Review: You need a budget

As I prepare to track my spending in 2017, I have to decide which tool to use.

In the olden days, there weren't many options. Lately, however, there's been a boom in personal finance tools. Rather than try every available app, I elected to take a look at four that seemed like good fits for me: Quicken, You Need a Budget, Personal Capital, and Mint.

Today I'm going to review my experience with You Need a Budget. I'll cover the other three options later this week.

You Need a Budget

You Need a Budget (a.k.a. YNAB) started as a simple spreadsheet that Jesse Mecham built while he was still in college. He was about to be married but still had three years of school left. He was worried about making ends meet, so he decided to create a budget. But not just any budget!

“I was taking a spreadsheet course at the time,” he told me in a 2014 interview, “and I thought spreadsheets seemed like a great way to build a budget.” From those humble beginnings, YNAB grew into the robust software that exists today.

Note: I'm friends with Jesse. I've followed the growth of his business over the past decade, and have enjoyed spending time with him at various PF gatherings (including the first-ever chautauqua in Ecuador). I've tried not to let that cloud this review, but you should keep this in mind.

You Need a Budget isn't just a piece of software. It's a financial philosophy.

One of the things I admire about the YNAB method is that it truly pushes people to take control of their money. The other software I'm reviewing this week isn't like that. The folks behind Quicken, Mint, and Personal Capital don't care whether you get out of debt and build wealth. The folks at YNAB do care, and that informs how they've built their app.

Here are the four fundamental rules of the YNAB method:

Give every dollar a job

“The secret is just to be intentional about what you want your money to do before you spend it,” says the YNAB website. In other words: Practice conscious spending. From experience, I know that many folks who struggle with money do so because they drain their checking accounts every month. If there's money there, they'll spend it. There's no plan behind their actions. YNAB wants you to give every dollar a job; every dollar is to be spent with purpose.

Embrace your true expenses

In YNAB parlance, “true expenses” are large irregular expenses like home insurance, Christmas gifts, or annual vacations. These are easily overlooked by people when they first start to budget. YNAB brings these true expenses front and center, and asks users to set aside money for them every month.

Roll with the punches

Be flexible and forgiving to yourself. Your budget isn't meant to be a rigid diet. It's meant to empower you, not to make you feel guilty. Some months you'll spend more on dining out, say, than you had originally planned. That's okay. Simply grab money from elsewhere in your budget to cover the overage.

Age your money

“If you're done budgeting for the month and you have extra funds, budget some to the next month,” Jesse writes. “The next time you sit down to budget, repeat the process. Send those dollars to the next month, whatever you can. In short order you’ll realize that you just funded all of February and it’s the middle of January.” YNAB tracks how many days you let your dollars sit before having them do the jobs they're assigned. Clever!

Unlike the other tools we'll look at later this week, YNAB isn't free. It costs $50 per year. Fortunately, the company offers a 34-day completely free trial. (You don't even have to enter a credit card to get set up!) And if you go beyond the trial period without paying you won't lose your data; you just won't be able to access it until you enter a payment method.

YNAB Sign-Up Screen

Is YNAB worth $50 per year when the competition is “free”? Let's find out.

Note: I put free in quotes because while you don't pay up front to use Mint or Personal Capital, they absolutely have revenue models that involve getting money from you. They're just not as straightforward as “pay me an annual fee”.

A Rocky Start

You Need a Budget has a fun origin story and a rock-solid philosophical foundation. But how is it as an actual tool? What's it like to use YNAB to manage your money? I'll be honest: My first impressions of YNAB were not good. In fact, I was frustrated from the start.

After you sign up for YNAB — which is quick and easy — you're presented with the following screen:

YNAB Get Started Screen

Looking at that, what would you do? Seems pretty simple, doesn't it? The sidebar says there's “five quick steps” to get started, so you'd follow those five quick steps. That's what I did, anyhow.

I clicked on “set a goal” and got the drop-down that said “add one now”. But if I click “show me how”, I'm redirected to a help page elsewhere on the YNAB site. And that help page instructs me to do things that I can't do from this page! WTF?

The same thing happens if I try to perform any of the other “quick steps”. If I click “add your accounts”, I'm given a link to a help page.

Now maybe I'm dumber than dirt, I don't know, but it took me a few minutes to realize that in order to do any of these things I had to create a budget. To me, that is actually the first “quick step”, and it should say so in the sidebar.

More frustration followed. Connecting to my accounts was slow and tedious. With other tools, you enter your financial institution and the app grabs all of your accounts. Not YNAB. YNAB grabs accounts one at a time. So, if you have five Fidelity accounts (like I do), you have to go through this process five times. T-E-D-I-O-U-S. (And the connection process felt slower than other apps, but maybe I'm wrong.)

The final piece of frustration came when I tried to figure out what I was supposed to do with my budget. Despite the quick start, things are non-obvious. YNAB doesn't work like other personal finance software, and I wasn't really sure what to enter where. How do I enter transactions? What's the difference between the Budgeted, Activity, and Available columns? I was confused.

So, first impressions weren't good. I was frustrated. Fortunately, things got better from there.

A Baby Budget

Once I figured out how the YNAB interface worked, I started to build my budget.

To begin, I restructured the default categories. Because I'm such a fan of the Consumer Expenditure Survey, I chose to use its categories to define my budget. I used Housing, Transportation, Food, Health & Fitness, and Entertainment for my broad categories. (And I kept the YBAB default Quality of Life category because I liked it.)

Within each broad category, I added subcategories to track specific expenses. Under Housing, for instance, I added subcategories for my HOA fee, the electric bill, cable & internet, home insurance, and maintenance costs.

After creating my categories, it was time to set a monthly budget for each item. For many expenses, this was easy. My HOA fee is $570 every month. My health insurance is $354 every month. My gym membership costs $137 every month. For other expenses, I had to guesstimate. Do I actually spend $200 per month on groceries? I'm not sure. That's part of why I'm doing this project in 2017! I need to discover how much I'm spending on what.

In the end, my budget for January looked like this:

My YNAB Budget

As you can see, for each line item there are columns labeled Budgeted, Activity, and Available. I've assigned the budgeted numbers. As I use the YNAB interface — which is similar to Quicken — it adds numbers to the Activity column. These numbers also affect how much money is in the Available column.

So, for instance, I've budgeted $25 for books this month. Last night, I bought an audio book for $3.99. When I manually entered that transaction this morning, that left me with $21.01 for books in January. Here's what the Books line item looks like:

YNAB Line Item

In the screenshot of my full budget, you can see another neat YNAB feature. I've highlighted the Travel line item. It might be tough to see, but I'm allocating $250 per month for future adventures. YNAB lets you set targets for specific budget items. In this case, I hope to save $2500 for a trip to Europe with my cousin this October. In the right-hand sidebar, you can see that I'm 10% of the way to my goal. Cool!

Note: My total budget is greater than I anticipated. I'd been guessing that I spend around $3000 per month (or $36,000 per year). That's not the case. After entering known fixed expenses — HOA fee, gym membership, health insurance, etc. — I had to guess at the variable expenses, such as groceries, gas, and pet supplies. If anything, I suspect my initial numbers are low. But even with what I've entered, my base budget is $3282.38 per month. That's more than I thought I was spending. (Fortunately, it's still well within what's affordable for me to maintain financial independence.)

YNAB offers other features including a handful of reports (spending, net worth, income & expense), transaction downloads (although the YNAB method encourages you to enter transactons by hand), account reconciliation, transfers from one budget category to another, and more.

Plus, I'm not kidding when I say that the folks at YNAB actually care about helping you master your money. To that end, they offer a lot of free resources that you can access whether you use their software or not. There are workshops, a 250-episode podcast, comprehensive guides on financial topics, a weekly email newsletter, and an ongoing video series on YouTube.

Here, for instance, is Uncle Jesse explaining why a tidy budget is a happy budget:

I love this video because he's covering a topic I've thought about exploring myself: How the Konmari method for tidying your house can be applied to your finances. (Seriously, I think I'm going to write about this sometime soon.)

A Flash of Insight

Other online personal finance tools do a good job of tracking your money, but they don't really help you find trouble spots. I feel like YNAB is different. The simple process of setting up my budget in YNAB instantly increased awareness of my spending — and helped me draft an action list of steps I can take to improve my cash flow. For example:

  • I'm spending $113.91 on our cell phones. Why so much? When Kim and I moved in together, we were spending over $200/month between the two of us, so I went on a quest to cut costs. We ended up with an $80/month shared plan through T-Mobile. Turns out I'd bumped up our data limits during the RV trip but never bothered to reduce them when we got home. Oops.
  • When we first moved into the condo, our cable/internet bill was something like $70 per month. But as Comcast is prone to do, they've hiked the rate to $105.84 per month. It's time for me to give them a call.
  • My personal health insurance is now $354 per month — up from $128/month in 2012. Yes, that's right. My health insurance costs have nearly tripled in five years (while my coverage has declined!). All I can say is: Holy shit! Finding more affordable insurance needs to be one of my top priorities for 2017.
  • I'm paying $123.18 per month for auto insurance, but this includes not only the Mini Cooper but also the motorcycle and the motorhome. Turns out, the motorhome is a thorn in my side. I ought to have sold it immediately upon returning from the trip, but I let that chore slide for a variety of reasons. Now the RV is costing me cold, hard cash.
  • Spending $306.95 on entertainment each month seems excessive, especially when you consider that I get the most enjoyment from two activities that are essentially free: reading and walking. Time to cut back there, I think.

Even if you have no desire to follow a budget on an ongoing basis, I think there's real value in breaking down your spending like this as a one-time exercise. Seriously, if you haven't done this in the past two years, you should do so soon. Commit a Saturday morning to sorting through recent bank statements and categorizing your expenses. You'll get a snapshot of your actual spending (as opposed to theoretical spending), which will help you see where and how to make changes to your household budget.

You can do this with pen and paper, with a spreadsheet, or the way I've done it — with YNAB. Since the software is free to use for 34 days, that seems like a smart way to go.

The Bottom Line

I feel like YNAB has already given me $50 worth of value, which is enough to pay for the first year of service. But I'm not sure if it's the best choice for me long-term. We'll see. I'm going to continue using it for the remainder of my 34-day trial period, and then I'll decide whether to subscribe or not. There's a chance that it can actually replace Quicken, but I'm not sure. (I'll be sure to let you know what I decide.)

Having said that, I recommend You Need a Budget without hesitation to anyone in the early stages of money mastery. Don't let the setup phase scare you off. Give it a chance.

If you're a slave to consumer debt, YNAB is for you. If you struggle to balance your bills, YNAB is for you. If you want a clearer picture of where your money is going, YNAB is for you. YNAB may or may not be useful to people further along the path to financial freedom, but it's absolutely awesome for those just getting started.

Footnote: While writing this review, I remembered a similar project I used to write about. PearBudget is another online budgeting tool run by a guy who used to read Get Rich Slowly. (Charlie, are you out there?) Like YNAB, PearBudget started as a simple spreadsheet and grew into something bigger. If you're considering YNAB, you might want to give PearBudget a try also. (And if you're into spreadsheets, the original PearBudget spreadsheet is still available as a free download!)

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