Starting to budget with YNAB

Almost 2 years ago I started using YNABs budgeting software (version 4). Before then, I thought I was pretty good with money, a bit impulsive sometimes, but I always had a good buffer. Or so I thought… What I found out is that I was using future money to pay for current spending. I was shocked! I thought I was doing so well!

So what happened?

Let’s pretend for convenience’s sake that I have €0. From now on I get €1000 a month. Every month is february, i.e. exactly 4 weeks or 28 days. The money comes in on day 21, so a week before the new month. I spend exactly €250 each week, so exactly €1000 in a month. This is what my balance looks like at the start of each week:

Week 1 Week 2 Week 3 Week 4
Month 1 0 0 0 1000
Month 2 750 500 250 1000
Month 3 750 500 250 1000

Do you see what happens there?! 2 things are going wrong here:

  1. I’m starting to spend next months money in week 4 of the previous month.
  2. My account never reaches 0 after the first month, which would’ve been a major red flag, even when that months money is gone.

And ironically, if you eliminate the first problem, the second one only gets worse. Watch:

Week 1 Week 2 Week 3 Week 4
Month 1 1000 750 500 1250
Month 2 1000 750 500 1250

Now if I look at my account balance, it never dips below 500! This makes me think I have €500 where I actually don’t have any left over money! So what happens next? I think I can afford to spend more, say €50 extra a week. That’s €1200 a month! Watch what happens:

Week 1 Week 2 Week 3 Week 4
Month 1 1000 700 400 1100
Month 2 800 500 200 900
Month 3 600 300 0 1000

I takes me 3 months of chronic overspending for my account to hit 0, and for me to realise I have a problem!

These are of course imaginary numbers, but the principle stays the same: you can chronically overspend for a pretty long time before you realise something is going wrong, and by then you have a host of bad habits to correct. And this is assuming you realise something is wrong the first time you hit 0, instead of just writing it off as a fluke!

So how can a budgeting program fix this? By splitting up that big number. Even just 1 extra row of info can be your saving grace:

Week 1 Week 2 Week 3 Week 4
Month 1 spending 1000 750 500 250
Next months money 0 0 0 1000

So to get back to my first point: I got YNAB and I was shocked. And then I was annoyed, because it took me several months of budgeting to start seeing useful patterns, and even longer to start reaping the benefits. But now, almost 2 years later, I just can not do without!

(stay tuned for more blogs on budgeting)

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