There are so many apps out there professing to improve your budgeting life based on different systems - such as YNAB, Mint, Everydollar, Monarch, Rocket Money and others - along with countless spreadsheet templates, rules of thumb, and ratios to guide how you structure your finances. Plenty to help you lay things out, track or plan how it goes, and identify if anything is potentially out of whack. The tough parts include getting it all to pan out, finding things that don't fit nicely, and your own circumstances that might mean the old rules of thumb aren't helpful for your goals and situation. So when, perhaps, our significant other turns to us and says "We should really make a budget," or we have our own realization, what approach should we take and how will it help us meet our own version of success?
What is a Budget?
What do you feel when you think of budgeting? What's the connotation when it's mentioned? Does it make you stressed or afraid to look at things because you know it's not a pretty picture? Maybe it feels synonymous with restriction, lack of freedom, keeping you from wistful happiness in exchange for stern frugality.
Scrap that.
A budget is simply a plan for your money. It doesn't mean being cheap or frugal, it doesn't mean being a wet blanket, and it doesn't mean you can't have what you want.
Spending your money is about making decisions, and making a choice. You may not feel like some of the items you pay for every month were a choice, but I assure for most of you they were. It was a choice to live where you live, drive what you drive, and eat what you eat. The choices are multi-dimensional based on what we decided in that moment was important to us. Those are our priorities. Our money is our scarcity, and when we don't have enough money for everything, we have to choose and decide on some things over others; our prioritization in action. What this also means, then, is our budget should be a living reflection of our priorities. A continuously updated plan that is adapted to changing circumstances and decisions. But often we think of budgets differently and the act of budgeting as a tortuous affair, a chore likened to punishment for last month's financial transgressions. Let's examine the budgeting activities you might be accustomed to and why they can feel futile.
Types of Budgets
Most budgeting systems can be organized into the following types, but YNAB's zero-based method is the most transformative and the one that requires us to rethink how we approach things. However, doing so will provide us with the best view of our present finances and more easily connect our plans with reality as they happen.
List of Obligations - This is a great starting point for a budget, but often people just stop here. They write down (one time) the bills and expenses they know of or can ballpark, tally it up, and compare it to their income. Everything fit? Great, that's a wrap.
Except, you probably forgot some things, were too optimistic on others, and some that don't come around every month. And if everything looks like it should be do-able, why do you find yourself still not getting where you want? How does this static list evolve with you?
50/30/20, Pay Yourself First, etc - These are all template ideas and strategies for how you might want to divide up your income and expenses, but they don't really represent how things should function and fall in between a list and a forecast in practice. Employing these can be done with any type of method as they are suggesting how you should prioritize things, but ultimately you might find your priorities to be different or more expansive and you need things to be reflective of that. It becomes less productive for us to get hung up on trying to mold our personal finances into these preset ideas and expecting the result to be any different when instead we should consider each item both independently and as part of how it achieves our goals.
Forecasting - This builds on the initial static list in a more active fashion with the intent of foresight and planning, but easily leads to putting the cart before the horse. When we forecast our income against our expenses, things work theoretically. However, seeing it through becomes tricky because we're earmarking money we don't have yet. If we use credit cards, we might then feel enabled to make the purchases now because we've "budgeted" for it with our future paycheck, and floated ourselves the money in the meantime. The danger in getting ahead of ourselves like that is when our theoretical plan gets a wrench thrown into it such as an unexpected or forgotten expense pops up, and now that paycheck needs to go towards something else, or maybe it doesn't arrive as expected. Now we're up a creek. We lose our ability to make decisions with the money we have because we need to use it to pay for the things we've already bought. Forecasting misses the execution of the plan in the present and has us relying too much with money we don't yet possess.
Expense Tracking - Staying aware of where your money is going is definitely needed for a successful budget, however doing only this part is akin to driving via rearview mirror. Expense tracking is missing the aspect of telling your money what to do and only observing what your money has done. That distinction can leave us feeling disconnected and helpless, even though we're the ones conducting the moves. Combining this technique with forecasting makes for a wonderful looking plan at the outset for what you'll get and then a look back at where things went, but you're not considering and connecting what's in the middle happening right now: what you have.
Zero-based - Also known as the envelope method or cash-stuffing, operating in this system requires you to only use the money you have at this moment and allocate it all to various particular purposes. Why specifically allocate all of it? Because doing so will now force you to be more intentional and evaluative if you remove the false perception of slack in your finances and consider what you're giving up to get something else. It assigns purpose. But you don't need to use cash or debit for this; it works just fine if you normally spend via credit cards too with a program like YNAB, but requires you to have the cash available as you go for covering the credit card purchase (regardless of when you actually pay your card) instead of waiting for the cash to arrive later to be able to pay it off. In a zero-based budget, you fill each of your budget line-item "buckets" or categories with the money you have in your accounts as you receive it, so you know in real time what choices to make regarding a purchase. And because every dollar is always allocated, if you need more for a category or line item, you shift it from a different one. Your prioritization in action. YNAB is a digital version of this system and takes it a few steps further to incorporate other aspects. Create targets for your categories to establish what they'll each eventually need and see your whole budget plan as a template. Categorize your transactions as they come in to track how your budget is progressing and if adjustments need to be made. It isn't a one-time plan, and it isn't a retrospective look-back. It's a continuous evaluation and evolution.
You Need A Budget, And I'm a Budget Coach!
With YNAB, you're always dealing in reality and not counting your chickens before they hatch. You're put into the driver's seat as you actively make decisions on what the purpose should be for each dollar you have before you spend them, and, crucially, modifying those purposes as needed and desired. Sustainable dieting is about changing habits and behaviors and how you make choices with your food as opposed to specifically limiting or restricting access to certain foods. In the same way, budgeting probably won't succeed long term by continually denying yourself for the sake of limiting consumption. Instead, with a zero-based system, you weigh the priority of a particular expense against the other things competing for the same dollars you have right now towards achieving your goals; what choice will you make and will you need to adapt your plan as a result? YNAB's four rules method and zero-based foundation turns our idea of budgeting on its head by leaning into the idea of scarcity, purpose and prioritization, and continuously adapting our plans. It may not all click for you initially, but ask yourself- if what you've tried hasn't worked before, maybe this is what you've been missing? If you're looking for some "aha!" moments with your personal finances and YNAB that will help you get to where you want to be, let's have a conversation about how I can help you as a certified YNAB budget coach. It's free!