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Why I Love YNAB and Zero-Based Budgeting

Although I got a full-ride to law school, I still racked up some debt while I was there and right after. When I was studying for the bar full-time (and thus unemployed), I took out a $10,000 personal loan. I rationalized both of these decisions because I was so far ahead of my peers and had solid jobs lined up. While taking on this debt was not the worst decision in the world, in hindsight I could have probably avoided mode of it, and I regret that I took on more than I really needed.

In my first year out of law school, I had a clerkship where I worked for a judge and made a fair, but not outstanding, salary, of roughly 75k in a medium-sized city in the Northeast. Living expenses were higher than I had expected, and my rent was about $1,800 a month for a small studio apartment that was only a five-minute walk to work. Although that was pretty pricey, I still had a decent amount of money left over after taking care of my necessary living expenses. After subtracting out these fixed necessities that had to be paid in cash, I put every penny of my extra cash towards paying off my debt. Any variable expenses I vowed to "keep as low as possible" but put on a credit card that I swore I'd pay off at the end of the month. Doesn't necessarily sound like a horrible plan, but it was. Although I paid off my entire $10,000 loan in less than a year, I "somehow" accrued $15,000 of debt in the process. Yes, I ended up worse off. Why did this happen, especially when I was making a perfectly fine salary?

Some of the explanations are obvious. I took a vacation when there was a brief pandemic reprieve, convincing myself I "deserved it" because I had "missed out" on taking a bar trip, hadn't gotten to see my partner in some time, and had been working really hard. I found a credit card with a $5,000 limit with 0% APR for two years. I put the whole trip on there and lived large, knowing I'd have a much higher salary the following year and would be able to pay it off. Tragically, I'm still paying for this decision close to a year later.

But the more subtle issue I ran into was getting stuck on was the cash flow problem I created for myself. When I got my paycheck, I saved only enough cash to pay my rent and utilities. Everything else when to debt repayment and my credit card. I had thought putting all my cash towards my debt was the "responsible" thing, but it caused two problems for me: (1) I had difficulty setting a budget and tracking my expenses and (2) I had no cash cushion.

I struggled to budget because I was working with future money I expected to get, not money I already had. I would set spending caps for myself based on what I made in a month and my expected monthly expenses. I figured $400 a month on food was realistic based on my bills and my income. But that number was actually pretty arbitrary and wasn't accounting for irregular expenses that weren't bills. Both the bad budgeting with future dollars and the lack of a cash cushion meant that when a routine oil change surprisingly turned into a $500 repair, I had to put that on my credit card, even if I wasn't sure I'd be able to pay off the full balance at the end of the month. I didn't have a choice.

I was sinking deeper and deeper into the hole. At best, I felt like I was paying off debt only to accrue the amount I just paid off.

Enter YNAB, short for You Need a Budget. (No, I am not getting paid for this. Indeed, I actively pay for YNAB.)

My February YNAB budget with my "annual expenses" and "true expenses" categories expanded. The money available will appear in a green bubble when you've allocated enough money to stay on track to hit whatever financial goal you've set for yourself (or if you have no goal). Yellow means you need to contribute more to stay on track.

Between when I finished my clerkship and when I began my higher paying firm job, I knew I had to do something. My salary was about to more than double and I did not want to screw that up.

YNAB uses "zero-based budgeting." It's essentially the Dave Ramsey "envelope method" but online, synched with my bank accounts, and compatible with credit cards. Zero-based budgeting teaches you to give every dollar that comes in a "job" and to only work with the money you actually have, not hypothetical future money. This meant that when my first paycheck came in, I had to figure out what all that money had to do for me before I expected my next paycheck. I couldn't put everything toward debt because I had to buy groceries, go to the veterinarian, and get my prescriptions. I still paid for those expenses on my credit cards (for the points), but YNAB made it concrete and prevented me from overdoing it. If I bought groceries on my credit card, for example, it moved my money from my theoretical grocery "envelope" to my credit card bill "envelope." And if there was no money left in my "fun money" category, I'd have to wait until my next paycheck came in to do something fun. I finally felt in control and like I knew where all of my money was going every month, forced to live within my means.

Another thing YNAB forced me to do was to start saving for my "true expenses" aka those non-monthly expenses that you know are going to eventually come up, but not exactly when. Example -- a car repair, a veterinary visit, or a clothing purchase. Even though I didn't know the precise amount I was going to need eventually, I started putting away about $90 a month for car-related expenses, $50 a month for veterinary expenses, and $40 a month for clothing. I also created an emergency fund for REAL emergencies that are actually unpredictable (regular car maintenance doesn't count). A few months in, I had saved up close to $500 for auto expenses. When it came time to get my regularly scheduled maintenance, I was prepared for the fact that it might be more than the $50 oil change I was expecting. It came to $250 and paying for it was a breeze because I already had money sitting there for this specific thing. I was no longer deluding myself into thinking that my only expenses for the month would be rent, utilities, car insurance, groceries, gas, and anything I wanted to do for fun and planning around that. I was accepting all the irregular and necessary expenses that will of course come up and planning for them. Again, this forced me to live within my means.

And one thing I love about YNAB are the fancy charts and reports it produces for me. I love tracking my net worth each month and watching it creep up. I love tracking the percentage of my income that I'm saving and investing. It helps keep me motivated even when my FIRE number is really far away. That was an added and unexpected bonus.

Do you like YNAB? Do you think it's a good tool for FIRE? What other personal finance software do you use?

Note: YNAB has a book that explains its methodology that I can't endorse, since I haven't read it. I've found their free YouTube videos to be very helpful.


Hi, I'm Brigid Friedman

A young lawyer's honest journey to (hopefully) financial independence.

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