What’s the cliched formula for any construction project? Take the estimate, add 20% and two months?
Well, we pretty much hit that nail on the head.
I’ll get into some details in just a minute, but the bottom line is that we’ve got some unplanned debt to pay down. And while I hate, hate, hate credit card debt, it’s a great motivator to kick my financial discipline in gear, and get some earning momentum going. While I’m working that growth plan, I’ll lean on the greatest budget management tool, You Need a Budget, or YNAB, to make sure we don’t end up digging a deeper hole.
Having just done the math, our total out of pocket expense was 12% of the real construction cost. Different math: it was 14% over the original estimate. So, not quite 20%, but definitely not nothing.
The good news is that we had cash and additional savings to fund a portion of that overage, so we didn’t have to fully rely on credit.
The not so good news: we had some other punches to roll with, namely losing 30% of our household income, blowing past our furniture budget pretty easily, and having additional living expenses (ahem, rent) due to the two month delay.
So, the credit card debt was unfortunately inevitable. But, it’s not going to hang around for long.
You Need a Budget
I have been using YNAB for exactly six years. Before 2020, our finances were in incredible shape. We paid off our credit card balances every month, we set aside small amounts of money from every paycheck for larger, irregular expenses — including the fun stuff. But most importantly to me, I had broken down our spending so granularly that I never, ever, ever had a surprise expense come up that I didn’t have money to cover.
Now, don’t get me wrong. Plenty of times we overspent on eating out or spoiled the kids, or whatever in a given month, but that just meant we would cover the overage from money already budgeted in another category.
How it works
YNAB is an online software tool that imports transactions from all your financial accounts allowing you to categorize your spending and subsequently budget against each category. Essentially, you use this system to future-proof your finances.
YNAB’s budgeting philosophy is based on four main strategies.
#1 Give Every Dollar a Job
This simply means budget your money. When income hits your bank account, assign those dollars to spending categories you have for the upcoming month.
Now, categories can be as macro or micro as you want them to be. I lean micro. YNAB gets you started with these suggested category buckets:
- Immediate Obligations – those expenses that never fail every single month – groceries, mortgage/rent, utilities, car payments…you know, bills.
- True Expenses – these are the more irregular, more significant expenses that, if not planned for, can hurt your cashflow.
- Debt Payments – self-explanatory
- Quality of Life Goals – here’s where you create categories for things you want to save for like vacations, an education fund, a personal luxury, or maybe a house renovation!
- Just for Fun – Our categories in this group are dining out, coffee and treats, a catchall “fun money” category, and babysitters.
Like I mentioned earlier, my categories have gone super micro. Here are my specific category groups.
Underneath these groups, I have 102 individual spending categories. That sounds like too many, but don’t think I’m over-zealous yet. These categories have been added, subtracted, condensed and expanded over six years. And, by no means I am budgeting money against all 102 categories every month. If you are just getting started, start simple. It will feel like a huge, frustrating chore at first, but once you have that full picture of your spending, budgeting becomes so much easier.
#2 Embrace Your True Expenses
That full picture doesn’t come into focus until you get a grip on those bigger expenses that come up every now and then. YNAB calls them True Expenses. Some are expected, like renewing your car registration once a year. Some are unexpected, like having to replace or repair a major home appliance.
Once you really think through where all your money goes, or could go, in a given year, you can start to plan ahead and truly gain control of your finances. I have gifts as a True Expense, for example. I have no idea how much I will need to spend in a given year, but I know it’s significantly more at the end of the year. So, I budget some money to that category every month. Some months I spend from it, and other months I build a balance. The goal is to have enough money set aside in December for the double-whammy – a birthday and Christmas within a 10 day period.
Let’s talk about goals, because it’s my favorite feature of the software, and so easy to use. In any given category you can customize a goal based on the specific need. This is clutch for saving, or for knowing how much to budget each month, because the software does the math for you and tells you how much you need to budget to meet category goals. This is exactly how I have been able to pay off previous debts, save for big expenses, and build a balance in categories where spending can’t always be planned to the penny.
#3 Roll with the Punches
This is YNAB telling us to give ourselves grace. Budgeting is hard, being disciplined with spending and saving is hard. In the months, or years, it takes to gain total control of your financial outlook, there are going to be surprises, overages, unplanned debt, and income hits. You might have to move money from a category you’ve been building, to cover over-spending in another. You might have to budget some of your paycheck to cover an expense that’s already been spent instead of budgeting for the month ahead.
I am living this rule right now. It’s anxiety-inducing. But it’s also temporary with the commitment and discipline this kind of budgeting calls for. I know we can get back on track.
#4 Age Your Money
The top right corner of the YNAB dashboard shows a number tells you how “old” your money is. The thinking is that you are in good shape if your money is 30 days or older. It means your paycheck is being allocated toward future spending, thus future-proofing it. If you are sticking to rules one through three, getting here is a simple conclusion.
My record: 92 days, meaning I was budgeting money that we had earned three months before. Oh, the good ol’ days. Don’t ask me how the formula is calculated in the software. The best I can gather is that it’s looking that the funds you have available to budget vs. how much, or how far ahead, you have actually allocated in your budget.
But I’ll tell you this, it’s pretty satisfying the first time you age your money beyond the suggested 30 days. Your age of money starts over every month, so it’s a good gauge of your discipline and consistency over time.
My 2021 plan
So, specifically, how am I going to pay down this credit card debt when realistically I have to keep spending to fully furnish this finished house?
Audit My Categories and Edit My Goals
Because I will be adding more money to credit card payments, I will have to forgo budgeting money to some other categories, or budgeting less money than usual. So, first I’m taking a hard look at all 102 categories and deciding where I can spend less (like groceries), where I can cut completely, or where I might need to temporarily pause on building savings. Then, I’ll edit my goals to reflect these changes so budgeting in future months will be somewhat on auto-pilot. There is a great feature called Quick Budget once goals or targets are set up.
Pay Down the Debt Avalanche
I’m taking the avalanche approach to paying down debt – we’re going to focus on the cards with the highest interest rates, one of which also has the highest balance. Justin and I each have one primary credit card that we do all our spending with. His, well, won the spending lottery. It has the biggest balance, and therefore the largest interest charges each month that have got to go. A lucky break in this strategy: the card with the highest interest rate is a secondary, rarely used card. And, it has the smallest balance. So, we will be able to pay that one off relatively quickly and that little win will feel so good. That’s essentially the benefit of the alternate strategy to the avalanche – the Debt Snowball. You focus on the smallest balance first, and build momentum and motivation since it’s quicker win.
A quick note about spending with credit cards in YNAB: When your spending activity on a credit card is budgeted for, YNAB automatically shows that money is available to make a payment. So, if you don’t overspend against your budget, you’ll have money available every month to pay off the balance. If you do overspend, YNAB will still tell you what money is available to make a payment with (based on what was budgeted), but you’ll start carrying a balance. In a future month, you’ll budget against the credit card category to catch up.
Earn More Income
Thanks for reading this far guys, you are an integral part of helping this blog grow into something that earns new income that I can subsequently budget.
If this post has got you interested in using YNAB for yourself, definitely use the 34 day free trial. But take it seriously and really use it. Then, use one of my 10 referral links to get a free month! Just email me at firstname.lastname@example.org or DM me on Instagram and I’ll send you the details!