Image credit: stevepb on Pixabay / CC0 / Public Domain
Today I read in the news that most Dutch people don’t have enough savings for rough financial times. A lot of people also live from pay-check to pay-check. I was in the same boat until I discovered a really intuitive way of budgeting. It’s called ‘You Need a Budget‘ or YNAB in short. It isn’t so much budgeting software as it is a budgeting philosophy. It changed the way how I handle money. I know it sounds like an ad, but that’s how I feel. They don’t pay me for this post!
Your money has a job, not a place
In YNAB’s method it doesn’t really matter where your money is, the only thing that matters is what it does. There is one big pile of money in your bank account, the software tells you what it is for. It’s sort of like an envelope system, but digital.
Your money’s job is to cover your expenses when you get billed for them. You just pay for it without having to juggle other expenses. I have three kinds of expenses: short-term, medium term and long-term. Those are my three master categories.
Rule 1: Give every euro its job
YNAB’s first rule is to distribute the money earned over all budgeting categories. Everything. No ‘saving for later’, you need to state what you are saving for. You have to budget to the last Euro until it says zero.
Rule 2: Embrace your true expenses
This rule is also known as the Christmas rule: Instead of being overwhelmed by how expensive the Christmas holiday season is, plan for it. If you save a little every month, you can do what you want to do without any pain.
In my system, the year only has 10 months. It’s easier to divide annual expenses by ten, giving myself a break in December and January. I have several of these funds and drop some money in every month until November. I do this for everything from municipal taxes to health insurance. When the bill drops, I just pay for it, without worrying how to fix the rest of my expenses. It’s amazing!
Rule 3: Roll with the punches
My budget isn’t set in stone, so if the groceries end up more expensive than budgeted for, I take some money from the fun fund to cover for them. You enter all your expenses in the app. After a few months it will be very good at guessing how much you’ll probably need to budget.
I usually sit down on Saturdays after getting my weekly groceries and make sure that my balance in YNAB corresponds with my bank account’s balance, credit card balance and cash balance in my wallet. Takes maybe 15 minutes, I then reconcile my balances and I’m good for another week. You can speed up the process by linking your bank account to the app, but I’m too paranoid over security issues to do that, I enter manually. I also think it doesn’t work with Dutch banks, but I haven’t tried.
Rule 4: Create a buffer
In order to avoid living from pay-check to pay-check you can make a ‘buffer’ category to save up one month worth of expenses, typically the amount of your salary. Once you have saved up the amount of money, you take it out and distribute it over next month’s budget. So when it’s July, you budget for August. When you then get paid at the end of July, you budget for September.
You will now be living on July’s salary in September instead of August. Depending on your situation you can push ahead even further. When disaster strikes, and you would suddenly lose your income or it nose-dives, you have created room to adjust for the new situation. Financial experts recommend to buffer up to three months to six months in advance. This allows you for instance to find a new job without having to drastically change your lifestyle.
How YNAB changed me
I used to be anxious when handling money. When I was little, I was well aware that my parents weren’t rich and that we couldn’t get what we wanted. As a student I barely had enough money to make ends meet and after finishing my studies I lived on welfare for four years, hovering around the poverty line because it was 2008 and all the banks had just fallen over.
Using YNAB I now feel confident that I can spend the money I have because of rule four. I don’t have to cling to, worrying over disasters looming at the horizon. I know I have space to cover for anything that can happen.
I sleep better and generally feel less anxious than I used to. I whole-heartedly recommend using this software. It costs money, but since you make better spending choices with it, you will earn it back within the first few months.
If you sign up for YNAB using this link, we both get a month for free. They have a 34-day free trial before you have to commit. Let me know what you think!