powerful effective budgeting

How to Make Your Budget Give You the Power (Instead of Grief)

powerful effective budgeting

Answer: Become super rich in a jiffy. Just kidding.

I love budgeting. No, really. I love working the budget when the purse is fat, and even when it’s thin. Well, let’s be honest, when is the student family budget not thin?

I have not always enjoyed budgeting. I used to avoid this particular task like I avoided doing the dishes. Okay, more than I avoided washing the dishes, and almost as much as I avoided ironing clothes. Then, a little over a year ago my budgeting perspective changed dramatically. How could the drudgery of budgeting become one of my favorite chores? Let’s start with a little story.

The people and places in this work of fiction have no connection to actual people or events. Oh wait, they do. Moving on…

Jack and Jill were young, newly married college students. Determined to start their finances off on the right foot, they opened up a little pamphlet they’d been given. It laid out the basics of budgeting with a simple little chart something like this:

basic budget chart

So, at the beginning of each month Jack and Jill would sit down and make clever guesses at what they would spend in each category before the next moon. At the end of the month, they would open their spreadsheet again and copy in their expenditures from their bank account records. Did their actual expenses match what they had “budgeted?” Drum roll…nope. Their spending pretty much almost never matched what they had expected. So they would scratch their heads, speculate about what went wrong in each category, and begin the process anew.

If (or rather when) unexpected expenses arose during the month, Jack would ask Jill, “can we afford this?” And Jill would recall, as best she could, the sum of money in their bank account. “Sure, we’re halfway through the month. There seems to be plenty of money left. Let’s go ahead and buy it.” (To avoid portraying Jack as a spendthrift, it should be noted that the roles were often reversed.)

After several months, Jack and Jill began to wonder what the whole point was behind guessing what they would spend each month and dutifully recording the ever-present disparities. They gradually abandoned this painstaking process and just made sure they never spent more than was in their bank account each month. This method was less work, and avoided the frustrating speculations on why they could never manage to spend according to the precise amounts laid out in the budget each month.

Gradually life became more complicated. The car broke down more often, a baby came along, Jack and Jill graduated from college, and there were student debts to pay. Jill renewed the careful budgeting process but found that it solved few problems. She was plagued with questions.

How could they tell if they really could afford something?

How could she ensure, during the month, that her money was going where it was needed before being spent on less important things?

How could she set aside money each month toward specific goals, or in preparation for unforeseen circumstances (like car failures)? Should she open multiple savings accounts to make sure the money wouldn’t be spent on the wrong purposes?

How could she track the money that always seemed to be “on the lam”—the money that just seemed to disappear each month?

I am happy to report that Jill found a solution to all of her problems. Well, her money management problems anyway. And I’m going to share it with you. It’s a budgeting program by the name of YNAB. This stands for “You Need A Budget.” More important than the software component is the financial philosophy behind it.

Jill was using a traditional budgeting method. This traditional method, as we’ve seen, is very limited. Here’s how YNAB makes beats the traditional method and makes budgeting effective and rewarding instead of lame and depressing.

How YNAB Fixes Traditional Budgeting Problems

  1. You budget money you actually have.You aren’t budgeting your “expected” income. You budget the income you’ve already earned. Your budget provides a plan for how you’ll spend. And since you’re going to spend based solely on your budget, you’ll never be spending money you don’t have.
  1. No money goes un-accounted for. You budget down to the dollar. Literally, you give every penny you’ve earned a designated purpose. It doesn’t just hang out as part of your bank account balance, ready to depart on a whim and leaving no footprints behind it. You first assign money to your most urgent needs and priorities, and then those that are less important, until every dollar has a job.

budget to zero

  1. You record transactions frequently and spend based on your category balances, never your bank account balance. You can record your transactions immediately with YNAB’s app on your phone or tablet, or if you’re still in the dumb phone camp with me, you can go home and enter them on your PC. Then you continue to based on what’s in your budget. For example, on Friday night you open up YNAB, see that you only have $5 left in the entertainment budget, and decide to read a book instead of see that movie, even though your bank account still has $500 left in it. If the movie turns out to be really important, you can move some money from a different category, because your budget allows you to adjust (see point 5).

what can I spend budget category

record transactions

  1. You can build and track savings easily. YNAB calls these the “rainy day” categories in your budget, and as you assign a little money here each month, YNAB adds each contribution to the balance, which is carried forward each month and waiting for you when you need it. It doesn’t accidentally get spent on something else, because once again, you spend based on your budget, not your bank account. The savings are there for you, without any need to open separate savings accounts to protect your money from being spent on the wrong thing.

rainy day funds

  1. You know when you’ve overspent a category, and you can adjust for it. It shows up in red, with a negative sign, in the balance for that category. And it’s fixable and flexible. You scour the other budget categories that still have positive balances, and pull money from one category to fix the one in the red. This is called “rolling with the punches.” There’s no punishment at the end of the month for not spending that exact number you put down in the beginning, because you adjust as you go according to your needs.

overspent category

  1. You live on last month’s income.This is one of the best parts of the YNAB method. You may not be here yet, but there are ways to get there, and it is completely worth the effort. Living on the previous month’s income eliminates the need to carefully time your bill payments based on your paycheck dates, and allows you more freedom to roll with the punches. If you go over your budget in August, the amount you overspent will be deducted from what you budget in September. It doesn’t become a problem unless it happens every month, in which case you will eventually you eat up that one-month “buffer” money.

So how does YNAB make budgeting awesome?

I love budgeting now because I am 100% in control of my money (I mean, we are in control of our money…) As my children and husband will assure you, I love control. The YNAB method gives me the power. And oh, I feel it. YNAB helps me stay in control by:

* Tracking every penny, every day.

* Allowing the budget to be flexible to meet the needs of life.

* Letting me save for rainy days with accuracy and accountability.

* Only letting me spend money I actually have.

* Removing the stress of living paycheck to paycheck by instead living on last month’s income.

The YNAB method can put you in control of your finances too. You can try it for 34 days for free (for real, you don’t put in any payment info to try the demo. There’s no commitment if you don’t want to continue. It simply stops working unless you choose to go buy the program.)

If the whole idea of a new budgeting system is overwhelming, fear not. The folks at YNAB have a slew of resources to help you not only learn the ins and outs of the software, but also to master the YNAB money management method. You don’t even need to buy the program to utilize their free email courses and online classes. They changed the way I thought about money!

After trying and loving the YNAB demo, I bought the program. It’s normally $60, but if you buy it using the referral link from Stephanie at Six Figures Under, you’ll get it for $54 (scroll to the bottom of her post). If you are a college student, you can get YNAB for free! I am telling you with complete honesty that my budget has never regretted that purchase. YNAB allows me–and my husband, lest you think I do all the spending–to have confidence in managing the family finances. And you can do the same. I realize that some of you out there could create a super-power spreadsheet that does everything that the YNAB software does. I do not fall into this camp, and therefore highly recommend the YNAB software.

With the New Year coming up, many of us will be making financial resolutions. If you give yourself YNAB for a Christmas present (exciting gift, I know) you’ll be perfectly equipped to give your money management a makeover. According to YNAB, the median net worth increase of their users after one month is $200. After nine months, the median net increase for a YNAB user is $3,300. I can confirm that our family’s net worth has increased since we began using YNAB.

Try YNAB

YNAB logo

Give the YNAB demo (and method) a try and let me know what you think! For those of you who already have your budgets serving you well, what program/method do you like and why? Please share your experiences in the comments.

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