You Need a Budget: The Proven System for Breaking the Paycheck to Paycheck Cycle, Getting Out of Debt, and Living the Life You Want

by Jesse Mecham

The question we need to ask ourselves isn’t Can I? or Should I? It’s What do I want my money to do for me? Answering this question will help us cope with endless options, pressure to keep up with the Joneses, and the paralyzing fear that we’re just not being smart with our money.

When we know what we want our money to do for us, the options become a lot less daunting, and confidence quickly replaces the stress.

If you’re not already living the life you want, how would you like to live instead? Don’t worry if your answer is radically different from your current reality. Just think about what’s important to you. Maybe the life you want involves staying home with your kids, annual European vacations, going back to school, or just less stress around bills.

This is actually how many of us treat our money. It just comes and goes without much thought until suddenly we are stressed, and we often don’t even realize we’re stressing about money. Everything just feels overwhelming.

Instead, think of what you want, and go from there. I want to take my family to Italy. I want to live debt-free. I want to hire a personal tutor to learn Italian. A budget lets you plan for all of these things.

Your budget lets you spend and save guilt-free because you’ve already decided where you want those dollars to go. It helps you look at your money through a whole new lens, so that you always feel good about your decisions—whether you’re spending or not spending.

After taking a close look at your spending, you may decide takeout and eBay purchases are important to you—just maybe not as important as saving for Italy or paying off your loans. Whatever you decide, you can find a way to fund anything that, to you, makes for a good life. You just need a plan.

Rule Two: Embrace Your True Expenses, combines the power of thinking ahead with taking action here and now. Whether expenses happen like clockwork (rent), feel impossible to predict (car repairs), or are just far-off dreams (cash for a wedding), they are all part of your true expenses. The key is to prepare a bit at a time by treating them all like monthly expenses.

Spend more than you expected on dinner out with friends? Life throw you a curveball? No need for stress. Just pull some money from lower-priority categories and carry on. You haven’t failed at budgeting, you’ve adapted with the best of them. This flexibility isn’t how most people imagine a budget, but it may be the key to making it work.

Rule One: Give Every Dollar a Job • Rule Two: Embrace Your True Expenses • Rule Three: Roll with the Punches • Rule Four: Age Your Money

When we’re done, we admire our handiwork. Even though it has holes in it, it’s more than we’ve done before, and so we lay out a plan to follow it every month. It feels so good to know exactly where our future paychecks need to go.

The difference between forecasting and budgeting is a lot like the difference between dreaming and doing. It’s fun to forecast and dream of the life you want if you can someday get those numbers to work. But how about looking at the money you have right now and creating a spending plan based on what’s most important to you? That’s what YNAB is all about.

This shift is a big deal. It’s the difference between dreaming about a better life and actually creating one. The moment you let your priorities lead, you’ll find that many of your anxieties around money—and the jitters you thought weren’t about money at all—quickly disappear. The fog clears and you can see exactly where you’re going.

You know your $50 cell phone bill and $100 cable bill are due before you get paid again, so you earmark those funds.

month. Yikes, money suddenly feels kind of scarce. Don’t worry, and don’t quit budgeting—this feeling of scarcity is a good thing. It means you’re seeing your money for what it truly is: a finite resource—and this is a huge part of that mindset shift I talked about. It doesn’t actually matter how much money we have or don’t have.

These changes free up the $150 you need for your debt payment goal. Success! Here’s the aerial view:

You would have spent it blindly, not realizing that the money you burned on a cab to your brother’s party really needed to fund your lunch for the next two weeks. You also wouldn’t have known—until it was too late—that the aged steaks you bought to impress Evelyn ultimately kept you from your debt-paydown goal. By being intentional with your spending, you managed to fuel all of your priorities with no financial fallout.

That said, the goal of the Four Rules is to get you to the point where you are never timing bills to paychecks. That may feel impossible, but you can get there. Just keep your eyes on your priorities—and keep reading.

Forecasting has you “budgeting” money you don’t have and pretending you know exactly what your expenses will be three months from now.

Budgeting helps you see where your money is truly going so you can reroute it if it’s not going in the places you want. So if you want to go to Paris, go to Paris! If you decide you really need to buy a beach house, buy one!

They hadn’t budgeted until now, but they had a good sense of their spending patterns after the two-year quest to save up that freelance fund.

So they revisited the budget, got real about their priorities, and shaved $870 from their monthly expenses within a few minutes: eating out went down by $250 and babysitters by $150.

Smaller choices aren’t spared, either. Should you really be spending on monthly pedicures or lunch with friends? It depends. If guilt haunts you it’s usually because: 1. You know in your gut that a bigger priority needs more of your attention; or 2. You’re letting other people’s expectations of how you should live your life color your choices.

You won’t feel confident about your money decisions unless you dig deep to figure out what really matters to you.

Once your goals are in place, they back up every one of your spending moves. If you’ve decided it would bring you peace of mind to have a $20,000 emergency fund and you want to save $1,000 a month until you hit your goal, you’ll happily adjust your spending behavior to make it happen. Maybe part of your saving strategy will be no more lattes, but it doesn’t have to be if you love lattes.

For example, impulse purchases typically get a bad rap, but why do they have to? Maybe the occasional clearance rack purchase brings you a thrill and you’re worried that budgeting means you can no longer troll the Anthropologie sale during your lunch break. Well, if you’ve met all your essentials and there’s money left over, why not actually budget for a few impulse buys every month?

As the anxiety dwindles, something much better takes its place: peace. Imagine paying your bills the moment they land because the money is just there, actually waiting for the bill. (Personally, I get a little thrill when I come home to a pile of bills I can pay on the spot.) Imagine shopping without guilt, saving without drudgery, and feeling that you can literally plan to live in whatever way makes you happy.

YOUR NEW MONEY MINDSET IN ONE SENTENCE: Forget future money; use today’s money to write your future.

You’re literally writing a to-do list for your money. If you’ve never done something so (pro)active with your money, you’ll quickly see how it changes your perspective on each dollar you hold.

Write down all of the places your money needs to go. Focus on payments you’re obligated to make to keep your life running. Think food and shelter, loans, school payments, and any necessary work expenses (for example, an Internet connection if you work from home, commuting costs, etc.).

core obligations:

Make a list and calculate my core obligations--monthly and yearly

To start, make sure you’re separating honest-to-goodness obligations from habits disguised as necessities. It can be hard to distinguish between the two at times. Just remember that your habits are ultimately negotiable in a pinch—your obligations are not. You could come up with an alternate plan for buying lunch if you really needed to. Paying your rent or mortgage? Not as easy to get around unless moving in with your parents is on the table. No shame.

For now it’s enough to say that your obligations go beyond your monthly bills and essentials—recognizing this was key for Julie and me, and will be for you, too. Before you can set aside money for other priorities, it’s important to freeze some funds for longer-term obligations.

Save more than zero each month and they won’t feel like a crisis when they hit. So when your four-year-old falls and splits open his lip on a Sunday night, the $300 urgent care visit won’t cut into money you’d set aside for your fall foliage trip. And—shudder—you won’t have to throw it on a credit card with a promise to figure it out later. You’ve set aside money for medical bills as a core essential, even if they aren’t a steady monthly expense. You’re prepared.

Your answer to Can I afford this? won’t be such a mystery, even if you may not like the answer. You’ll be tempted to revert back to blissful ignorance, but hang in there.

Write down your quality-of-life goals even if you don’t have money to assign to them right now. You will soon, and the moment you do you can put those dollars to work in exactly the way you want to.

Maybe you hate your debt, but you also hate the idea of waiting to save a little for your kid’s college until your debt is paid off. That inner conflict can reveal your answer: put a little toward both. I personally don’t believe in saving for college (more on that later) and I can’t stand debt—not even if it’s my own mortgage—so I make it a priority to pay down any balances at a ferocious pace. Neither approach is right or wrong. Pick the one that brings you the most peace.

Take the time to think about what makes you happy and add those things to your budget—even if they’re just ambitious notes right now, with no dollars yet available for them.

you’re still not sure, enjoy the fact that this is a good problem to have. And know that this will get easier. Budgeting—and prioritizing—is like a muscle you exercise. The more you do it, the better you’ll be at it.

But wait. If you have debt, a chunk of your dollars is already spoken for. That means your debt is literally stealing from your ability to fund your current priorities.

But a lot of the time, that credit card balance is the fallout from buying things that didn’t mean much to us. It’s an accumulation of lunches we don’t remember, new shirts we didn’t wear, and trips to see movies we didn’t even like. And it’s keeping us from reaching the goals we’ve set for ourselves today.

Fair enough, but I disagree. Credit cards are not the problem—it’s how we use them. You’re fine to use credit cards as long as you use them to spend the money that’s already in your bank account. Money you’ve already budgeted. But hold on: this is not the same as having the money to pay your bill when it’s due. Paying your bill is a great start, but if you only have enough to pay the statement balance when it’s due there’s a chance you’re still spending more than you actually have.

At YNAB we talk a lot about what we call the Credit Card Float. If you’re riding “the float” it means you’re relying on next month’s income to fund this month’s spending. It can be hard to detect the float because most people who are trapped in this cycle are those who take pride in paying their credit card balance in full, every month, on time. They never pay interest and reap whatever rewards their credit card offers, whether it’s miles, cash back, or a free pony. If you’re one of these people, you’re in better financial shape than most. But let’s take a close look at how this setup usually works.

If you don’t have enough in the bank to pay your card down to $0, you’re riding the Credit Card Float—and this isn’t a fun amusement park kind of ride.

YNAB’s strategy for using credit cards will keep you from spending money you don’t have. The approach is simple: only charge something if that money is already in the bank and it’s budgeted toward that expense. When you do this, you’re using your credit card only because you want to (yay, points!), not because you have to (I can pay this bill as soon as my next check arrives!). You’re essentially using it like a debit card. The only difference is that the cash stays in your checking account until you pay the bill. And you can pay the bill any day of the month, because the money is always there.

That one will get paid down to $0 every month. Also consider using cash or debit until your credit card balance is gone. Don’t use any credit card that carries a balance—just focus on paying it down.

Lifestyle creep is when the cost of your lifestyle rises in tandem with your income.

Question everything. Once a year (I like to do this in January), question every one of your expenses. Question the “givens” like housing, transportation, and insurance. Question the vacations you always take, the gifts you always buy, and the food you always eat. Every single item should be on the table. Following the tactic of asking why six or seven times as it relates to any one of your line items will help you peel back the layers of that priority and really see it for what it is.

Reassess expenses

If you’re using our software, you can do this using the “Fresh Start” feature we have built right in. If you’re using a spreadsheet, file it away and start a new one. The idea is to start with just your bank account balance, then slowly add in your expenses one at a time.

Now the real fun kicks in. What are your highest priorities after your obligations? Family time? A hobby that borders on obsession? I won’t judge, but fund those next.