By now you should have a pretty thorough understanding of your monthly incomings and outgoings. Don’t worry if there are some utterly embarrassing outgoings on your list, we will tackle them later (anonymously). For now, we need to build a budget around the historical data we have collected for our spending, and potentially any adjustments we intend to make going forward. After all, in very simplistic terms, a budget is there to lay out a plan of where you want your finances to be used. This baseline is then used to compare actual expenses, allowing you to understand the reasons behind overspending and underspending in certain categories.
Since I’m a big proponent of YNAB, I’m going to be using this tool throughout the tutorial. (Note: I am not receiving any royalties for this, I simply appreciate good products, and YNAB is the best product on the market). I’ll write a thorough review on why I like YNAB in a later post, but for now you can either subscribe to YNAB (Free for 34 days for everyone, 12 months to students or $5 a month thereafter), Mint (Free) or you can simply track your budget manually. YNAB does things a little differently when it comes to budgeting than most traditional budgets, so this guide might need some very slight adjustments if you are using a different tool. I know you might be thinking “I’m trying to reduce my spending and this is costing me $5 per month”? I guarantee you will be saving A LOT more than $5 per month if you use this tool efficiently.
To begin with, you will want to follow this link: https://www.youneedabudget.com/ and sign up. Once you’re through the registration process, you should reach this screen:
This is basically your budgeting bible, where the magic happens. Don’t tell me you’re not excited, I guarantee that heart rate is climbing with anticipation!
The next thing you want to do is add your bank account(s) you are budgeting. Click the little “add account” button to the left and the following screen will appear. Here you want to name the account, I’ve gone for Money-Miser, select the account type, I’ve gone for Checking and then the important question. Do you want YNAB to automatically import transactions from your bank? In my actual personal budget (not this example), I use this feature as the convenience alone is massive. YNAB will automatically download every transaction from your linked account, and all you have to do is allocate the expense against a category. The downside is some people are concerned with the security of giving bank login details to third parties (an understandable concern).
If you are linking your account for importing transactions, you will be taken through a process of linking your account. Since I’m not linking an account, I’ll go ahead and uncheck importing transactions.
Once you’re through linking your account (or not) you should see your account on the left, under “All Accounts”. I believe if you have linked your account, YNAB will take your balance and create an “inflow” into your account. It’s important this happens as this balance is what you will use to budget. If you are not linking your account, you need to create the inflow manually. If you click on your account on the left, you will see a transaction called “starting balance” with a category called “inflow: to be budgeted”. Click this, then enter the amount in your bank under “inflow”. This essentially creates an incoming into your bank to use for budgeting. Now click “Budget” to the left and you should see the amount in your bank in the big green button called “To be Budgeted”, as below (I used $2,500):
You will note I added another account, a student loan, as a tracking account. This is done the same way as adding your bank account, only you select tracking. Tracking accounts are for accounts you just want to keep track of, but don’t actually affect your budget (you don’t buy anything from your student loan account).
Now for the moment you’ve all been waiting for, building the budget, woohoo!
You will see various categories and subcategories already created in the budget, but you can edit/delete these as you like just by clicking on them. I like to create categories called “Mandatory Spending” and “Discretionary Spending”. One thing YNAB really likes is for budgets to be flexible, so I like to use discretionary spending accounts as flexible budgets, and mandatory accounts as inflexible budgets. This is entirely up to you though. Feel free to follow their template and use whatever categories you like.
Next up you need to enter sub-categories under the main category heading, which is where you will allocate every expense you incur. For example under “Mandatory Spending” I could have rent, groceries, student loan payments etc. that are generally the same every month. You will notice I have already changed my account structure in the above screenshot.
Once you’ve reached this stage, all that is left to do is enter your budget for each category into the “Budgeted” column for the month. This is where all that pain and angst of researching your past and current expenses starts to pay off. Be honest here, and to begin with, enter figures that are currently accurate rather than what you want your budget to be like. Once you’re done, your budget should look something like this:
Oh crap I’m losing money!?!
If your “To be budgeted” button at the top goes red, don’t fret (yet). This just means that what you currently have in the bank is not enough to cover the months expenses. So let’s assume it is October 1 and this month you will incur all these expenses you have budgeted, what you have in the bank right now won’t cover them, you will be relying on income received during the month in order to do so. When you do get paid during the month, this amount will get added to the “To be budgeted” amount and (hopefully) it will turn green. This is basically what people mean when they say you are living paycheck to paycheck. You are reliant upon your next paycheck in order to be able to pay your bills for the month.
If your button remains green with a positive figure, this means you have enough money currently in your bank to cover all your expected expenses for the month. Awesome! You’re one step ahead of the game as you already have a one month buffer in your bank (assuming your budget is realistic)
Oh, I almost forgot, if you’re anything like me you probably pay for everything with a credit card, then pay your credit card off from your bank. This adds a bit of extra work as you need to add a credit card account to your list of accounts. You can do this just the same as previously mentioned, and a budgetary account is automatically created for credit card payments (I’ll explain how this works later), I went ahead and added one:
Okay, I think we need a breather as I can smell the sweat that is dripping from your brow. We’ll be going through the next step of the budget soon, if you haven’t passed out from anxiety yet, feel free to move on to part 2 at that point.