Mastering Your Finances: Four Simple Rules for Budgeting

Budgeting

Sep 27

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Discover YNAB's Four Rules for a Stress-Free Financial Life

As you may know, YNAB is my favorite budgeting software. Not only do I use it personally (and by personally, I mean not only for our household budget, but also one for each of our two businesses!), but I have taught the majority of my clients how to use it as well. And I’ve found that once they are able to learn the ropes, YNAB can be a game-changer for their budgeting.

Why is that?

Not only is YNAB a handy piece of software, but they have four rules of budgeting they suggest following. While the term ‘rule’ may seem restrictive, they are really meant to guide you to budgeting success. Here are their four rules and how I interpret them in my own budgeting!

Rule One – Give Every Dollar a Job

When it comes to budgeting, the first rule is simple yet transformative. Give every dollar a job. This means assigning a purpose to each and every dollar you earn. By doing so, you'll gain clarity on where your money is going and eliminate any wasteful spending.

The best thing about this first budgeting rule is that it helps you break down your money (the balance in your checking account) into different categories of spending. It eliminates that mental accounting that can lead to trouble. You know what I'm talking about, when you look at your checking account balance and think you have enough money to buy whatever you want at that moment. But the truth is, you actually have some bills coming up in the next week that you forgot to factor in. And by the time you remember them, it's too late because you've already spent the money on something else. Now you're officially stressed out.

With YNAB, you break your checking account balance into categories. Let's say you're eyeing a cool new shirt. All you have do is peek into your clothing category, and bam! You'll see that you've got $20 stashed away for that. Now here's the exciting part - guess what? This shirt is on sale for just $14.99! So go ahead and snag it, guilt-free! Woohoo!

Why This Works

Mental accounting just doesn’t work. Managing our finances can be overwhelming enough. When you add in everything else you need to remember?? Forget it! Why not use a tool that allows you to easily see what your money is up to with just a quick glance.

Rule Two – Embrace Your True Expenses

Budgeting isn't just about covering your immediate needs; it's about planning for the future. YNAB's second rule of budgeting encourages you to embrace your true expenses, those irregular or less frequent expenses that often catch us off guard. These are things like holiday shopping, car repairs, vet bills or back to school shopping.

Imagine the possibilities when you commit to squirreling away a small portion of your earnings every month. Picture this: when August arrives and your little ones are pleading for those coveted Spiderman backpacks, you can confidently embark on your shopping spree, secure in the knowledge that you've already set aside funds specifically for these expenses. It's a smart and empowering way to plan ahead and ensure that you're fully prepared for the financial demands that lie ahead.

Why This Works

Just like Rule One, our lives are filled with countless responsibilities and it's only natural for things to slip through the cracks. That's why it's crucial to incorporate true expense categories into your budgeting system. By adding these categories, you can ensure that nothing gets forgotten or lost amidst the chaos of everyday life. No more relying on sticky notes that mysteriously vanish or become playthings for mischievous felines. With this rule of budgeting in place, you'll have a clear and organized approach to managing your finances, keeping you on top of your game and ready to conquer any financial challenge that comes your way.

Rule Three – Roll With The Punches

One of the most common budgeting myths I hear is that it is restrictive. That’s where Rule #3 comes in. But fear not, because here comes Rule #3 to the rescue! The truth is, no two months are ever exactly the same. While you may set a goal of spending $500 on groceries each month, there will be times when you come in under budget (cue the excitement for those amazing coupons!) and times when you may go slightly over.

The key here is to embrace flexibility and not beat yourself up over a small overspending of $20. Instead, take a moment to review your budget and identify areas where you have some extra money allocated. With a simple adjustment, you can shift those funds towards groceries and keep moving forward with your day. Remember, the beauty of budgeting with rule number three lies in its adaptability and the power it gives you to make these adjustments. So, stay positive, roll with it, and keep working towards your financial goals!

Why This Works

With YNAB and rule #3 of budgeting, you have the power to make real-time adjustments throughout the month, instead of waiting until it's too late to do anything about the money you've already spent. By providing you with this real-time info, YNAB enables you to take control of your finances and make small tweaks before it’s too late.

Rule Four – Age Your Money

While most of us may cringe at the thought of aging, there are certain things in life that actually improve with time – like fine wine, aged cheese, and yes, even your money! Imagine breaking free from the paycheck-to-paycheck cycle and building a solid financial foundation. It all starts with giving your money a chance to age gracefully.

By holding onto your money a little longer before spending it, you create a valuable buffer between the time you receive your paycheck and when you actually need to use it. This is the secret to building a financial cushion. The ultimate goal? Living comfortably on the income you earned last month.

Why This Works

The anxiety-inducing game of banking roulette, as I fondly refer to it, is undeniably overwhelming. Picture this: you have your hard-earned paycheck eagerly waiting to be deposited, while two bills loom as pending debits. And all that stands between you and financial chaos is a mere $47.12 balance. It's nerve-wracking, isn't it? The burning question remains: which one will hit first? Fingers crossed it's the paycheck, sparing you from those dreaded overdraft fees.

But with Rule 4, there's a way to slowly bid farewell to this stress by embracing the concept of aging your money. By cultivating a financial cushion in your account, you'll never again have to play this high-stakes game with the bank.

Recap: YNAB's Four Rules for Budgeting

YNAB's Four Rules for Budgeting provide a great jumping off point for taking control of your finances and helping you build a great relationship with your money. Remember:

First rule of budgeting: Give every dollar a job. This means assigning each and every dollar a purpose, so you know exactly where your money is going.
Second rule: Embrace your true expenses. It's all about planning ahead and saving for those not-so-regular expenses that tend to sneak up on you.
Third rule: Roll with the punches. Life happens, unexpected expenses come up, but with this rule, you'll be prepared to adapt your budget and keep moving forward.
Lastly, the fourth rule of budgeting: Age your money. This one is all about building a buffer so you're not living paycheck to paycheck. It's about having some financial breathing room.

Of course, this process takes time and dedication. But by following all four of these rules for budgeting, you'll gain a newfound awareness of where your money is going. And guess what? You might even find yourself spending a bit less along the way. This, in turn, allows you to allocate more funds towards your future goals and dreams. It's like stepping into a beautiful, self-sustaining cycle of financial well-being.

So, don't fear these guidelines! Embrace the idea of starting off with these four rules for budgeting success. With patience and a commitment to these principles, you'll find yourself on the path to financial freedom. Cheers to a brighter, more secure future!

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