YNAB You really do need a budget

YNAB is a budgeting app on mobile and web and it has proved to be invaluable for me personally. Majority of people squirm at the thought of creating and maintaining a personal budget because it has a reputation of restricting freedom to spend on things they enjoy like retail, entertainment or holidays. These feelings are definitely not foreign to many. However YNAB came along and provided other views on budgeting I would like to share here.

Predictability and confidence

Monthly salaries can be tricky for most people as they would just start spending as soon as the money lands. Weekly could be the case if you’re even more careless! It starts with buying that thing you couldn’t last month because you ran out of cash. You you pay those little debts to you or someone else. Next few weeks you indulge in things you cannot usually. By the end of month it’s out of pocket and having to say no or borrowing money. This process is repeated…

Implementing a budget solves this problem by providing awareness. This is actually quite powerful because in turns it generates confidence to say yes or no to things. There are necessities we must pay like mortgage and bills. They come first. Then it’s hobbies and lifestyle choices. In YNAB, each one is simply an account which can accumulate over months. During a month, if one one these accounts goes in to negative, then you need to dig in to another lifestyle category to cover the overspending. Simple… Well maybe not at the beginning, but the concept is simple.

Breaking out of the loop

Many budgeting systems including YNAB focus on a monthly basis and the first time setting up the budget for a month you’ll find that there isn’t enough money to cover all your expenses. And the salary that may or may not come that month is not considered yet because you just don’t have it yet. Makes sense. Right?

So the logical goal is to one day, have enough money at the start of the month to ensure you have enough for your expenditure especially the necessities. And you should not have to rely on the coming pay, because that’s the pool of money for next month. This is a great achievement when accomplished. With a bit of discipline it can be done!

My friend, for example found this to be a daunting task since they were only able to budget their current pool of money for about two weeks before relying on potential income. About 6 months later, they smashed this cycle.

Barefoot, you don’t need multiple bank accounts

The concept I love about YNAB is that every category is a virtual account. The barefoot investor has strategies where physical bank accounts are required and are very rigid if following his guidelines. But that seems like a lot of wasted effort when it comes to YNAB. There may be just one actual bank account which inherits the “To be budgeted” category. It’s a pool of money you can assign/move to other categories. So at the start of each month you make the decision where that pool of money will go.

Honesty is the best policy

This is all worthless if you cannot track your actual expenditure.

And if you start tracking, the number one rule is to be honest. No bullshit about money coming in or going out. Including cash. So when adding accounts you have to add everything including “cash” as an account or credit card. So be sure to include everything including transferring between accounts like mortgages and even buying 3 dollar lattes with your coins. Especially credit card spending.

Credit cards are yours! The moment you tap or swipe or buy online with you credit card, that payment is recorded as it happened this month! It’s part of your current expenses, not when you have to “pay back”. Unlike Barefoot Investor, I don’t believe credit cards are a problem if you adopt the this mentality. Otherwise, cut them immediately.

Tracking money is a legit problem

Ok, so it’s 2020 and unfortunately our banks who hold the transaction data gold mine are dinasours. The big four banks (Commonwealth Bank, Westpac, NAB and ANZ) are all at least 10 years behind in modern technology.

YNAB cannot take the blame for lack of automatic integration because Aussie banks don’t provide such a feature. There is no API, even if you own the data. So there are two options.

1. Manually record every transaction. I used to do this every night before bed, or even in the moment I spend it.
2. Figure out how to automate incoming transactions and automatically record / assign them in YNAB.

Option 1 is prone to human error. It ends up with YNAB accounts not matching the real bank account which then forces us to either create a dummy transaction balance out (my preference) or clicking reconcile in the app which does something funny and hides old transactions.

This is the biggest downside to budgeting with real transactions especially in non-American countries. Personally, I believe the YNAB and other budgeting apps should be a lot cheaper for manual entry. It makes absolutely no sense to charge at the same rate for automated and manual recording.

Option 2 is definitely within reach if you’re a software developer because YNAB does provide an API to fetch and update almost all budget data. In my next post I will explain the strategy and technology used to achieve this automation and even open sourced it.

Having said all that, budgeting in general is still worth the effort with or without YNAB. But the has app has definitely changed my mind about the whole concept.