In January 2014 I set myself a new year’s resolution: control my money better. This was a long-standing ambition and a genuinely tough problem for me. I’d put in plenty of effort in the past, but failed each time. Nothing stuck: budgeting spreadsheets, Microsoft Money, detailed spreadsheets for specific projects – everything seemed logical and comprehensive, but never actually worked. But I needed to do something: the previous December I’d come back from a dancing competition in Paris to find £1000 less in my account than I’d anticipated through my amazing Winter 2013 Budget Spreadsheet, so this was getting serious.
So I tried You Need A Budget. And by that March, I pretty much understood my finances for the first time ever. 18 months later, I’m now fully in control of my finances and have been for over a year. It’s really quite a profound change in my life.
The YNAB approach is essentially this: take all your income for the month, and allocate it to a series of buckets. £500 for the mortgage, £20 for broadband fees, £15 for books, £40 for spending money, £50 for savings – you get the picture. Allocate all of it. Much of this will be informed guesswork, but that’s fine. Then, as the month goes on, track what you’re actually spending. Literally every penny. They have apps to make this as quick and easy as possible. If something comes up that’s unexpected, no problem: create a new bucket. At this point you’re not too worried about going over your limits (assuming you aren’t in dire straits) – that comes later. Right now it’s about tracking where your money’s going.
Come the end of the month you’ll have a general idea of what’s what. Some buckets will have money left in them. Some you’ll have gone way over. Some of this will be surprising – I was taken aback at how much I was spending on going out for lunch at work, for example – so you might make some immediate changes. But don’t be too rash – this is how your life is, and making big changes might not be necessary as yet.
Then set up another budget for the next month. It’ll be much more based in reality than the previous one. And this time, re-allocate as you go. The important point is that you don’t need to stick to your initial budget. You obviously don’t want to overspend, though, so whenever you empty a bucket, shift money from other buckets. If you want the new Neal Stephenson book, great – is there £10 in the Books bucket? If not, move £10 from the General Spending Money bucket. Need to get a plumber in at short notice? Ok, there’s no choice – the only way is to pull it out of the Savings bucket; so be it.
Great, you’re now up and running. Each month, allocate all your income to the buckets. Obviously expenses will come in that you’ve forgotten about, so create new buckets as needed. What about if you’re saving for something in particular? Create a bucket for said New Laptop, put £x a month into it, and make sure you don’t spend it. YNAB will carry the total over from month to month. Do the same for quarterly / irregular payments – set up a bucket, put £x into it, and when that payment is eventually due it’ll empty the bucket and you’ll barely notice. The idea is that you stop relying on the amount of money in your current account as the key figure in your finances – instead you imagine it sliced and diced into a few dozen buckets, and track each one individually.
The basic philosophy is: life happens, but live within your means. Of course unexpected things will happen, and your life will change. And of course it’s bad to be spending more than you’re bringing in. But similarly, give yourself a break. You’ll make mistakes, impulse purchases and the like. Pretending that you won’t, and that your life will be stable and predictable, is not going to help. You won’t get it right each and every month, but you need to understand your finances well enough that you can roll with the punches.
Also: forecasting is bollocks. It’s never going to be correct. Life is just too complicated. YNAB has some forecasting features, but they strongly advise against using them. Looking back on an incorrect forecast feels like a failure, and feeling like a failure means you’ll probably stop doing it. It’s the same reason that productivity experts advise against daily to-do lists: you’ll never complete everything on them, which means you’re ending each day on a down note. Instead, set things up so that you see your successes, while still understanding what’s coming next.
All of which sounds great in theory, but how does it work in practice? The YNAB site has a huge amount of guidance, plus free webinars, on how to manage your particular situation. And it did take me a few months to properly get my head around everything. There are some complexities such as tracking work expenses (easy enough once you know how), and I found it difficult to click into the mindset of tracking things month-by-month, rather than forecasting ahead. But by about April I had it all sorted.
18 months in, I try to reconcile my bank statement with YNAB once a week. This takes maybe 20mins. I put each payment into YNAB, and say which bucket it’s from. I’m lucky enough that I don’t have to worry about every purchase sending me overdrawn, so I don’t keep an eye on it every day. But I know what’s going on. This works well. I pay as much on card as possible, and try to put the big cash purposes into the app. I admit I no longer track every penny, but have an Unknown Cash bucket that always somehow ends up with twenty quid in it. I’m happy to live with that.
The best bit comes at the end of each month when I see how everything turned out: how much or little each bucket has left. There are often pleasant surprises. I didn’t eat out as much as I thought, say, so there’s £20 left in the Restaurant bucket. I can drop that into the Savings bucket, or maybe treat myself to a guilt-free meal. Or just leave it in the Restaurant bucket – it’ll roll over to the next month automatically, and it’s always nice to have a buffer.
Obviously some months it goes the other way, and you have to roll over a debt. YNAB handles this automatically, and gives you less money to spend the next month. But in general I’ve found that you get better at this. You just become more aware of where unexpected things are likely to occur, and give yourself some leeway. But even when it does happen it’s far less painful and guilt-inducing, because I know exactly what impact it’s had. That all said, in 18 months I’ve usually ended up with a surprising (if small) deficit that I need to decide what to do with. It’s hard to express how much of a psychological difference this makes. It’s so much nicer than making a forecast and finding you were just wrong. It makes the whole thing a pleasure, frankly.
And then at the end of the year you can use YNAB’s reporting features to entertain and occasionally appall yourself at how small numbers add up to big numbers. I’ve given how much to the Turkish cafe near the office?!
So that’s how it works. The only catch is that YNAB isn’t free. You can try it out for 34 days, then it’s £40. Ouch. But for me it’s been more than worth it. Yes, in theory there’s nothing here you can’t do in a spreadsheet. But screw that. Tracking payments is undeniably laborious, and you want as little friction as possible. Their software makes it pretty easy. There are desktop and phone apps that sync automatically (this happens via Dropbox – nothing’s stored on the YNAB servers). The apps are thoughtfully designed in that they autofill existing payees, for example, and track payments using GPS – so that the next time you add a payment in M&S they’ll guess it should be for the Clothes bucket. As you’d hope for £40, the apps work well.
In short: YNAB worked for me. It’s the only thing that ever has. And I recommend it.
The holy grail of the YNAB process is this: get to the stage where every bucket has enough in it to cover you for an extra month. That gives you a hell of a lot of leeway if things go wrong. I haven’t tried for that yet, but it’d be a good goal.