If you’ve never used a budgeting service, you need a budget (YNAB), you may be unfamiliar with the budgeting concept known as zero-sum budgeting.
The power of zero-sum budgeting and how YNAB uses it effectively is why we rated YNAB as a better budgeting service than Mint.
But YNAB’s value goes far beyond its website or mobile app features. The reason YNAB can help you take control of your finances is because the service helps you learn zero-sum budgeting just by using the service.
What is zero budgeting?
When most people budget, they create categories for things like bills, utilities, and groceries with a fixed amount to spend each month.
These amounts are set regardless of your income (although it is desirable that the expenses are less than your income). Because of this, very little thought is often given to what to do with the extra funds. Also, this form of budget is a way to plan for future income that you don’t have yet.
This is basically how Mint allows you to budget using their platform.
The problem with this approach is that you are always trying to plan for the future without knowing your actual financial situation in the future. When surprises do happen, if you haven’t built something into your budget to deal with them, it can put your entire financial plan in jeopardy.
Zero-sum budgeting is quite different. Whenever you earn income, you need to put each of those dollars toward bills, groceries, or other things that will help you get your next paycheck or other income.
Since you sync YNAB with your bank accounts, any source of income applies to a Subject to budget a category that appears at the top of a web page or application.
Your goal every time you log in to manage your budget is to select each of the categories in which you have the closest bills, and allocate enough of your “To Budget” amount to cover those bills.
Note: To do this correctly, you will need to maintain the due dates of the bills in another spreadsheet, as YNAB has no place to show when this bill is usually due.
When your income runs out for the budget, you’ll have to wait for your next paycheck or other source of income to allocate additional funds to other accounts. So plan wisely and pay the bills that are due first!
How zero-sum budgeting on YNAB is better
There are several reasons why the zero-budget approach at YNAB helps you gain more control over your finances.
Apply additional income to important savings
If you have less bills than you have income (which you should, or you should be looking at reducing your bills), then YNAB forces you to put those extra funds toward something.
That’s when you should consider adding other categories to apply your income to, such as an emergency fund, clothing fund, vacation savings, vacation savings, etc. These are the unexpected things that you never seem to have enough money for when you budget the “old” way.
This means that when you accumulate money in your bank account, all those funds have a reserved purpose. You’ll never have to worry about running out of money when your car breaks down or you need to make repairs to your house because you’re spending on those things.
Maintains your spending discipline
If you overspend the funds you have assigned to a category in YNAB, you will see your balance turn red. This means you need to shift funds from other things you spent your income on to cover this overspend.
You can do this by selecting the red balance and then using the transfer window to transfer money from another category to this overspent one.
This forces you to constantly monitor your expenses and the impact they have on your finances. You won’t be able to overspend on things like birthday gifts or restaurant meals without being responsible for it, taking money away from other things you care about.
Over time, this will help you keep track of how much you have left to spend in each category and ensure you keep your spending within those categories.
It is also a learning process. If you’re not allocating enough for things like groceries, using YNAB will teach you to understand your true spending patterns and how much you really need in those categories.
Budgeting based on real costs
By budgeting based on future bills and future income, you’re always second-guessing how much you think you’ll need. This assumption may be realistic based on an examination of your previous bank statements. However, most people do not find time for this.
YNAB gives you a spending history in all the categories you’ve created. These expenses are allocated based on what came out of your bank account and the category you assigned the expenses to.
These are real numbers, not guesses. These reports in YNAB can help you fine-tune how much money you allocate to these categories each time you receive new income.
Over time, this will help you allocate your money more responsibly and realistically. It also highlights where you might be overspending and can cut back so you can use those funds for more important things, like vacations or college savings.
Enables you to save and spend better
YNAB’s reporting section helps you better monitor your savings and spending patterns.
You may see things like:
- Your total income vs. total expenses
- Your spending patterns over time in pie chart format
- A line and bar chart showing how you’ve accumulated net worth over time using a zero-sum budget with YNAB.
These charts are a powerful feedback system that will make you feel really good about making the right choices about where you put your income in different areas of your life.
You’ll see your equity begin to improve from day one when you start using YNAB and apply zero-sum budgeting principles.
The more disciplined you are with your designated funds, the higher your other funds, such as savings categories, will be each month. This contributes to the growth of your capital.
Use YNAB and Zero Sum Budgeting
Currently, there is no other budgeting service that effectively helps you use zero budget correctly. This will help you apply the approach to everyday life in a way that is sustainable and unobtrusive to your everyday life.
It also becomes interesting, every time you receive an income, to spend that money on what is most important to you. And it’s great to see your savings categories grow over time thanks to your discipline and careful planning.