YNAB You Need A Budget

[creamintheblues]

Good evening fellow YNABEANS (if that's the correct collective noun?).

I have been using Wesabe to track spending until now and have been using a manual method for budgeting expenditure and savings. I've been a little lax over the years, have become a Spender and have been looking for a tool to get me back on track.

I have to say, I am loving YNAB 3!!

MONTHLY EXPENSE BUDGETING
Many of my necessary expenses (bills & insurances) are paid monthly by direct debit. These are easy to budget. Some of them are paid annually and some utilities are paid quarterly. For the manual method I have been using to date I generally calculate the TOTAL ANNUAL EXPENDITURE of all expenses, divide this by 12 and transfer this amount each month into a bank account (which I call Home management). All direct debits and bill payments are made from this account.

Now that I have moved to YNAB I want to do things properly but am unsure how I manage monthly expense budgeting for expenses which will not normally occur monthly. For example, I budget small monthly amounts each month for bills that I am able to quantify, Car Insurance, Car Tax, Car Servicing. The problem with this method is that I appear to be OverBudgeting each month.

I have set up categories for all my likely expenses both known and otherwise.

QUESTIONS

1. Should I set up a sinking fund 'category' or 'account' to which I can transfer or allocate the monthly total for these items? That way the money would appear to be allocated.

2. Should I just leave the money rolling over to my 'Buffer' each month. Problem is I would never have a true picture of how much money is available and may run into difficulties come bill payment date.

3. Should I continue to physically (in the real world) transfer money from my 'Checking Account' to a 'Home Management Account'? So that my checking account has actual 'free income'?

4. Should I apply this method (1-3) for expenses which are likely to occur but are not as determinable as bills, ie, gifts, christmas, holidays, etc...?

I apologise if I am repeating questions but this is so important to get right. I have been trawling this forum, the help files, video tutorials and have found related questions. I am sure my answer lies in negative budgeting somewhere but I must confess that I am utterly confused by all the 'On-Budget', 'Off-Budget' malarky that I've seen bandied around!

Many thanks in anticipation to what appears to be a very successful community.

[chrish]

1. Create a category. Categories are like envelopes you budget money into them and it stays there until you take it out to pay your bill.

2. No! Budget down to $0 available each month. This is the key tenet of 0 based budgeting!

3. Once you get used to YNAB you will use your categories for spending decisions instead of account balances. This allows you to stash money that won't be used soon (even though it has been budgeted...given a purpose) in an interest bearing account. Categories is a 'different' way to look at your money, they don't care physically where the money is, they give it a purpose.

4. Kind of. You want to create categories, but you may need to budget differently for them. If you know exactly what your bill will be in 12 months, then just start saving 1/12 each month. For more variable bills there are more options. Many of my bills are due early in the month so before I budget for the month I know exactly how much to budget. In other circumstances people with variable bills (like gas for heating) know the winter will bring higher costs so they budget 1/12 of what they expect for the year, but they must start that pattern when their usage is low otherwise they wouldn't have enough built up for the higher cost months.

I recommend watching the tutorial videos.

[malisab]

To expand on #3, I have done it in a similar manner as you've described for a number of years. I have a 'bills' checking account and an 'everyday expenses' checking account. The bills account gets a direct deposit that covers any 'musts' and I don't use the debit card ever. DH doesn't even get one. The everyday expenses account is where we generally spend from. In the past, the whole amount in that account (and any available credit line on our credit cards was fair game. That kept us in good shape as far as always having the money to pay our bills, but did nothing to decrease our debt and plenty to increase it.

Since starting YNAB, I've continued to use the accounts in the same way, but the money in the everyday expenses account is now spent according to the category balances and we're not incurring new CC debt. All the 'extra' money used to go into the everyday account to get frittered away, it now goes to the bills account to go toward debt repayment. I have a master category for everyday expenses that roughly matches the everyday account balance. I have a master category for bills that roughly matches the bills account balance.

I can see that this arrangement wouldn't be necessary when using YNAB, but I'm comfortable with it and will continue in this way for the foreseeable future.

Welcome!

[creamintheblues]

Thanks, Chris.

1. Create a category. Categories are like envelopes you budget money into them and it stays there until you take it out to pay your bill.

So do you recommend just the one category for accumulating all expenses or do (as I have done) have lots of different categories for each likely expense, then another category for 'allocating' the budget amounts to each month (I'm not even making sense to myself anymore!)

2. No! Budget down to $0 available each month. This is the key tenet of 0 based budgeting!

But at the moment I don't have a sufficient enough Buffer to match one month's worth of expenses. As I understand it when I am first starting out I should try not to budget all of the available amount as the extra money will roll forward to build up to a full buffer. I had planned on getting to a full buffer then employing rule two by budgeting everything to zero and making all future income available next month. At least, that's how I thought it worked based on the videos, although it seems a little alien to have free cash when I have debt to clear but I guess that's the first step in avoiding further debt by living paycheck to paycheck.

3. Categories is a 'different' way to look at your money, they don't care physically where the money is, they give it a purpose.

This is starting to make some sense.

You want to create categories, but you may need to budget differently for them. If you know exactly what your bill will be in 12 months, then just start saving 1/12 each month.

I have created a Category for every perceivable expense and where possible have used the 1/12 rule. Thanks.

I have a 'bills' checking account and an 'everyday expenses' checking account. The bills account gets a direct deposit that covers any 'musts' and I don't use the debit card ever. DH doesn't even get one. The everyday expenses account is where we generally spend from. In the past, the whole amount in that account (and any available credit line on our credit cards was fair game. That kept us in good shape as far as always having the money to pay our bills, but did nothing to decrease our debt and plenty to increase it.

This is exactly how I've always worked.

Welcome!

Why thank you, this seems like a nice place to be.

Thank you both for taking the time to help.

[creamintheblues]

2. No! Budget down to $0 available each month. This is the key tenet of 0 based budgeting!

But at the moment I don't have a sufficient enough Buffer to match one month's worth of expenses. As I understand it when I am first starting out I should try not to budget all of the available amount as the extra money will roll forward to build up to a full buffer. I had planned on getting to a full buffer then employing rule two by budgeting everything to zero and making all future income available next month. At least, that's how I thought it worked based on the videos, although it seems a little alien to have free cash when I have debt to clear but I guess that's the first step in avoiding further debt by living paycheck to paycheck.

OK I think I understand what you mean here. I have created a category which is YNAB buffer and allocated the remaining amount left available to budget this month to that category.

The only thing is, the Buffer amount doesn't show at all for next month (April) as YNAB thinks I've allocated all my money and so have no buffer, although, I have attributed that which I would have allocated to savings as a buffer category.

On this assumption, as YNAB doesn't care where the money sits as long as it's allocated is it OK to move the 'buffer' amount into a savings account or should it stay in the checking account?

Still got to get my head around this. I'm sure it will come with time. It's quite a learning curve for the newly disciplined!!

[blarg]

So do you recommend just the one category for accumulating all expenses or do (as I have done) have lots of different categories for each likely expense, then another category for 'allocating' the budget amounts to each month (I'm not even making sense to myself anymore!)

It depends. How much benefit are you going to get from your sub categories? I break mine up in general, and some bills have their own category, but others are lumped together. Phone/Internet/Web Hosting/Mobile Me all live in a category called Bills: Phone & Internet. On the other hand, Car Payment has its own category. Basically break them down as much as you think will help you, but not more.

Jesse talks about having a category for toothpaste. Sure, you could track how much you spend on toothpaste, but is that really going to help you with your spending? Do you waste toothpaste? How much are you going to be able to change your spending habits around toothpaste? This video might help: http://www.youneedabudget.com/2010/an-a ... wednesday/

Basically his argument is that the more simple things are, the better it will work for you. At the same time, having one category called "Bills" that gets thousands allocated to it each month doesn't show you where your money is going either. So there's a balance somewhere in there you want to hunt for.

But at the moment I don't have a sufficient enough Buffer to match one month's worth of expenses. As I understand it when I am first starting out I should try not to budget all of the available amount as the extra money will roll forward to build up to a full buffer. I had planned on getting to a full buffer then employing rule two by budgeting everything to zero and making all future income available next month. At least, that's how I thought it worked based on the videos, although it seems a little alien to have free cash when I have debt to clear but I guess that's the first step in avoiding further debt by living paycheck to paycheck.

Before you have a buffer, you probably do want to let your money build up in available income. The goal is to give every dollar a job. When you're starting out, leaving the money in Available is essentially saying that its job is to build the buffer. That's fine. The Rule 1 video on this page shows how this works in the software very clearly: http://www.youneedabudget.com/support/tutorials/

[creamintheblues]

Excellent reply all round Blarg.

I Think I'm learning that it doesn't matter what my bank balance says. In future I should make all financial decisions based on my YNAB budgets. That is, just because my bank balance tells me I have say, £2,000 it doesn't mean that it's available to spend (necessarily). I need to look into YNAB to see where I can spend or invest it.

The difficulty is understanding whether I have yet spent against a category that is budgeted 1/12 monthly yet paid let's say, annually. I still can't figure this for all the categories I have which are like this. Each month it'll just look like I've over budgeted until I come to the day that I make the annual payment.

Still a little confused over these mechanics but understanding the 'philosophy' more.

[souwalker]

Before you have a buffer, you probably do want to let your money build up in available income. The goal is to give every dollar a job. When you're starting out, leaving the money in Available is essentially saying that its job is to build the buffer. That's fine. The Rule 1 video on this page shows how this works in the software very clearly: http://www.youneedabudget.com/support/tutorials/

I have been using YNAB for a few months and is working well for me but I seem to have trouble understanding conflicting rules The ideal as I see all the time from other users or even the help files, is to follow a $0 budget. Give every dollar a job. I do this. But then the video mentioned above tells us not to budget everything against the Income so to leave some for the buffer. This is conflicting rules?? How can I create a buffer if I am supposed to do a $0 budget?

Rgds

[creamintheblues]

conflicting rules?? How can I create a buffer if I am supposed to do a $0 budget?

I'm certainly no-one to give advice but I don't think the rules are necessarily conflicting, maybe just interpretations. As I see it, zero budgeting is Rule 2, you don't need to zero budget until you get past Rule 1, that is, to the point of a full buffer.

That's my interpretation at least.

[malisab]

OK I think I understand what you mean here. I have created a category which is YNAB buffer and allocated the remaining amount left available to budget this month to that category.

The only thing is, the Buffer amount doesn't show at all for next month (April) as YNAB thinks I've allocated all my money and so have no buffer, although, I have attributed that which I would have allocated to savings as a buffer category.

Part of the confusion is the difference between YNAB Pro and YNAB 3. The YNAB Pro "way" works in both. The YNAB 3 works only in 3 and is new. So sometimes familiar phrases are tossed about and then 'oops...it's not quite like that in 3'. For those that know both, the get the gist. For those that are new, it creates confusion.

Either way works. They're somewhat mutually exclusive though. The 'set up a buffer category' is the Pro way. It works beautifully. It's easy to explain what's happening, but it's out of site. It's saving for that 'expense' just like saving for a vacation or property taxes. The new way, the 3 way, has it staying at the bottom of each month and being rolled forward. You technically don't budget down to zero anymore. Which makes it a bit odd. It's more visible, which can either be good or bad. With the 3 way, when you're fully buffered, the only change you make is starting to categorize your paychecks as Available Next Month. With the Pro way, you eventually budget a negative number to the category to 'withdraw' the money from the buffer category and make it available to budget. Use whichever method makes you the most comfortable.

On this assumption, as YNAB doesn't care where the money sits as long as it's allocated is it OK to move the 'buffer' amount into a savings account or should it stay in the checking account?

Keep enough in checking to make sure things clear. Or keep it all in there so you don't have to worry. Your choice. It depends how low you go and how much 'work' you want to invest to shuffle things.

[chrish]

I concur with malisab.

I personally do not like the 'YNAB 3' way of saving for a buffer, because I feel like it breaks Rule 2. It is mostly just a matter of semantics though. As long as you are intentional about leaving money unbudgeted, or putting it in a buffer category with the same purpose (to become your buffer), either way will work.

[creamintheblues]

The buffer is now clear. It was the YNAB Pro, YNAB 3 issue muddying the water especially as I had been looking at the example file (was it Dick and Jane / Mary and Joe???) that someone had posted which I'm guessing now was Pro.

I will delete my buffer category and let YNAB3 take care of it. I prefer it this way, makes me feel like I'm making progress.

I'm still not sure about this though:

The difficulty is understanding whether I have yet spent against a category that is budgeted 1/12 monthly yet paid let's say, annually. I still can't figure this for all the categories I have which are like this. Each month it'll just look like I've over budgeted until I come to the day that I make the annual payment.

Still a little confused over these mechanics but understanding the 'philosophy' more.

...but we're well into Thursday already and it's been a very long day sorting finance, budgets and establishing a decent software tool upon which to start my base so I'm going to pat myself on my back for what I have managed to achieve today and retire to my pit for a well earned rest. I look forward to waking with another day in which to improve my understanding of YNAB3 and improve my finances.

As most users will be coming online around now I may also have some replies to clear this whole thing up in no time at all.

Good night all.

[souwalker]

[quote="creamintheblues

I'm certainly no-one to give advice but I don't think the rules are necessarily conflicting, maybe just interpretations. As I see it, zero budgeting is Rule 2, you don't need to zero budget until you get past Rule 1, that is, to the point of a full buffer.

That's my interpretation at least.[/quote]

I like to $0 budget so I know where all monies are allocated to. I've got also a 'Catch All' category which an amount is bugeted for for expenses without a category. I've covered every category for my needs. If I do not budget to zero and left the extra to buffer, if a bill comes and is not budgeted for, I'd need to take it out from the buffer..now I take it out of the 'Catch All' category...

At month end, some categories will have a positive balance. Is this then considered starting a buffer?

Rgds

[Patzer]

The difficulty is understanding whether I have yet spent against a category that is budgeted 1/12 monthly yet paid let's say, annually. I still can't figure this for all the categories I have which are like this. Each month it'll just look like I've over budgeted until I come to the day that I make the annual payment.

It's a different way of thinking. Think of this type of category as being like a sinking fund. For example, suppose you have an annual expense of $1200. (I know, across the pond you'll be using pounds sterling or euros, but my keyboard doesn't have those symbols. So bear with the explanation in dollars for the moment.) You want to budget $100 per month. The first month you budget $100, and you have $100 in the category. The second month you budget $100, and you have $200 in the category, and so on. The twelfth month you budget $100, have $1200 in the category, spend the $1200 for the expense, and then have zero in the category. Then in the 13th month you start the cycle over.

Now, suppose you start YNAB today, but that $1200 expense is going to show up in your sixth month of using YNAB? There are a couple of ways of dealing with this. You could budget $200 per month in order to accumulate the $1200 you'll need in the sixth month. Then in the seventh month, you start budgeting $100 per month to build toward the $1200 you'll need a year from then. Alternatively, assuming you have the money in savings, you could budget $700 in the first month to catch up to where you would have been if you'd been using YNAB all along. Then you budget $100 per month each month, and spending the $1200 in the sixth month brings the balance down to zero to start a fresh cycle. A third method would be to budget $100 per month, and have $600 accumulated by the sixth month. Then when you spend the $1200, you have overspent by $600 and you need to deal with that $600 overspending at that time.

Of course, there are many variations on these ideas. The important thing is the categories work conceptually like sinking funds or dedicated savings accounts for these non-monthly expenses.

Patzer

[Ambar]

The difficulty is understanding whether I have yet spent against a category that is budgeted 1/12 monthly yet paid let's say, annually. I still can't figure this for all the categories I have which are like this. Each month it'll just look like I've over budgeted until I come to the day that I make the annual payment.

To add to what Patzer has explained -- I have taken to making notes on the relevant categories. For example, the "Prius registration" category has a note saying "$211 due mid-February". So I know when I go to budget for a new month that 1/12th of $211 needs to go in there, and come July, if I'm curious, I can count up and know that I should have 5/12ths of the eventual amount stored.

This is how I avoid the "temptation" to budget out future months "on spec".