When I returned from our 4-year long business assignment in Asia, I was ready to finally utilize a budgeting software that would help simplify the budgeting process and minimize the time I was spending tracking our expenses. I am a HUGE believer in tracking expenses and had been using the same spreadsheet that I’ve provided to you in the class about tracking expenses here since I had a mix of foreign and U.S. transactions.
Living in a foreign country, but still having many expenses here in the U.S. meant that I had to convert all of my day-to-day expenses back to U.S. dollars to really be able to track my cash flow in a meaningful way. While it worked, it was a time-consuming process that didn’t add a lot of value to me.
So, I Tried All the Budgeting Software
I was sure that I would love Quicken so I purchased the software first. After all, my background is in accounting and I’m a debt-credit type of girl. I absolutely did not (the bad reviews on the new Quicken are true, darn it!). So then I also tried Mint, Mvelopes, YNAB, Personal Capital, EveryDollar and LearnVest. I put my information in each one of these budgeting programs and tried it out for at least a week. Each had their features and flaws. I didn’t feel like any of them were perfect for me.
However, of all the budgeting software programs I tried, I loved the format of YNAB the most. If you’re not familiar with this budgeting software, it stands for You Need a Budget. YNAB uses zero-based budgeting and is in a simple spreadsheet-type format. After trying many additional budgeting programs after YNAB, I found myself wishing that they had the same features as YNAB.
Related Post: Which Personal Finance Software Should You Use?
However, a main premise of YNAB is that you only budget for income that you’ve already received. This lack of being able to forecast my income against future expenses was a deal breaker for me. I continued to look for a better zero-based budgeting software that incorporated some of the same features but also had the ability to budget income. I can tell you that it doesn’t exist.
At this point I had a simple realization: I could budget my income in YNAB. Income is simply a negative expense.
Do You Want to Be a Fellow YNAB Rule Breaker?
YNAB has 4 rules that encompass the company’s philosophy behind budgeting:
- Give Every Dollar a Job – All money coming in is assigned to a task, either a spending or saving line item.
- Embrace Your True Expenses – Set aside money in advance for irregular bills such as insurance premiums, repairs and holidays.
- Roll with the Punches – Be flexible with your budget and since it’s a zero-based budget, you can move money around from one category to another when you overspend.
- Age Your Money – Break the paycheck-to-paycheck cycle and use last month’s income to cover this month’s expenses.
By hacking YNAB to include your income, you are partially breaking Rule #4 by including this month’s income against this month’s expenses. In order to successfully budget your income in YNAB, you should consider the following:
- You should have enough funds that the timing of income and expenses during the month won’t matter (i.e. not be living paycheck-to-paycheck) but be living on last month’s income already like they suggest.
- You should also have enough in an emergency fund or in the “true expense” buckets from Rule 2 that you won’t be negative in your cash flow if a few unexpected things come up.
- You shouldn’t have an excessive amount of debt that you’re trying to pay off (in this case you should wait to budget your income until you receive it so you can allocate your extra to debt payments).
We don’t live paycheck-to-paycheck and actually have at least 6 months expenses saved in an emergency fund, plus no debt except our mortgage. So, this method works great for us and we would just adjust our budget if we were to have a decrease in income. It’s always possible to go back to budgeting for income the YNAB way if we ever needed!
Setting Up Your YNAB Budget for Income
First, let’s take a look at how the budgeting categories look when you first set up a new budget with YNAB. The main default categories are Immediate Obligations, True Expenses, Debt Payments, Quality of Life Goals and Just for Fun. For simplicity purposes, I’m assuming there are essentially no other funds (this is a paycheck-to-paycheck situation).
After your first paycheck, you can start budgeting for your next expenses, including rent/mortgage, auto loan, and half of the month’s other expenses such as groceries and clothing. However, you aren’t able to budget for the entire month’s expenses or you will be in the red for the budget. Note here that there is an extra $250 in a savings account that was added in.
After the second paycheck, you are able to budget for the remaining expenses for the month. These expenses in this example include a student loan payment, and more day-to-day expenses like groceries, transportation, and giving. In addition, by creating a budget instead of spending everything that was earned, there’s a hundred dollars that they can save toward their vacation and other savings categories.
If instead, you budget your income for the entire month, you can set something up similar to this example below. Note that I personally set up my payroll income to be broken out between gross pay and deductions. I talked about this in the budgeting class here.
After the income and expenses for the entire month, the budget will look like this:
Other Suggestions for Budgeting Income in YNAB
If you have several pay sources, such as multiple paychecks if both you and your spouse work, you can add another master category to reflect the additional income source.
You can also add and adjust income categories to reflect any other income sources that you have such as selling items on craigslist, business consulting, or rental properties.
Just make sure that you aren’t relying on future income in your budget that is uncertain or overestimating your possible income, as this may cause you to overspend and go into debt.
The key to successful budgeting is to use a method that works for you. If the perfect budgeting method isn’t out there for you, make some adjustments to make it work for you!
If you’re interested in more YNAB tutorials and/or exactly how I set up my categories and accounts in YNAB, go to my YNAB tutorial list here.