Budget Mastery: Creating a Defensive Budget with YNAB

The goal of budgeting is to give you insight into how you are spending and saving.

I've been using YNAB (You Need a Budget) for a while, and it has allowed us to aggressively pay off our debt that would have been more difficult if we didn't use their software. Since we've become consumer debt free, we are now in a transitional phase to create a solid financial foundation that will hopefully give us a strong start next year.

Each of us is in a different spot on our financial journey. You might be trying to pay off debt, or are at the stage where you are seeing your net-worth rapidly increasing every year. In either case, having a solid picture of your spending habits will give you deep insights into what is going on.

Creating a defensive budget will help make sure you are on track. It isn't necessarily about limiting yourself, or not spending a certain amount in a budget category. Everyone's budget is going to look different and will change over time. But the idea is the more you can set yourself up for success, the more likely you are to make progress towards your long-term financial plan.

Defining your Ultimate Goal

It's going to be hard to manage your budget, or even be motivated to think about the details unless you are pursuing some kind of long-term financial goal.

You don't have to necessarily need to have 100% of the details of your ultimate goal figured out. But the more you can define and make clear what you are shooting for, the more likely you will be motivated to pursue those dreams.

If you are married, this should involve talking to your spouse about what their dreams are too. Because if you are going to be successful, it is going to require everyone on the team to be generally on the same page. Otherwise, one person might feel limited or held back with what they want to do. And that's going to cause stress and strain in your relationship.

Your ultimate financial goal should be the fire to help motivate you in figuring out a budget plan that will work best for you.

The Power of your Budget is in Your Plan

Instead of having your spending dictate what happens with your money, it's better to think about how you want to use your income to pursue your dreams.

If I just lived life spending however things unfolded, with whatever comes to mind, we are going to waste a ton of money. Especially if you are married and have kids, it's very easy to justify going out to eat for every meal. Or spending massive amounts of money at Costco.

If you want to aggressively pursue financial independence, the more detailed you can make your plan, and constantly think about that plan, the more likely you are going to make the progress you want to see.

And your budget plan isn't just focused on the future. It is also responsible for making sure you can enjoy life with where you are at now. This is going to be very relative to each person, and you want to make sure you aren't being overly excessive. The goal is to balance your future priorities with your life right now.

Making your Budget Livable

We are all going to have different perspectives in what areas we want to cut back, and which budget categories we want to expand. There are no right or wrong answers.

But creating a defensive budget requires thinking about what is livable for you and your family (if you have one). You might be able to make do with the bare minimum for your grocery spending, while others will want to have more wiggle room.

You don't want to find yourself constantly miserable and feeling like your budget is holding you back from everything you want to do in the present. In order to stick to a plan, you have to be able to enjoy life. Otherwise, it will not last. With that said, there are some things that I “think” I want now, that won't add to my life. So it becomes figuring out a healthy balance and getting to the bottom of what ultimately makes you happy.

Is it worth being completely miserable for 10-years to reach FIRE (financial independence, retire early)? Some people might say yes, but I don't like the idea of being miserable (on purpose) for long periods of time. I don't want to sacrifice too much of the present for the future, as that is time we won't be able to get back.

A defensive budget is thinking about how to optimize your life enjoyment now, and also push forward on your financial vision. They don't have to be mutually exclusive. There are some ways you can spend money that adds great value to your life. And other ways where you see little or no value. The key is figuring out which is which in your budget, and making adjustments.

Be Willing to Adjust Your Budget

Most people aren't going to be able to create a budget plan and 100% stick to that plan for multiple years. There are going to be times when you will most likely want to adjust how much is in each category.

Maybe you know a month is going to be extra difficult, and you want to go out to eat more. Unless you go crazy, doing this shouldn't have much of an effect on your long-term financial plan.

The goal of having a defensive budget is to make it as realistic as possible. Don't be as rigid as a rock. Figure out what amounts are comfortable for each budget category, and adjust as necessary.

We have two allowance categories we give each other that we use to spend however we want. The amounts in these categories have changed over time. At times we've cut this back, and others we have added more funds. This flexibility has allowed us to change based on what is happening during each phase of our lives.

Creating Margin in Your Budget

Since we use YNAB to manage our budget, we implement a zero-based budget. At the start of every month, we figure out how much to put into each category. But sometimes we don't know 100% exactly how the month is going to turn out. There are a few ways to handle this:

  1. Add margin to each of your spending categories. So if you think you want to generally spend around $400/mo on groceries, you might increase that to $450 or $500.
  2. Set each budget category to how much you want to spend, but create a general category that you can dip into when needed. We call this budget category in YNAB our “rainy day fund”.

Each option has its' pros and cons. I like option #1 because you should eventually see the budget category balance carry over some amount of money every month. The negatives of option #1, however, are that if you have a tendency to spend money that is available, you might end naturally spending it all every month.

The benefits of option #2 are that your goal is to keep your budget category amounts as accurate as possible, but provide some wiggle room with your rainy day fund. That way if you end up overspending in a specific category, you can easily transfer money into that category with cash that you have in your budget.

At this stage, we are trying to implement both options in a way. We are adding some margin to each budget category, and also maintaining a rain day fund that we can tap into if needed. A benefit with this approach is that sometimes unexpected expenses pop up, and this makes sure that in most cases, we will always have cash available to handle the expense in the current budget. The rainy day fund also provides somewhat of a “safety net” that will protect us from dipping into our emergency fund, unless it becomes absolutely necessary.

Doing this allows us to be aggressive with our saving goals, and be able to transfer that money on the 1st of the month. It's hard to balance figuring out how much margin or what amount in our rainy day fund is too much, but we expect to tweak this over time.

Avoid General Spending Budget Categories

For most of the time we've been using YNAB, we had a budget category called “groceries” that we used for everything we purchased at the grocery store. This included toiletries, medicine, laundry detergent, and cleaning supplies. But some months it felt like our grocery fund was too tight, especially when we ran out of some necessities like laundry detergent and toiletries.

This added extra stress on our relationship because it made us feel like we didn't have enough money to get the groceries we needed, especially during the 2nd half of the month.

A few months back, we decided to separate our grocery fund so that budget category was 100% dedicated to money spent on food. There are a few benefits to this approach:

  1. We get a more accurate picture of what we are spending on “food” at the grocery store.
  2. The amount of money we are spending on toiletries, dishwasher + laundry detergent, etc. is more easily tracked.
  3. We increase our chances of not 100% depleting our grocery fund.

In the past, our grocery budget has been what we struggled with the most. It's much easier to iron out other categories, like fuel, insurance, date night, etc. mainly because we aren't dipping into those funds as frequently and those amounts are consistent from month to month.

A defensive budget is about giving yourself access to as much info as possible, so you can make educated decisions. The more you can break things up, the more insight you will have in what is going on from month to month.

This perspective will probably mean you have more budget categories to manage. But once you get things set up, and get used to organizing your transactions into the correct budget categories, the easier it becomes.

Plan Ahead

Budgeting can be difficult if you aren't planning for usual expenses. These could include regular insurance premium payments, replacing your car, or replacing other things that break in your house.

You aren't going to know 100% on everything that needs to get replaced until it breaks. But some items are more obvious than others.

A good example of this type of expense is car maintenance costs. Eventually, you will have to take your car in for an oil change, replace the tires, and other normal car work. Setting aside an amount every month in your budget will make it easier to handle these expenses as they come up. Having a medical category, especially if you have kids, is another example of creating a defensive budget.

The more you can prevent yourself from being surprised when bills/fees come in, the more likely you are to stay on budget and be able to avoid credit card debt. It will make your financial life less stressful and more enjoyable, and you are more likely to stick to your general plan.

Income Fluctuations

If your income fluctuates, you'll need to pay closer attention to your budget. You might decide to withdraw your savings or extra debt repayments towards the end of the month when you already have received this income.

If your income is fairly consistent, budgeting is easier. But that doesn't mean it is impossible if every paycheck is different. You just need to figure out your base expenses to survive, and how you will use and plan for the extra funds.

If you can get a month ahead of your budget, which means by the 1st of the month you already have the cash in your account for that month, this will make budgeting easier. That way you know how much cash you have to work with, and can plan using the income you've already received. Even with a fairly consistent income, we find this has simplified our budget process. We no longer have to time bills to paychecks, since everything is in the account by the 1st of the month.

It takes work to get to a spot where you can be 1-month ahead of your budget, but it makes budgeting a ton easier. You also get the added benefit of having one month's worth of expenses in your account, which you can include as part of your emergency fund calculations.

Don't Lose Hope

Budgeting should give you peace of mind that you are on track with your long term plans. Sometimes this means adding extra funds to cover vacations or special scenarios (like saving for a car replacement).

If you are feeling dragged down by your budget, I would challenge you to think about why that is happening. Are there certain categories that are too tight? Is your partner not on the same page with how much they want to spend in a category? Do you have enough discretionary money to buy things you are interested in? It becomes a balance of giving and taking to figure out a happy medium that allows you to pursue your goals and to enjoy life now.

The perfect balance is you don't feel too restrained, but you are also limiting wasteful spending on things that don't add value to your life.

Progress is the Ultimate Budget Motivator

When you are just starting out, or are paying down debts, it can be easy to lose motivation. If this is the smart move, why doesn't it provide positive feelings?

It's true that in the early stages where progress isn't as obvious, that it can be hard to see the benefit of your choices. But once you start to make progress on paying off your debts and increasing your net worth, the positive feelings of progress will start to show up.

For example, we are still currently building our emergency (as of the time I am writing this article), but we are already seeing our balance earn significant monthly interest from our high-yield online savings account. Last month we earned $8 in interest. This month and next month that amount will increase as we continue to fill our emergency fund. This is money we didn't have to work to earn! It isn't a huge amount but compared to paying interest charges on our credit cards, it is a life-changing feeling.

As we continue down our financial path and focus on being defensive with our budget, these feelings will increase. Know that over time, you will start to see the fruits of your labor!

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