Starting YNAB — How to budget $10k to zero

Hi all,

I'm fairly new to YNAB and have been playing around with the software lately and falling in love with the methodology. As tax season is over with, I'm ready to kick things into high gear and will be starting from scratch with a new budget May 1. 

The biggest point of confusion that I'm running into is knowing how to budget the $10k I have saved without spending or allocating funds irrationally. My immediate obligations—rent, utilities, phone, internet etc.—amount to just about $1,000, and I have a monthly debt payment of ~$1,000 as well. Figuring say $400-500/m for groceries (definitely higher than I want and just an estimate, but I do like to eat well), that leaves me with all of the other categories and around $7,500 to play around with. 

Here's where I get a headache: It makes sense for me to allocate portions of my money to things like auto maintenance, transportation, cleaning supplies, subscriptions and other "true expenses," but certainly not $7,500. The same goes for fun money, entertainment, dining out etc.; I would love to throw $1k in each category for the month, but that's not realistic or anywhere near what my actual goals of cutting spending are in line with. 

Then there are the savings categories, ie: new instrument fund, travel/vacation etc. Again, with $5k+ left to play around with, it seems a bit much for me to throw a couple grand towards a new guitar fund right now; I don't feel like I've "earned it," if that makes sense. 

Important to note as well is that the $10k I have saved is not an indication of my monthly income, which hovers around $5-6k before taking out estimated taxes (I am a freelancer and deal with variable/random payments/income). Thus, my fear is that I will set up false expectations and an inaccurate budget by having 10k to play with vs. what I will likely have next month and the months going forward. Add to this the fear uncertainty and doubt of possibly having a $0k month (very unlikely but always possible), and knowing that I should have some sort of plan in place to compensate for this. 

At the end of the day—"what do I want my money to do for me"—I would like to use what I've saved to help set me up for comfortable, worry-free, modest living in the years ahead as I also continue to build my business and generate additional income. It seems like filling my categories full of dollars just to budget to zero is a slippery slope toward making costly mistakes about how I handle my money with that goal in mind.

So, how do I go about approaching this?

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  • 6-8 Month Income Replacement (this is not an emergency fund that you can use to replace a dishwasher, it is for when you find yourself out of a job), Annual Medical Out of Pocket Maximum (assuming USA), Vehicle Replacement, Debt Pay Down, House Down Payment.

    These are all categories that you might not spend any time soon, but are good to have in your budget.

    Like 4
  • Since you are a freelancer with variable income, perhaps create a category called "Income Equalization" (not a very catchy name, but I'm sure you'll figure one out!) where you put the excess of high income months, so that you can use that excess during low income months. An example: let's say you are earning between $4,000 and $6,000 per month, and your typical spending is at about $5,000 per month. On a $6,000 income month, you take the extra $1,000 and put it into the "Income Equalization" category so that when your next $4,000 income month comes around, the money is there for you to use. For any excess income that is above what you think you'll need for this category, you can send to "Income Replacement" (as suggested by jenmas above) or "Emergency Fund."

    I agree with you that you don't want to be overly generous with funding "fun" discretionary things with money you otherwise considered to be "savings" prior to joining YNAB. But, if you thought of some of that money as saving up for a vacation later this year, for example, then go ahead and put that portion into a vacation category. I'm pretty new to YNAB, too, and one thing I really like about it is that I am already finding that I think things through more when I am taking money from a vacation category, clothing category, etc. instead of just from general "savings". YNAB forces scarcity and prioritization, and I am less likely to spend money on take-out dinner after a long day of work when I am out of dining out funds and see that I need to reduce my vacation fund in order to do it. 

    Like 2
  • Keep in mind that "sit in a rainy day fund until I have need of you" is a 100% valid job for you to give your money while you are budgeting down to zero. You can do this with one big category called Emergency Fund or you can break it into specific areas for long-term saving.

    There have probably been times in your past where you've had to make an unexpected expense, but you were able to handle it because you had reserves. And you probably had times where you decided to splurge on a new thing for yourself and you knew your reserves could take the hit. Labeling your categories in YNAB is just a way to allocate those reserves in advance.

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  • It's sounds like a time based prioritisation might help.  With all those savings goals and true expenses you'll need to ask 'What's my number 1 priority?'  You don't have to stop at one either but not more than five priorities will ensure you have a clear focus.  It might be an emergency fund, a three month Income Replacement buffer, or a car replacement fund.  You have to identify what your main goals are and start there.   

    Once you get past funding these top priorities for the current month, ask yourself 'How much do I need in here and when do I need it by?'  The answer will help you decide how much to start with and give you solid guidelines for setting time based funding goals.  For example, a vacation fund: when do you want to go on vacation, this gives you a timeframe, what's your budget total and given the timeframe how much will you need to save each month to get your $ goal by the time chosen.  If this amount is beyond your monthly capabilities, seed it with some of your 'leftover' money and see what's the optimum amount that will help you achieve your goal comfortably.

    This is a process that's rarely done in one sitting because priorities change but I think it's really helpful in getting you to think and visualise longer term goals which can help bring clarity to goals overall.  

    While I can see what your saying about the dangers of budgeting to zero I feel like there's a lot of danger (that many of us are experienced in tasting) when we don't give our dollars jobs and that is spending impulsively instead of working towards our goals by having money just sitting around.

    Like 1
  • What were you saving it for? Maybe some should go towards an investment if it was just ‘saving up’?

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  • I don't know if you figured it all out by now, but my one question for you would have been what is your total debt? You indicated you had a monthly debt obligation of $1000 per month. You should set some money aside (perhaps about $1500) as a small emergency fund, and then set an austere and disciplined budget to cover your required monthly expenses so you can free up as much discretionary funds as possible to aggressively pay down your debt to zero. Once that is done, since you are a freelancer, you should build up an emergency fund to cover 6 months of expenses ( basically food, shelter, utilities, and medical insurance). After that, start investing in a Roth IRA, contributing the maximum allowed each year. Beyond that, there are other things to consider, such as additional investments, life insurance, homeownership vs. rent, but these are all factors that vary depending upon the lifestyle of each individual. I recommend you look up The Dave Ramsey Show on YouTube, and start with this video: https://youtu.be/H2Zd0-0XLBU.

    If you have what it takes to generate $5-6k per month of income, then you can totally do this, it simply depends on your motivation to get out of debt and build enough wealth to be truly financially independent.  Make no mistake, so long as you have debt, you are NOT financially independent. 

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  • I'm new to YNAB too and I don't know if this is the recommended way of doing it but budget 2-3 months ahead. So for instance if you know you spend 400 for food a month, put 400 in the current month and 400 in the next month. Ditto for all the other categories. That way your current month can have adjusted budgets as the moths spending happens and you need to move money around, but the next month is still you 'standard' or starting budget. When I get a paycheck I go to the third month and use the copy budget from last month (#2 with the standard budget) for as many categories as I can fill with that paycheck. you may not fill all the categories with one paycheck, and you might end up with money left over that is too small to cover a full category. The left over goes back into month 1 goals or stuff you forgot fund. Usually by my last paycheck all the categories are covered and I can put more toward savings. So you know the next 2-3 months are always covered and you are still putting some away for savings.

    I don't know if I explained it well. It makes sense when I'm doing it. 

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      • WordTenor
      • Not discriminating between the sinners and the saints.
      • WordTenor
      • 3 mths ago
      • 7
      • Reported - view

      Sky Blue Saxophone There are three reasons not to do this. One, The software as it is written right now makes it fairly easy to increase the budget in the current month and have it pull money back from future months where you budgeted without your being able to see it. This is what you’ll hear called stealing from the future. The farther you have budgeted out, the farther out you have to look to make sure that everything is fine.

      The second reason not to do this is simply practical. If the cost of Netflix goes up by $0.10, you have to make that adjustment across every month that you have budgeted. 

      The third reason, is that if you actually did have to access your emergency fund, odds are you would be reducing your spending anyway.  So with the exception of your fixed expenses, the future months budget is meaningless, because you will probably stop going out, you won’t spend as much on gas, you cancel your vacation, you might spend more heating and cooling your home because you’d be home all day, etc. 

      Best practice is to use this months money to fund next month‘s budget and then use any money on top of that for specific savings goals, one of which may well be replacing income in the case of a loss of employment. 

      Like 7
      • dakinemaui
      • dakinemaui
      • 3 mths ago
      • 5
      • Reported - view

      WordTenor Can't +1 your reply enough. YNAB went to a lot of trouble to create a tool that allows budgeting as far as you want into the future. Unfortunately, that was a solution in search of a problem -- one that didn't need solving.

      Like 5
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