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13 May 2013

Everybody, Meet Harriet. Does She Need YNAB?

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by Jesse Mecham

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 requires 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.

Your Next Step

Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)

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