Forecast in YNAB

What is forecasting?

Many people ask about YNAB’s forecasting capabilities. Before addressing how to use YNAB to look forward, though, let’s look at the difference between forecasting and budgeting.

When you hear about budgets in the news, the discussion is typically focused on preparing and planning for the coming year ahead. At YNAB, we don’t think of that as budgeting, for one simple reason: the money isn’t there yet to fund those “budgets”. Instead, that’s what we call forecasting. Forecasting is looking out into the future to see what might happen. It’s about projection, looking forward, and what you do with money that’s not here yet.

Budgeting, on the other hand, is what you do with the money you have. It focuses on the present.  It’s making a concrete, realistic plan for the dollars you have in your possession.  That distinction is very important.

People who want to forecast have great intentions and their goals are certainly worthy.  They are typically trying to:

  • see where things will be financially at a certain point in the future (a year from now, 6 months from now, etc.);
  • make sure that they’ve considered upcoming expenses and that there will be enough income to cover those expenses;
  • make sure they don’t miss any bills.

This article will provide some strategies you can use in YNAB to help scratch that forecasting itch.  But first, let’s talk about why budgeting (the YNAB way) is the most important activity to focus on.

Why budgeting is better

Working with the money you have right now gives you crystal clear focus.  If you only have $500 on hand to last you until the next paycheck, the single best thing you could do is plan what to do with that money. Look at this budget:

All $500 of my dollars have been given a job.  I can trust this budget.  This money is in the bank.  As long as I make spending decisions by checking the category balance in the budget, I’ll be fine.  No, I couldn’t budget the entire month, but I’ll add to this budget when I get paid again.  At least this way, I’m dealing with reality.
Now let’s imagine that instead of budgeting just the $500, I “forecast” the entire month:

I budgeted $3,160.  But I only have $500 in the account.  How do I know what those $500--the ones I actually have--are supposed to do?  Which categories are more important?  What has to be done right now?

Some of the most important shifts in becoming a successful budgeter are learning to work with the money you have, prioritize, and base your decisions on those priorities. The YNAB software and the methodology are built to help you do these things. Adding in money that’s not there clouds your vision and leads you to lose focus.  You’re not prioritizing.  Further, you can’t trust the budget anymore. If you spend according to those budget category balances, you’ll overdraft in a hurry.

Look at the first screenshot again.  Doesn’t that look simpler?  More manageable?  That’s a benefit of  budgeting based on reality. You can handle that, right?

But my paychecks are always the same.  Why can’t I just go ahead and budget for the year?

You may know your income for the year, but that doesn’t mean you know all your expenses.  When budgeting, you have to consider both the planning and the actual spending.  Sure, some expenses are fixed, but not all.  Ask yourself:

  • When will the car break down again and how much will it cost?
  • When will the dog need to go to the vet and how much will it cost?
  • What is the dentist going to find at the kids’ next check-ups and how much will it cost?
  • What will you spend on groceries this year?  (Notice the question was “spend”, not budget.)

There are just too many things that we can’t know because we can’t predict the future. When you forecast this way, you tend to slip into assumptions based on an ideal budget.  That “ideal” budget may not match reality when it arrives--in fact, it’s unusual to have even a single month turn out exactly as we planned.  In this way, forecasting allows you to deny your real spending as you continue to strive for ideals that may not be realistic.

A YNAB Budget is built on the idea that our predictions are most accurate in the immediate future. Start by budgeting what you have now and just answer one question: “What does this money need to do before I get paid again?”  Answer that, and you’ve won the most important battle.

So how can I plan for the future?

We’re not opposed to looking forward. In fact, there are several things you can do that will help you plan for and reach your goals for the future. Here are four that are built right into the software and method:

  1. Work towards living on last month’s income.  With Rule Four in place, you’ll be a month ahead.  You can budget for next month and know that money is in the bank.
  2. Start working on future expenses with the money you have now.  If you know a bill is due in 3 months and it will be $900, you can budget $300 each month when you are paid and have the money available when the bill arrives. Rule Two will get you there!
  3. Use the scheduler to enter future transactions.  Once your transactions are in the scheduler, you can sort by date and see what bills are due next.
  4. Add the total amount you want to budget to the name of the budget category.  This allows you to compare where you are in reality (the budget column) against what you’re shooting for.

Want to look a little bit farther ahead and play with scenarios that might impact your budget? Here are two ways to do that without entering money that you don’t actually have:

1. Have a target budget that you’re shooting for and set those target numbers in the next month.  For example, if it’s March, go to April and budget the entire month.  If you are still living paycheck to paycheck, you will be over budget because no money has arrived yet for next month.

There’s no danger that I’ll overdraft in April--it’s not here yet.  I can look at the budget column in April and see how close March is to those numbers.

The other benefit is that YNAB is now forecasting.  In the example above, I’m over budget in April by $3160.  YNAB is saying, “That’s how much you need to bring in to make April’s budget numbers work.”

The important thing is that I’ve kept things real in the current month.  I’ve only budgeted what I’ve got so I can trust my budget.  This helps me make that shift in thinking so I’m making spending decisions by the budget category balances, not the bank balances.

2. Quick Budget allows you to copy the budget numbers from one month to the next so you can use that feature to play out future scenarios.   In a matter of moments, you can budget the next six months. This is especially realistic if you Quick Budget based on an average of past outflows. You’ll see what you need to bring in during those months to make those budgets work. You’ll see how your category balances will grow in different areas.  You’ll get a snapshot of what the future “might” be.  When you’re done, use Quick Budget again to bring the budget back to zero.  Keep your eye focused on the present and making sure the money you have now does what you told it to do.

Can’t I just enter my future paychecks now so I’m not over budget?

Some people do this and even go so far as to enter a fake account in which to place future paychecks. While it seems harmless at first, we advise against it.  When you do that:

  • You’re not working with real money, and that means you don’t make that shift in thinking to focusing on what you have right now.
  • Your YNAB accounts should mirror your real world accounts. It keeps your life simpler and allows you to address spending habits honestly.  
  • When you create accounts that don’t exist, you’ve broken the mirror.  You can no longer trust the budget. You’ve entered false information, so you have false data.

We know it’s important to look to the future financially and YNAB offers a number of ways to help you do that. We think the best way to do that is to start planning for the future right now with the dollars you have.

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