We get a lot of questions about savings accounts. Why does YNAB handle them the way we do? Why should you include your savings accounts in your budget? Why don’t you categorize when transferring between savings and checking accounts? It can be confusing.
Today I’m going to attempt to use an analogy to help drive home the point.
So you have a pile of clothes on the floor of your closet. It’s a mess. It’s chaos. It’s all there but you need that one shirt for that thing and, well, good luck.
This is exactly how some people “manage” their money. It’s all there in one pile but you don’t know what it’s doing or where it’s going or what will be available in the future. It’s a mess. It’s chaos. And should an emergency come up, well, good luck.
But at some point, it gets frustrating, and you decide you have to get organized. And maybe you get a little over zealous. You’ve heard good things about dressers so you get five. And there is an elaborate system that involves moving the items of clothing you will wear the next day to a special dresser because on the day you wear them you like to take them out of this one particular dresser. It’s complicated. It’s time-consuming. It’s overkill.
And for a lot of you, this is what your finances feel like. Lots of accounts. An elaborate, hierarchy of accounts and transferring—and for what? To hide money from yourself? It’s complicated. It’s time-consuming. It’s overkill.
What if you had just one dresser and each of the drawers had a distinct purpose? Socks in the top left-hand drawer. Pants in the bottom drawer, etc. There will be drawers that you hardly ever open, but when you need your vacation clothes, they will be there. And for the clothes in regular rotation, you will always know exactly what they are for and where they are. (In case it wasn’t obvious, this is the “just right” solution.)
Your finances are the same. Within the budget, every category has a distinct purpose and every dollar has been allocated purposefully. In the budget, if you think about the dresser as your whole budget, it makes sense that when you actually spend the money—and pull it out of the dresser—that is when you categorize it. If you are just moving money within your budget, from category to category, the money is still there it is just in a different spot. We only need to categorize our money when it goes into the budget, and when it is spent and leaves the system entirely. Just right.
If you can’t wait until next week for more whiteboard wisdom, you can view the entire library here. If you have a question or an idea you’d like us to address in a future Whiteboard Wednesday episode – we’d love to hear from you! Email us at [email protected]
Until next time…