull relevant data out of the budget at tax time.

I’d be curious to hear how other YNABers deal with property management.

The beauty of YNAB is its flexibility. Could my mom go completely against my advice? Sure (it’s typically the safe move). What matters is finding a work flow that helps you make better, more thoughtful decisions about your money.

How would you have answered my mom’s YNAB questions?

I wonder if many people “succeed” with budgeting on their first attempt. It must have been at least four years ago that Jesse first gave me YNAB, and yet I’m just now closing in on two months as a “real budgeter.” Actually, “real budgeter” is too strong a title. How about Budgeting Intern?

My attempts at budgeting are similar to my (and many others’) attempts at sustained scripture study.

“How many times have you read the Bible cover to cover?” someone might ask me.

“Uh, well, none.”

“How many times have you read the first few chapters of Genesis?”

“826.”

So why do we all fall off the wagon so often?

We’re sold on the 4 Rules. We see the benefits of budgeting, but for some reason, we just stop. One day we’re budgeting; the next day we’re not.

Here’s my take on why I kept flaking:

I Kept Breaking Rule 1

I didn’t even know I was breaking it (because I didn’t attend one of the excellent YNAB live classes – which would have sorted me out in no time) – but I sure was. I kept trying to budget for an entire month before I had an entire month of money available to budget.

So I’d make these estimates across all these categories, and the total budgeted amount would look ridiculous (because it was), and I’d throw up my hands. “I guess budgeting works for some people, but not for me. The numbers just don’t work.”

The numbers didn’t work because I was treating categories as guesses, rather than treating them as official jobs for each dollar. My budget wasn’t reality. It was what might happen, sort of.

As a budgeting intern, I now understand that you always budget to $0, and you never budget money you don’t have.

I Over-Estimated the Hassle of Entering Transactions

…and underestimated the benefit. These days, YNAB’s free mobile apps allow Kate and me to enter 90% of our transactions at the point of sale.

Before cloud sync and the mobile apps, it would only have taken two or three minutes per day to open my online checking and credit card accounts, look for any new transactions, and square things up. Why was I so convinced the only “efficient” way to deal with YNAB was a weekly or monthly import from my accounts?

I’d fall behind on my transactions, then mess up the import process, so my numbers were always wrong, and I’d quit (again).

My budgeting internship has taught me nothing raises awareness like entering transactions at the point of sale and reviewing the budget daily.

I Handled Credit Card Balances Incorrectly

I’m grateful to say I no longer carry any credit card balances.

When I did have balances (on cards I was still using), they constantly made a mess of my budget. One of two choices would have solved this problem, but I was too lazy to carry out either:

• I could have stopped using the card until it was paid off, making it just like any other debt I pay monthly and manage off-budget (like my mortgage).
• I could have watched the education team’s excellent video on credit card management in YNAB (or attended the live credit card class), and followed through on their instructions.

All said and done, I can’t blame any of these circumstances for my budgeting setbacks. The reality is I hadn’t fully converted myself to the joys and disciplines of budgeting. Once the pain of not budgeting exceeded the temporary discomfort of creating the habit, YNABing became a breeze.

Have you ever fallen off the budgeting wagon? Why? And how did you get yourself back in the groove?

From November 1998 to October 1999, a mountain bike was my sole means of transportation. I was living in northern Virginia at the time, riding around in a white shirt and tie with a little black name tag. Unlike many other guys riding around in white shirts and ties with little black name tags, I enjoyed climbing up stairs and park benches while still mounted on the bike.

I loved this fit and happy time of life.

After eleven blissful months as a serious biker, I was forced back into a Ford Escort – where I promptly gained 20 pounds. On arriving home at the end of my time in Virginia, my older sister welcomed me with “Hi. You’re FAT.” We Butlers don’t mince words.

I think it’s time to get back in the proverbial – and literal – saddle. My younger brother and my dad bike commute religiously. They love it. The blogosphere seems to be talking a lot about the way of the bike, and I want in.

Because I haven’t explicitly budgeted for the purchase, I’ll have to rob my growing buffer or my emergency fund. (YNABers the world over gasp in horror: “No! How could you?!”)

Calm down. I haven’t yet committed either of these Deadly Budgeting Sins. But there’s math here –  math deserving due consideration.

I’ll break down the numbers. You weigh in on the purchase (please).

The Bike, The Helmet, The Upkeep

I haven’t shopped bikes yet, but I could do very well for about $500.  I’ll need a helmet. Let’s call that $75. It seems fair to estimate another $100 of maintenance and accessories in the first year of ownership.

*Serious Bikers: please comment on my cost estimates.

$675 to start my new life as a bike commuter. After spending the $675, I’d still have a full three month emergency fund – just throwing that out there.

Increased Travel Time, Decreased Convenience

I’m estimating 45 to 48 minutes per day in the saddle, compared to 20 minutes per day in the car (five minutes from home to office, and I go home for lunch nearly every day). The bike adds 25 to 30 minutes to my daily travel time.

It also seriously limits my mobility from the office, making random errands during the work day impossible (or at least impractical).

On the Other Hand, the Bike is a Two-wheeled Cash Machine

Taylor (YNAB CTO)  has a good friend Pete (your YNAB t-shirt is on its way, my man) who has tracked all auto-related expenses in his life for the last several years.  Driving a 2005 Mazda 3, he calculates total operating cost per mile at $0.22.

*I have no idea how the IRS comes up with a number like 50 cents. Based on Pete’s data, the IRS number is outrageous.

The YNAB office is 2.5 miles from my house; I go home for lunch almost every day.

10 miles of driving x $0.22 = $2.20 per day

250 working days per year yields $550 in direct savings in the first year.

*You could argue I’ll drive less overall because the car won’t be available for this or that little trip from the office, which would bump up the bike-related savings. I’m sure it’s true, but I can’t quantify it. 

Don’t Forget About the Shrinking Love Handles

A handy calculator estimates a 195 pound man will burn around 100 calories riding 12 minutes at 10 to 12 miles per hour. Two round-trips per day would earn me a 400 calorie burn. I plan to keep things calorie neutral by munching on bagels while riding. Just kidding, sweetie (my wife is, um, psyched about the 400 calories burned per day).

400 calories per day x 250 days per year = 100,000 calories burned. At 3,500 calories per pound of fat burned (by the way, is that a real thing?), I’d theoretically burn about 28.6 pounds of fat in the next year. That sounds pretty fantastic.

A bike-centric lifestyle would mean better health and less money spent on health care in the long run.

I’ll Also Be Happier, Less Stressed, and More Productive

As a bike commuter, I’d arrive at the office in the morning invigorated; I’d expect a corresponding bump in my output.

The ride home would be a good opportunity to detox from the work day, better preparing  me for the daily post-work wrestling match with the kids.

The time outside would make me feel a little less terrible about spending my finite life staring at walls and computer screens (this really does give me serious angst).

The Bike Puts $750 per Year in My Pocket

All physical/mental/emotional benefits considered, I’m going to bump the value of the bike commute up to $3 per day, bringing the value of the bike to about $750 per year. Subtracting $100 for maintenance and accessories, the bike just about pays for itself in year one.

A full commitment to the bike commuting lifestyle would double the money, while leaving it in savings would generate $3.52 in interest (yes, I just made that number up on the spot).

The bike makes perfect financial sense: it doesn’t meaningfully affect the emergency fund, it pays a higher interest rate than the savings account, and it comes will big positive externalities (read: smaller love handles).

So I should go out and bike the bike tomorrow.

If…

IF…

I actually ride it.

So, what do you think? Should I take the money out of savings to buy the bike?