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

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.

YNAB’S PRIORITY CHEAT SHEET Knowing what to prioritize first doesn’t always come naturally, so at YNAB, we encourage following this clear Rule One hierarchy: • Take care of your immediate obligations first—a roof over your head, food for you and your family, and bills like electric and heat that mean bad things if you don’t pay them. Just setting aside money for these and knowing it’s there will help you be more secure and feel more secure. • Then move to the true expenses (more about these in Chapter 3). These are large, irregular expenses that surprise you (you know the feeling) but really shouldn’t. • 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. • From there, we get into things that require money, but are just for fun. The sky wouldn’t fall if they didn’t get funded for a month. The choices are still yours, but following this structure can help you learn what’s important to you, and what might just have been spending habits you’d happily drop.

You’ll also quickly discover that the more you fund your infrequent expenses, the less stressed you’ll feel.

I often compare Rule Two to the idea of trying to climb a large mountain. It looks daunting—even impossible—but if you break it up into small hills, your heart rate barely registers the effort. Little ups and downs are so much easier to manage than big ones, whether you’re scaling a mountain or working toward a financial goal.

Once you feel comfortable with a certain amount in a particular area (like maybe a vet or car-repair fund), you can stop filling it. That’s easy.

With so many goals vying for your cash, it can be hard to know where to start. Put a little in each? Target one ferociously? This is where strategizing is so important. As I said earlier, start with the bills or expenses that always tend to knock you out when they arrive—insurance premiums, birthdays or holidays, big annual dues like summer camps or tuition.

If you’re feeling consumed by a goal, attack it as fiercely as it’s attacking you—or not. Julie and I have goals in our budget that have no money in them at all. They’re long-term targets that we’d like to accomplish one day, but they’re not urgent enough to attract our dollars yet. Our big one right now is a family cabin. We’d love to save for one but we want to be mortgage-free before we start. So we put the cabin in our budget as a reminder, and something to look forward to.

Whatever your strategy, know that for every dollar to which you assign a job, you’re a dollar better off than you were before.

When your long-term goals are on your radar, your bank account balance is no longer the deciding factor in whether or not to buy something. The question stops being Can I afford this? You can likely afford lots of things if you have the cash on hand, but that’s not the point. You’re now asking yourself, “Does this move me closer to my goal(s)?” You’re considering the future ramifications of your decision in a very concrete way, and spending becomes about real trade-offs: “If I buy these shoes now, it will take me an extra month to hit my vacation goal.” You’ll quickly find that, when looking at your spending through this lens, you make great decisions!

Our motivation never lasts when we decide not to spend because we want more money. We’ll always want more money—it’s an unattainable goal. We end up feeling deprived because we’re reining ourselves in by dangling an unreachable carrot.

Rule Two draws the line to real consequences. Now you’re thinking, “If I buy this, I’ll have less money for that thing I want in three months.” That reality makes all the difference. Now the trade-off isn’t about having less money, it’s about not having something you’ve decided you want. There’s no deprivation there at all. You’re getting something for your sacrifice. Something you actually want!

Every time you choose to put money toward a long-term priority, you’re literally sending money ahead to the future, setting Future You up for success.

One of my favorites is the fact that, once you’re really rolling with it, the idea of an “emergency fund” becomes obsolete. I know that nearly every financial guru tells us we need to have a certain number of months’ worth of expenses stashed away in a big untouchable lump. But the money you set aside for Rule Two is your emergency fund. Only better, it’s more targeted, more proactive, and likely to have you better prepared than that vague bubble of money sitting in the bank without a specific purpose.

Think of it as an income replacement fund and then you’ll never touch it for an impulse splurge. The really important job you gave that money—different from a generic emergency fund—protects your original intention. Technically your bank account will look the same as if that money were a generic emergency fund—it will just sit there as one big sum. But your budget will tell the full story: you’ll know exactly what each dollar will cover, and for how long.

Calling All Workers with a Variable Income

In truth, if you’re living on a variable income, you need a budget more than anyone. That’s not because you’re bad with money—it’s because there’s so much more room for error when your cash flow is not predictable.

Common money surprises hit so much harder when you don’t have that regular paycheck on which to fall back. These are the moments when your budget will save you.

The other, often hidden, risk when your income is variable is that it’s easier to trick yourself into feeling rich on the months when a big payment lands. Those are the times you exhale and think, “Things are great. What was I ever worried about?” It’s tempting to avoid important money decisions and blow your chance at stabilizing your cash flow on the high-income months, when you feel everything is going so well that you’ve earned yourself a new pair of boots.

Looking at your expenses by month will also give you a clear view of where you stand financially. You may feel rich when that five-figure payment lands, but plugging it into your monthly budget will show you the real picture.

RULE TWO: EMBRACE YOUR TRUE EXPENSES Most of us aren’t used to thinking of spending in terms of true expenses, but once you embrace this mindset you’ll start to feel the power of financial freedom. Hardly any bill or spending jump will be a surprise—and you’ll have the money, just sitting there. Remember, your true expenses fall into two groups: • Predictable expenses aren’t frequent but we know exactly when they’ll hit and how much they’ll cost. There are bills like insurance premiums and car registrations, but also remember predictable spending bumps: holiday shopping, summer camp, gardening supplies, back-to-school clothes. Even if they’re not set

CHAPTER 4: Rule Three—Roll with the Punches

You get this. You know it’s not realistic to micromanage your time. You understand your day won’t go exactly as expected, and (depending on how type-A you are) you’re fine with that. You also know you’re more likely to accomplish your goals if you have some kind of plan, even if it ends up changing. This is exactly how we should treat our budget: like a flexible plan.

The problem is, most people have a hard time seeing their budget as a living, adaptable thing. They feel that if they change it, they’re not really budgeting, they’re cheating—but that couldn’t be more wrong.

Rule Three: Roll with the Punches is all about adjusting your budget to allow for whatever comes your way. Because your budget is a plan that reflects your life...

Let me say this again: it’s okay to change your budget. Scratch that (change, right?). You have to change your budget if...

Any budget changes you make can feel like your self-discipline score is being docked another point. We’re led to believe we won’t ever succeed if we can’t be accountable to our budget.

Accountability is critical, but let’s be clear on what accountability actually is. Accountability is dealing with the truth of every decision you make. You’re actually never more accountable than when you change your budget. (Go ahead, read that sentence again, it’s important.) If you’ve overspent on eating out and need to take that money from a different priority, like vacation, that’s accountability. You are living the reality of what it means to spend more than you’d planned: you’re now that much farther from your vacation goal. It’s not a failure, but a reprioritization.

If you spend more than planned in one place, you have to pull that money from another spending goal because it doesn’t exist anywhere else (and because debt is not an option!).

Likewise, if you hadn’t planned to pick up your dry cleaning, your blazer would still be hanging from that revolving rack. The goals are what matter. As long as you keep moving toward them, you’re succeeding.

If you’re constantly adjusting to compensate for overspending in one area, you’re probably not being honest with yourself when you budget that number in the first place.

If you’re habitually adjusting your budget, it’s like having that item on your today to-do list for a month. You know you’re not going to declutter your closet today, or even this week, so either pull it off the list or reevaluate your priorities. Otherwise that task will just sit there, heckling you and making you feel like you’re constantly underachieving.

We still wield Rule Three all the time—only now it’s for actual surprises, not things we swear we’ll do but know will never happen.

Priorities shifted. Values intact.

That combo kept us from having to dip into our emergency fund, which was huge. You work so hard to build that up, you really don’t want to spend it!”

Tracy and Dan’s experience is a reminder that the longer you budget, the less the punches will hurt when they do land. Even the mega-clobbers.

Rule One gets you laser-focused on the top priorities that need your dollars. • You may not have a job-loss fund, but if you’ve been rolling on Rule Two for a while you will likely have enough on hand to cover a good amount of your expenses.

RULE THREE: ROLL WITH THE PUNCHES Repeat after me: Changing my budget is not failing. Changing my budget is not failing. If you spend more than you’d planned, or a surprise expense hits that you weren’t saving for, don’t worry. Your budget is meant to reflect real life. When did anything in your life ever go exactly as planned? Just roll with the punches and keep going. And remember: even if you don’t hit all of your goals as you’d hoped, you’ll probably see that your budget still reflects your values. So even if that $100 Little League registration was not on your radar, you’ll pull

it from other spending targets, like clothing or restaurants, because you value outdoor fun for your family. You’re not failing—you’re just budgeting in real life.

CHAPTER 5: Rule Four—Age Your Money

But the older your money, the further away that money stress will be. Age your money long enough, and the stress won’t even be in your line of sight.

The best way to avoid running out of food is to take less than what is added each day. When that happens consistently, reserves build up out of the portions that are left over. Each day’s leftovers slowly work their way down the tower as new cereal is added to the top.

You’re living on the edge if you’re eating cereal that was added that same day, or even the day before. It means you’ll run out if you miss even one day of refilling your supplies.

Money’s “age” is based on the gap of time between when you earned the money (cereal in) and when you spend the money (cereal out).

old. If it’s Friday before you’re spending that money you deposited on Monday, then your money is five days old.

Rule Four is more of a tool than a rule because we don’t set an absolute standard for how old your money should be—just older. We tell people that thirty to sixty days is a good goal, but one day ...

The goal is to slow down the cycle of money in and money out to give yourself breathing room between when you earn your money and when you need to use it.

But if you can build up your money to be at least thirty days old, that valueless game goes away because the month’s money is already sitting there, waiting to be spent.

Without Rule Four, you’ve got a stack of bills waiting for money. With Rule Four, you’ve got a stack of money waiting for bills.

That beautiful gift of time is especially valuable if you have a variable income. When you’re living off old money, you don’t have to take that crazy client just because this month is a bit short. You have a cash buffer. The more variable your income, the greater your age of money should be so you have a cushion to ride out the low-cash months.

You’ll be relieved knowing your expenses are covered for a span of time. You’ll be more creative and less reactive no matter what kind of financial challenges might crop up.