How to manage cash flow: YNAB's Four Rules
As you know by now, cash flow management is the first step and foundation to financial success. There are as many ways to manage cash flow as there are people in the world, from spreadsheets to "carrying it around in your head", but my personal favorite is a budgeting app called, directly enough, "You Need A Budget". What sets YNAB apart isn't just the stellar customer support or the ever-expanding feature set, but the cash flow management framework that underpins the whole thing. They call it the Four Rules, and it might be the single best cash flow management system out there. (And no, I have no association with YNAB. I think it's the best cash flow management system out there.)
Before I get into the Four Rules and why they work so beautifully, let me make a caveat to the comment I made above. I said it might be the single best CFM system out there. This is a critical distinction! I can tell you right now that there are plenty of folks who just won't be able to wrap their heads around it. It's not that YNAB is complicated; it's just that it requires a certain mode of thinking. If it's not something that resonates with you, it likely won't work. Kind of like trying to switch between macOS and Windows, you'll find yourself not being able to do stuff that you want in a way that makes sense to you. And that's OK! The best CFM system is the one that you use.
That said, if the following Four Rules do make sense to you, I highly recommend giving YNAB a look.
Rule #1: Give Every Dollar A Job.
The common term for this idea is "zero-based budgeting", and it's the same idea as in Dave Ramsey's method. The idea is simple: take the money that you have and assign each dollar a budget category. Keep going until every dollar you have is in a category.
YNAB itself makes it very easy to do this: you just move money around in virtual envelopes until all the money is allocated. And if you change your mind, no problem -- just move the money again!
Now, the temptation will be to stop once you run out of categories or dollars, rather than giving every dollar a job. Don't do it! If you run out of money before you run out of categories, don't just assume your credit cards will take care of the rest "until you figure something out". Get creative and figure something out now! (Dave Ramsey's books are a great resource in this area.)
And if you run out of categories before you run out of money, you'll be tempted to just leave the money there "for when you need it". Don't do that, either! Think creatively: is there something coming up that you're not saving for? This leads us to...
Rule #2: Embrace Your True Expenses.
When you're going about giving every dollar a job, you need to remember that some jobs need doing now, while some need doing later. Are you saving up for Christmas? Your next vacation? Your next car or home maintenance bill? Heck, your next car or home? Do you have an emergency savings fund set aside?
YNAB handles this by allowing you to accumulate money from month to month in its virtual envelopes, in the straightforward manner you might expect. (We'll talk about what happens if you overspend from an envelope in the next rule.)
People I know who have truly embraced rule #2 start experiencing something I call the "YNAB Effect". When they look at their checking account, it seems...weirdly high. Like, "why am I keeping so much money in checking?" high. So they go back and look at YNAB, and realize that while it may seem high compared to what you're used to, every dollar in there is actually accounted for, between the normal monthly expenses and the aforementioned infrequent-but-major expenses covered by Rule #2.
This leads to an interesting side effect: in order to properly account for this, you have to stop using your account balances to figure out whether you can afford something. Rather, you're forced to use your budget. Do I have enough money in the category? Or is there money in another category I'm OK with moving? If not, then it doesn't matter how much is in checking.
And in fact, the phrase "can I afford this?" becomes meaningless. Rather, the question becomes, "is it in the budget?" In other words, have you made an intentional choice to sacrifice other things in order to make purchases in this category? This is a much better question to ask!
Rule #3: Roll With The Punches.
Wanna know a dark secret? Every budget is wrong.
Yep, every single one. You'll over-allocate in one category and under-allocate in another -- perhaps massively. For example, let's say you just started using YNAB and you're hit with a massive car bill. What do you do then? You roll with the punches.
Other budgeting programs might record a negative balance in that category, and you would sort of "pay off the debt" over time. YNAB doesn't allow you to do that. Rather, you're strongly encouraged to cover overspending with money from other categories. When the next month rolls around, if an envelope is still "in the red", that envelope's balance is set to zero, and the amount overspent is taken "off the top" from the total you have available to budget.
This is by far my favorite way to handle category overspending. Each month, you start with a "clean slate", but you're still only spending money you actually have!
Rule #4: Age Your Money
This rule used to be called "live on last month's paycheck", which was a lot more intuitive, even if it was slightly less than accurate for some people.
The idea here is to stop living paycheck-to-paycheck, to have a bit of "buffer" between you and the slings and arrows of financial fortune. Ever had a stressful day of hoping a check you wrote doesn't clear before your direct deposit does? This gets rid of that. You don't have to time bills with paychecks, because you're living off of money you've already allocated. You don't have to so much as look at your checking account more than once a month, because you know you have enough "padding" to handle the natural fluctuations that occur in the meantime.
Resources -- and inspiration
If you'd like to learn more about the Four Rules, check out YNAB's guide. They've got a whole slew of resources on their site, from free workshops to videos and everything in between.
You might be wondering: if I have no relationship with YNAB, why write a whole article on them? Well, they were literally my first step into the world of being a financial advisor. If I hadn't mastered the Four Rules for myself, I wouldn't have slowly gathered the momentum to have the financial freedom I have today. I spend hours of my time writing blogs just because I want to!
Think about it: what would you do if you didn't have to worry about money? Use that inspiration to sign up for YNAB (or your other CFM system of choice), and start down the path to freedom!
It could change your life.