How to Master Your Personal Finances with You Need a Budget (YNAB)

I hate personal budgeting. Most people do. You set a plan, you inevitably blow your budget, get demoralized, and the downward spiral of overspending starts.

You stress over spending too much on something. Then beat yourself up over it, then to cope with the stress, you order takeout or go shopping, thus perpetuating the cycle.

I had used Mint for the longest time and always found what it told me depressing. I ultimately avoided looking at it altogether. This just made budgeting (or lack thereof) worse.

I had heard about the app You Need a Budget aka “YNAB”. I hated the name. It sounded a little condescending and a little cheesy. But, it had a cult-like following, so I decided to give it a try.

At first, I didn’t get it. Its take on budgeting didn’t make a lot of sense. I watched their how-to videos, and quickly, their philosophy on personal finance clicked into place.

All of a sudden, I loved budgeting. The app enabled me to feel a level of control over my finances that previous budgeting apps failed to do.

To save you so time, here is a guide on how to use YNAB to master your finances.

YNAB’s Budgeting Philosophy

YNAB has a unique budgeting philosophy when compared to other budgeting apps like Mint. Its philosophy involves “giving every dollar a job”, yet not budgeting beyond your current cash on hand.

Typically, a budgeting app requires you to enter a monthly budget for each spending area you define. Then, over the month, as you spend, you see how much you have left against that budget.

With YNAB, instead of a fixed budget per category, you categorize every dollar you have on hand into budgets. That might be money towards groceries, savings, or takeout. You can’t (or shouldn’t) budget beyond the cash you currently have.

While this difference takes some getting used to, this philosophy forces you to think about your cash—what you actually have, instead of what you say you can spend in a given month.

Before we dive into the specifics of YNAB budgeting, any financial tracker needs to see where your money is going. So let’s first get our banking accounts set up in the app.

Connecting your Accounts

The Accounts section is where you keep track of all of your bank accounts: checking accounts, credit cards, and savings accounts. It houses all of your transactions and balances. In this tab, these types of accounts are referred to as “Budget” accounts.

You can also record the cash value of different assets you own, such as a house or investment accounts. Mortgage or personal loans can also be added here. These types of accounts are referred to as “Tracking” accounts. What happens in these accounts doesn’t directly affect your budget, but is still helpful to watch.

I prefer to record ALL of my assets and liabilities in YNAB, so I can get an accurate picture of my Net Worth over time.

Managing Transactions

The Accounts tab houses all the transactions that are recorded against each account you have.

Like many budgeting applications, YNAB has a pretty robust import capability with most financial institutions. Most of your bank accounts can automatically import balances and transactions into YNAB.

Setting up automated import with your banks is highly recommended. HOWEVER, because the automated import of these transactions is delayed by a day or two, relying solely on the automated import will leave your budget progress outdated.

To counteract this, YNAB encourages you to enter your transactions manually when they happen. You can do this by hitting the “+” button at the bottom of the mobile app or hitting the “Add Transaction” button within the web application for the appropriate account.

Don’t worry about the transaction being duplicated once the automated import brings in that same spending. As long as the transaction imports within 10 days of when you originally recorded it, and the amounts equal, YNAB will automatically match them together. If the app doesn’t do this automatically, there is an option for you to match the transaction yourself. This ability to match transactions ensures you don’t have duplicate entries in your system.

Manual entry of transactions, while a little extra work, is highly recommended for several reasons. They include:

• A more up-to-date account balance of what cash you have on hand, including what hasn’t cleared your accounts yet
• A more up-to-date progress for each budget. This way, you don’t risk blowing your budget by not remembering how many transactions you have uncleared. They’ve already been entered.
• You are much more conscious of your spending as it occurs. It is easy to spend money on a credit or debit card and not appreciate how much money has left your hands. Entering transactions into your budgeting app manually keeps the amount of cash leaving your hands top of mind, thus helping you control your spending habits.
  

Bank Reconciliations

You’ve added your bank accounts, they’re automatically importing transactions, and you’re entering your spending as it occurs in real-time. How do you ensure your balances in YNAB match your balances in your bank account?

Luckily, YNAB gives you the ability to reconcile your account balances. You should complete reconciliations at least weekly to ensure everything is accurate. This way, you can rely on checking your balances all within one app, instead of several banking apps. You can also trust that your Budget progress is up-to-date.

If you follow the suggestions above, where you link your accounts for automatic import while also manually recording transactions as they happen, Bank Recons should be relatively easy.

Bank recons become more fun as you update investment and mortgage balances, as you can see changes to your Net Worth over time. This article is a great reference to how you can keep your non-bank account balances up to date in YNAB without over-complicating things.

Scheduled and Recurring Transactions

Occasionally, some recurring charges on your credit cards or checking accounts may happen that you forget to manually capture. They’ll eventually import, but can take you by surprise, making budgeting more difficult.

YNAB allows you to record scheduled transactions, so they don’t surprise you in the future. This may include a future one-time transaction or transactions that happen regularly. If you put these in and indicate how frequently they occur, the app will automatically create these transactions for you as frequently as you ask it to.

Let’s use an automatic mortgage payment as an example. You may know it will hit your account every month on the 3rd. Instead of waiting for the automatic import, or manually entering it every month, you can create a scheduled transaction. YNAB will automatically create a transaction for you each month, then match it once the automated import occurs.

By using the Scheduled Transactions feature, YNAB’s budgeting tab will tell you when these transactions are expected to hit. This way, you’ll know to put the right amount of money in your budget and have less risk of blowing it.

Setting up your Budgets

You’ve added all of your accounts in YNAB, and are entering all of your transactions.

Now, we get to budget. The Budget tab is the real meat of YNAB.

In this tab, you give each dollar you have a “job”. That job may be an expense like mortgage or rent, or it could be used for savings. The important thing is that every dollar you have is given one of these categories.

Whenever you get paid, allocate each dollar of your paycheck to your different budget categories (rent, electricity, savings, takeout, etc.).

Don’t confuse your budget (the “job” you are giving each dollar) with what you expect to spend on a given month. In the world of YNAB, your budgets are the jobs you give your cash on hand.

Make sure that when budgeting, ALL dollars are given a job. When you are done budgeting, the “Ready to Assign” section (as screenshotted above), should be $0.

YNAB allows you to move money between budgets after you’ve set them. This is super helpful as your spending never goes according to plan. This flexibility in budgeting gives you a feeling of much greater control over where your money is managed.

Think about it like you are putting cash in different envelopes. Each envelope is earmarked for a different purpose. You can take cash out of one envelope later and put it in another if you need it there. This is YNAB’s approach to budgeting, where each YNAB budget is a digital “envelope”.

Spending within your Means

Whether you are spending money on a credit card, with a check, or from a withdrawal, the app tracks this in such a way that it discourages spending beyond your means. It’s harder to accumulate debt if you follow along with the app’s rules.

Budgets maintain a balance in terms of what remains available. As you spend, you draw down on the balance in that budget. If you go over, this is where you can move money from another budget (see screenshot above).

Budgets also roll over each month. Going back to our cash-in-the-envelope example, this is akin to cash being left over in the envelope at the end of the month. It’s still there.

Unlike other budgeting apps, your budget won’t reset the following month if you have money left over. This flexibility is great for a variety of spending patterns (ex: holiday expenses, where you’d want to save up over the year, but will only spend against it one or two months out of the year).

Assign Spending Targets

You’re probably asking: “by only budgeting based on the cash I have today, how do I keep track of what I SHOULD be spending or saving each month?”

In YNAB, that is where “Spending Targets” FKA “Goals” come in. For each Budget, you can define a recurring or one-time target. Here, you can enter what you expect to spend or save each month, so you don’t lose track of what your monthly expenses are expected to be.

YNAB will then display the Budget you’ve allocated against your Target in a progress bar or pie-chart format.

Different types of targets include:

• Monthly spending targets
• Savings goals
• Spending targets over a longer period (quarterly, annually, date-specific)
• Debt repaying goals
  • Fixed repayment amount per month
  • Calculated repayment based on a date you enter to pay off your debt
    

Organize your Budget with Categories

You can group your different Budgets into Categories. These groupings are customizable to whatever is useful for you.

The default categories that YNAB gives you are based on whether an expense type is recurring. Mortgage, electricity, and groceries for example default to the “Immediate Obligations” category. Expenses that happen as non-recurring (like a car repair) default to a “True Expenses” category.

While these are the defaults, they are all changeable. Some prefer to change the category to be based on timing of expenses, such as when a transaction will hit (middle of the month vs end of the month).

There are no rules for how you categorize your budgets, it’s really whatever is most useful for you.

Understanding your Credit Card Payments

At the top of the budgeting section is a list of your credit cards and how much you’ve spent on them for a given month.

This is a very handy feature YNAB does for you, as it automatically calculates your monthly spending on each card. This helps you understand what you need to pay each month to not accumulate a balance.

Track your Progress with Reports

YNAB contains several reports that can be helpful for you to see how your finances are tracking.

• Income Statement: The Income Statement allows you to see if you are earning more than you are spending each month. The way YNAB handles this is slightly confusing, as it automatically includes ANY job you’ve given your cash, including savings or investing. You can easily filter out these different budgets or categories to see what your true income is each month.
• Spending Patterns: this report can give you a pie-chart view of the different categories in where your money is going. This can help identify if you are overspending in a particular area over time, allowing you to consider opportunities to decrease your spending in those areas.
• Age of Money: this report describes how long you hold on to your money (in days). The longer you hold on to your money, the better equipped you are in making long-term budgetary decisions. If you can hold on to your money for longer than 30 days, you are no longer living paycheck-to-paycheck and can make longer-term choices on how to manage your finances.
• Net Worth: this report weighs your assets against your debt. If you are diligent in tracking ALL of your accounts (including assets, loans, and mortgages), and regularly reconciling these values, you can get a down-to-the-penny value of your Net Worth. If you are sticking to your targets, chances are you will see your Net Worth grow over time, which is very rewarding to watch.
  

Pros and Cons of YNAB

There are way more pros than cons when using YNAB. I’ve found the app incredibly powerful at helping me manage my finances and tracking where my money goes, without feeling demoralized if I blow one budget.

Pros

• The app is extremely flexible in budgeting when compared to other personal finance apps like Mint. It understands that your spending never goes according to plan.
  • Being able to “move money” between budgets as your spending deviates from the plan is incredibly valuable. You end up feeling more in control of your finances and less demoralized when something unexpected happens.
• Updates to the app are always solid improvements. YNAB listens to its users and ships updates that continuously make tracking your budget easier.
• The more you track in the app, the more utility you get as you use its features.
  • For some budgeting apps, you feel you need to “hide” spending or accounts from it, so you don’t feel punished when you blow a budget. The opposite is true with YNAB. The forgiving nature of the app makes you want to track more in it.
• Targets and tracking allow you to plan for the unexpected over time, months in advance. Something that other apps don’t do as well.
  

Cons

• Costly. The app isn’t cheap and runs $84/year, which is far higher than what other apps charge (many are free).
  • I believe the value more than offsets this cost. Within three months of using this app, my net worth went up by way more than $80.
• Steep learning curve. You’ll need to watch a series of videos on their site and read several articles to “get it”. They’ve recently shipped an update to address this issue, which involves a more guided experience for new users, yet this paradigm shift in budgeting still requires some getting used to for the uninitiated.