Why I Love the You Need a Budget (YNAB) System for Budgeting

You Need a Budget (YNAB) is the tool I am closest to being an evangelist on. It forms the backbone of how I handle my personal and my LLC finances. This post will detail the benefits I have found from doing so.

What is the You Need a Budget Method?

Between the YNAB site and the YouTube influencers, there is a lof content out there on the method. In my own words, the YNAB method provides a framework to not only track your spending, but more importantly see if you are living beyond your means or stockpiling for the future.

The traditional approach with a budget is to create spending and saving categories that reflect your monthly activity. YNAB follows this same approach, but then takes it a step farther by requiring that you assign dollars from your bank accounts to cover your spending activity in a given month.

At the end of the day, you are left with a system that answers both where your money is going and if you can afford your current lifestyle.

The Benefits

There are many benefits of the YNAB method, but for the me the top four are:

1. Understanding where my money is going
2. Cannot spend money you do not have
3. Guilt around spending decreases
4. Emergency funds become more concrete

Let’s step through each of these.

Understanding Where My Money is Going

A prerequisite for being successful with YNAB is taking time upfront to review your spending habits. Specifically taking a look at your expenses over something like the past year to get a sense of both what you are spending money on and how much you are spending in each of those areas. With this understanding in hand, you can then create a budget that accurately reflects your spending habits as well any savings goals that you have.

Once your budget is setup, the next step is to connect your bank accounts and credit cards to YNAB. From here, YNAB will automatically import all of your transactions and do its best to map them to your budget categories. Once this machine gets humming, it is really easy to understand your spending behavior over time. The ability to do this was particularly helpful when deciding if I wanted to go full time on Lost Creek Designs. It was trivial to look at my average monthly expenses, see where I could make cuts, and then set an informed minimum revenue target for my business.

Spending Money You Do Not Have

As mentioned earlier, YNAB takes conventional budgeting apps a step further by not only tracking your spending, but additionally requiring you to assign money from your accounts to cover your spending. This approach provides guardrails to prevent you from spending money you do not currently have. This takes the guesswork out of wondering what you can and cannot afford. It frees up mental bandwidth and even more importantly helps remove guilt around spending your money. More on this next.

Guilt Around Spending Decreases

With the ability to understand where my money is going and a system to prevent spending money I do not have, my guilt around spending has decreased. Previously, there was often a nagging voice in my head whispering “Should you really be spending this money?” for every purchase. Whether my dollars were going to a fundamental like groceries or an extravagence like vacation, spending felt bad.

Because I have a clear sense of how I spend my money, I can create targets for my budget categories and assign money to cover my anticipated expenses ahead of time. For instance, we have decided that we would like spend up to $400/month on dining out. At the start of the month, I assign $400 assigned to cover that anticipated spending. With that spending covered, I can dine out guilt free up to that $400 target.

In addition to easing spending guilt, assigning money ahead of time brings me peace of my mind around building up an emergency fund.

Emergency Funds Become Concrete

Another domain where YNAB improves things is around emergency funds. The traditional approach for an emergency fund is to accumulate a big pile of cash that you hope will cover your expenses for something like three to six months should you lose your income. It works but you might be socking away less or more than you actually need to. In the case of more, you could be doing something else with that money instead!

As mentioned earlier, when you spin up a budget in YNAB, you create your budget categories and set spending targets for each category. From there, your next task is to assign every last dollar from your bank accounts to those categories. If you have money available after covering your expenses for the current month, you can assign the remaining money to the next month’s anticipated expenses. You can continue this until all of your money is assigned.

Let’s say your goal is to have an emergency fund that can support you for three months with no income. If you can assign money to cover all of your budget categories for the current month plus the next three, you are set! If you are short, there is your next savings goal. If you still have money left over, you can put that money to work for some other goal. The method ensures you are earmarking exactly what you need to hit your emergency fund target.

Closing Thoughts

There are some additional benefits to using YNAB, but the four covered here are the ones that help me sleep at night. I will likely do some follow up posts on the specifics of how I implement YNAB, but wanted to start by articulating what I like so much about the method. I love nerding out on all things budgeting. Thanks for reading and hope you found this helpful!