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10 Apr 2015

The Relationship Between Your Budget & Your Accounts: It’s Complicated

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by Jesse Mecham

Your budget and your bank accounts have one of those “It’s Complicated” relationships. They’re connected, yet separate.

We know your budget and your accounts are connected through categories. Inflows become available to budget and outflows appear in the outflow column. YNAB looks at that information and keeps you up to date on what’s left in a category at any given time.

Here’s another way to think about it: YNAB gives you two completely different views of the exact same dollars.  The money in your bank accounts is made up of  the exact same dollars that you have in the budget, you’re just organizing that money a different way to gain additional perspective.

If you have a deck of cards, you could organize them by suit or by color. But either way, it’s the same deck of cards. Same principle applies here — if you take your money and look at it through the lens of your accounts, you’re looking at the location of those dollars.

You may have a few checking accounts and savings accounts.

accounts : budget.005

If you take those same dollars and organize them through budget categories, you’re no longer looking at location. Through this lens,  you’re looking at the job you’ve given each of those dollars.

accounts : budget.002

Either way, your money is at the center. Looking at it one way gives you the view of the location, looking at it another way gives you the view of the jobs those dollars need to do.

accounts : budget.004

So your budget and your accounts are connected because they are just different views of the same money.  But they are also independent of each other. You can move money around between your budget accounts without impacting the budget at all.

To keep things simple, I’ve got $100 budgeted in each category. There’s $1000 in checking and $600 in savings.

accounts:budget01

What if I transfer $250 from checking to savings? I hit the transfer button to get the ball rolling.

accounts:budget02

Notice the transfer has no category.

accounts:budget03

We categorize income when new money arrives. But no new money has arrived, this money was already here.  We categorize outflows when we buy something. We aren’t buying anything, we’re just changing the location of the money.

Let’s look at the whole view again.

accounts:budget04

The account balances have changed, and that makes sense since we did move money between accounts.  But notice the budget has not changed. We didn’t change our plan for the dollars.

What if we move all $850 out of the savings account and into the checking account?

accounts:budget05

The budget is not phased. It does not care where you keep the money. What if I had this same $1600 spread across more accounts?

accounts:budget06

That’s also fine with the budget.  It has no impact at all.  My category balances are exactly the same.  It is more complicated this way though, isn’t it?  More accounts to reconcile, a lot more transferring back and forth.

( You may be thinking…”Hmm…maybe I don’t need all these extra accounts?”  And that would be a good thing.)

You can also move money between categories without impacting accounts. What if I take all the money out of my rainy day funds, car replacement and vacation and put it all in the emergency fund category?

accounts:budget07

Notice the account balances didn’t change.  You may be thinking, “Well where’s my emergency fund money?”  It’s spread across all those accounts. But you know what? It doesn’t really matter. The budget is telling you how much you have for emergencies. The accounts don’t tell you that.  They simply report on location.  That’s it.

The real power in money management is focusing on what you want the money to do, not where it’s located.  We’ve been brainwashed a little bit to believe that account management equals money management.  And hey, let’s be honest: Account management is better than no management.  (That’s how I operated before YNAB and it did help a little.)

But once you start budgeting, you have a better way. Budgeting is the truest form of money management.

“So theoretically, I could just have all my money in one account?”

Yes, yes you could. And we’ll discuss that in my next post.

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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