Yes, You Need a Budget!

July 4, 2017

Finance

I’ve always considered myself pretty good when it comes to personal finance since I have most of the big stuff taken care of. I live well below my means, invest the rest, and have consistently been saving in the neighborhood of $40K-$50K per year for over a decade. Someone like me surely doesn’t need a budget, right? Budgets are only for those who are in debt or those who need help managing their spending. This was my mindset going in as I tried You Need A Budget¬†(YNAB), software that I had been hearing a lot about, but never thought would be able to benefit me. So I decided to give it a spin and see what the hype was about and why this company had such a community of dedicated followers that users are also known as YNABers. After six months of using it, I am willing to concede that maintaining a budget is immensely helpful, even to someone with an extremely high savings rate. Let’s delve into some specifics on what I was doing before and how this simple change positively impacted my life.

Before YNAB

Before using YNAB, I would track my spending on Mint. Mint would pull data from my credit card accounts and I’d put the transactions in the appropriate category. At the end of the month, I’d be able to pull up a nifty pie chart showing how much money I had spent in each category.

Mint Spending

The key difference here is that I was “tracking”, not budgeting. Although I could tell you how much I spent on “Food & Dining” the previous month, my behavior wasn’t being altered other than me saying to myself, “You know, I really should spend less on going out.”

Also, like Kevin Hart, I had a checking and a savings account.


Each month, I would have a savings account from another bank take out $460 from my checking account. By the end of the year, I’d have $5500 in that savings account which I would use to max my Roth IRA on January 1st. As you will see, both of these methods will be replaced by something much more efficient once you start budgeting.

Benefits of YNAB

The first benefit, especially for those who plan to retire early, is having a true understanding of what your costs are. When breaking out my budget, I found it helpful to divide my categories between Fixed Costs, Variable Costs, and Long Term. Fixed Costs are the items that I know will regularly hit my account for a specified amount each month. This includes items such as rent, cell phone bill, and monthly subscriptions. Variable Costs are things that will change from month to month. This includes things such as utilities, groceries, going out, and shopping. Finally, my Long Term category are goals with an extended timeline, such as saving for my Roth IRA contribution next year, vacations, auto maintenance, and annual subscriptions. Of course, you have the option of choosing the categories that make the most sense in your head, but these are mine.

Screen Shot 2017-07-04 at 1.36.59 PM

As an upcoming early retiree using the 4% withdrawal rule, it can be fun to see your net worth grow, examine your budget, and think to yourself, “Now that I have accumulated $XXX,XXX, I have enough money to cover my rent, groceries, etc. in retirement.

After developing your initial budget shell for the month, you will input your transactions every time you make a purchase. You can do this from your computer at home or in real-time via the YNAB app on your phone. In either case, inputting the transaction can be done in a matter of seconds. Once input, the transaction will automatically reduce the amount of money you have left in that category.

The physical act of inputting your transactions is where the magic occurs. You will no longer be spending blindly. You know how much you allotted to that category that month and you have consciously made a decision to use your money for that particular expenditure.

What if I overspend in my budgeted category? Isn’t having a budget restrictive?

My budget, especially in the Variable Costs category, is almost never spot on. However, dealing with it is simple. Let’s say that I really want to go out with my friends, but my “Going Out” category is already depleted. Chances are that I have underspent in another category. For example, I might have additional money budgeted for “Shopping” and I value going out with my friends this weekend more than I value buying some more shirts and pants this month. Within the app, I’d simply transfer the money from “Shopping” to “Going Out.”

Using the previous example, you can see how this eliminates the need for a savings account. You really never needed that savings account. All you needed was to give every dollar a job (one of the tenets of YNAB). If my dollars are given the job of “Roth IRA”, then I can keep all my funds in my checking account.

Results

I wouldn’t be writing this post if I didn’t see results from using YNAB. Although I had a high savings rate, the truth is that there would be months when I would overspend and, as a result, I would not be able to fund my Vanguard investment account with as much money as I would’ve liked to. If I had an unexpected auto repair bill or upcoming vacation, I would simply skip my regular Vanguard investment that month to have enough money to pay for it. Since I began using this software at the beginning of the year, I have fully funded my investment account each month despite those expenses. Because I now consciously allot money to various long term expenses in advance, my other savings goals can remain intact.

My behavior doesn’t seem like it has been altered because I still feel like I go out with friends just as much as I used to and I still buy the things that I want, but maintaining a budget has undoubtedly altered my behavior by making me consider my purchase in the larger scheme of things.

There is a bit of a learning curve when using the software, but luckily there are tons of resources out there and a whole community of users to help you out. You can attend recurring live video sessions where experienced users will provide demos and answer your questions.

Bottom line: If you have trouble with your finances (and even if you don’t), you owe it to yourself to try out YNAB.

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