Update: YNAB 4 has been released with significant enhancements to the software. Reader our detailed YNAB 4 review for more details.
I’m just going to get this out of the way right now—YNAB 3 is an awesome budgeting software tool. And at the “tender” age of 43, it takes a lot for me to use the word “awesome” in public.
We’ll get to a full review of YNAB 3 in a minute, including some of its downsides, but first a brief story. Budgeting and I have had a love/hate relationship for years. While I love knowing where my money is going, I hate the actual process of budgeting. I’ve used every tool imaginable—Quicken, Microsoft Money, pen and paper, Excel, envelopes. I always start with the best of intentions, but after a couple of weeks, I find myself ignoring the budget. Ditto with dieting.
YNAB 3 won’t totally solve my motivational issues, but it will help. It will help because it’s easy to use, is great at what it does, and is fun (at least as fun as budgeting can get). And I think it can help you, too. So let’s dive into the software.
What is YNAB 3?
YNAB 3 (YNAB stands for You Need A Budget) is the latest major version of a budgeting software system built by a regular guy, Jesse Mecham (there he is with his family on the left). In fact, YNAB started out in 2003 as a system for Jesse and his wife to manage their own money, not to start a business selling budgeting software. The fact that Jesse is a certified public accountant no doubt helped him build a system that really worked. As he shared what he was doing with friends and family, and as they saw the positive financial results that YNAB was producing, they wanted to use the system, too.
And YNAB was born. YNAB in its current iteration (version 3) is a software budgeting program that will enable you to better manage your money. It’s designed around four core financial principals:
- Rule One: Stop Living Paycheck to Paycheck
- Rule Two: Give Every Dollar a Job
- Rule Three: Save for a Rainy Day
- Rule Four: Roll with the Punches
I’ve started using YNAB 3 to manage our finances, and below I’ll share my experience thus far. As I often like to do with any review, let’s start with the downsides of the software.
What are the downsides of YNAB 3?
For starters, it’s not cheap. YNAB 3 costs $59.95, which is a lot of money when you compare it something like Mint.com. The upside here is that the data and software are on your computer, not some third party site like mint.com. (YNAB is also a much better budgeting tool than Mint, but we’ll get to that in a minute.) In addition, YNAB offers a 7-day free trial of the software, which gives you a chance to use the system before deciding whether to buy. That said, YNAB 3 is for those who are serious about improving their finances. If you are fed up living paycheck to paycheck and want to make a change, YNAB 3 can help. If you are not serious about improving your finances (maybe you haven’t hit bottom, yet), than this budgeting program is not for you.
Second, YNAB 3 does one thing—budgeting. If you want a system to track investments, real estate, taxes, etc., you’re better off with a program like Quicken. But if your focus is to stop living paycheck to paycheck, nothing works better than YNAB 3.
Finally, be prepared to spend at least one hour learning the system and setting up your accounts. I don’t know that this is really a downside, as much as it is setting expectations. YNAB has put together a series of video tutorials that make learning the system and setting up your budget a snap. But you need to spend the time to get YNAB 3 up and running the right way. Once that initial investment of time is over, maintaining your budget is quick and easy.
Getting Started with YNAB 3
Setting up accounts and a budget in YNAB 3 was really simple. We created four accounts: checking, one credit card, a cash account, and a line of credit. Creating an account literally takes about 30 seconds. You simply click the “add account” button (it’s easy to find) and in the box that appears enter what name you want to give the account, the current balance and date, and then select an account type. We set up our four accounts in about two minutes.
With the exception of the cash account, we then downloaded our transactions right into YNAB 3. The process here is simple, too. We logged in to each account to download our transactions for the month. We used the Quicken file type, which is recommended by YNAB. In each account screen, there is an import button at the top of the screen that allows you to select the downloaded file. The import took just a fraction of a second to complete.
Once you’ve downloaded your transactions, you have to categorize them. And to do that, you have to set up your budget categories. YNAB 3 comes with a budget and categories already set up, but you can customize it to suit your needs. I found that I needed to add just a few categories. YNAB organizes its categories into master categories that can each hold any number of categories. The master categories help you organize your budget. I generally try to keep the number of categories to a minimum.
YNAB had put together an excellent Getting Started video that is a must to watch. It’s only 15 minutes, and it walks you through in more detail how to set up YNAB 3.
What Sets YNAB 3 Apart
So far, YNAB 3 sounds like every other budgeting software available. You create a budget, set up your accounts, and download and categorize your transactions. So what’s so special about YNAB 3? There are several things that set YNAB 3 apart.
Getting Ahead: YNAB 3 is designed to help you stop living paycheck to paycheck. How does it do this. First, as you budget for the current month, any extra money left over goes to what YNAB calls a buffer. So if you have $250 left at the end of the month, that money will show up as your starting YNAB buffer for the next month. The goal is to get to the point where your buffer is sufficient to handle all of your expenses for the next month.
YNAB takes this concept a step farther. Let’s assume that you’ve budgeted $500 for groceries one month, but spent $550. How do you handle the $50 you spent over your budget? In YNAB 3, with the click of a mouse, you can choose to have this $50 subtracted from next month’s grocery budget or have it reduce your buffer for next month. For a category that gets used monthly like groceries, we deduct it from our buffer. For periodic categories (e.g., gifts, car repair, insurance), we deduct from the next month’s category.
This feature alone sets YNAB apart from just about every other budgeting software we’ve reviewed. That said, we no longer live paycheck to paycheck, so as important as this feature is for those rebuilding their finances, it wasn’t all that important to us. What is important to us is how effective YNAB is at allowing us to manage our money, which brings me to the next observation.
YNAB is easy to use: The program is very intuitive, and the user-interface is wonderful. I particularly like how the program shows you three months of budget at one time. This is important because how you spend you money this month will affect your budget next month. Here’s a screenshot of a YNAB budget (click image to enlarge):
And once you set up your budget the first time and categorize your transactions, the program becomes even easier to use. How? First, it remembers how you categorized each transaction, and automatically categorizes the same transactions the same way. You can override the category YNAB chooses, but most of the time it gets it right. Second, with the click of a button, you can automatically fill in the current month’s budget amounts based on last month’s budgeted amounts, actual outflows from last month, average total outflows from the past 2 months, or the total scheduled outflows for the current month. You also have these same options on a category by category basis.
Likewise, the account register is intuitive and very easy to use (click image to enlarge):
And YNAB 3 offers plenty of reporting and graphs to help track your progress. You can even add your assets to YNAB and track your net worth (click image to enlarge):
Pop-ups: Hover over just about any item in your budget, and a pop-up appears with information about that item. For example, hover the cursor over the grocery outflows for the month, and a pop-up appears listing all of the transactions that are represented in that category. And if you click on any one transaction, YNAB takes you to that transaction in the register.
For such a “simple” program, YNAB has just about every feature you could want in a budget tool. I’ve not covered every feature here, but there are a two things you’ll want to do if you give the program a try.
Credit Cards: Handling credit cards in any budget program can be a bit tricky. How you account for credit card payments will differ depending on how you use your cards. For example, if you have a card with a balance that you are not using anymore, you’ll want a budget item with how much you’ll pay down on the card each month. On the other hand, if you use a credit card for daily purchases and pay it off in full each month, you’ll want to download the transactions and categorize them like you would any purchase.
YNAB has put together several great video tutorials on handling credit cards that you’ll definitely want to watch.
Transfers: Sometimes we transfer money from one account to another. In some cases, these transfers are payments, as is the case when you “transfer” money from a checking account to a credit card account. In other cases, the transfer is not a payment, such as a transfer from checking to savings. Handling these transfers is easy, but you’ll want to make sure you do it right. Fortunately, YNAB has a great video on transfers, too.
I’m still fairly new to YNAB, but so far I really like what I see. As I use the program more, I’ll share tips and tricks learned along the way. Until then, if you’d like to give YNAB 3 a try, sign up for their 34-day free trial.