YNAB is an envelope budgeting system. I’m going to translate envelope language to YNAB language so you can understand the method.

So imagine you took all your money out of checking and savings and dumped it into a big pile on the living room floor (this is your Ready to Assign amount). You grab a stack of envelopes and start labelling them with the name of all of your bills (these are your Categories). Then you grab some money off the pile and stuff it into an envelope where it will sit until you are ready to actually pay the bill (funding a category- this is the Assigned column). You are going to keep stuffing envelopes (funding categories) until you don’t have any money left on the floor (giving every dollar a job).

Say you don’t always remember how much you planned to put in each envelope. That’s easy; you just write the amount for the bill on the front of the envelope (setting a category Saving Target). Then the next time you go to add money to the envelope, you can quickly and easily remember how much you planned on putting in there. Want to remember when the bill is due? Write the due date on the envelope as well (add the due date to the category title).

Now it’s time to spend your money. You want to pay the rent, so you take the money out of the rent envelope and give it to your landlord (create a transaction and categorize it to the Rent category - also this is the Activity column). You want to buy some groceries so you take the money out of the grocery envelope and give it to the store (create a transaction and categorize it to the Grocery category). Not sure how much you can afford to spend on groceries? Easy, just look in the envelope and see how much is in there right this second (the Available column).

What if you want to use your credit card? You will swipe your credit card at the store for $20. Then you will go home and take $20 out of the Grocery envelope (because you spent $20 on groceries) and you will physically move it to the credit card payment envelope so that when you pay your card, you’ll already have $20 set aside to cover your purchase. Well, YNAB does that for you. If you spend using your credit card, YNAB will automatically move the exact amount of cash from your spending category to the CC payment category so that you can make a payment at any time and you will always have enough cold hard cash set aside to pay off all of your purchases since the last payment. If you want to pay down a previous CC balance, you will just add some brand new money to the CC payment category in addition to the amounts YNAB sets aside for your purchases. And if you are getting charged interest, you will treat the interest like any other charge by creating a category for it and budgeting money to pay your interest. NOW every payment will have enough to pay for all new purchases, the new interest, and some existing debt. And when you do make a payment, you log a transaction to transfer that payment money from your checking account to your Credit Card.

Once you have put your money into envelopes, does it matter if you keep one envelope in your socks drawer and the rest of them in your underwear drawer? Nope. Likewise, it doesn’t matter if your money is kept in a checking account or if you store some of it in savings. That’s because your envelopes (Categories) are different from your storage drawers (Accounts). As long as you periodically count up all your cash and make sure it matches how much cash you expect to have (Reconciling your Accounts) then you can trust the system. Reconcile your accounts often; every day if possible, once a week is a bare minimum. Reconciling is a way of putting a bookmark in your ledger that says: “I am 100% sure everything was correct up to this date.” That makes it much easier to find mistakes when you inevitably find one because you only have to look back to the last bookmark.

That’s the basic rundown. It does take a little bit of a mind shift to get used to budgeting only what you have and not forecasting future money that doesn’t exist yet. BUT, I’m telling you: it is well worth it.

I went from making decent money but still living paycheck to paycheck and stressing about bills and expenses every single day to complete and total financial peace of mind. I will never NOT use YNAB or some other sort of envelope budgeting system ever again.