If you’re a new user of YNAB, learning the default categories can be difficult. In this article, I want to clearly explain the difference between immediate obligations vs. true expenses.
First off, let me point out YNAB has great documentation and an outstanding blog you should check out. When I have an issue, the YNAB support site is the first place I check.
If you don’t want to browse through YNAB’s documentation, I should be able to help. I use YNAB every day and I’ve typically been able to solve any problem I’ve come across. Budgeting can be difficult at first, so don’t get discouraged.
If you don’t pay your immediate obligations, your life will suck.
That’s the key difference between immediate obligations and true expenses. Your life will seriously start to suck if you don’t budget money for your immediate obligations. On the other hand, you can usually get away with not having the money to budget for true expenses.
So, when you’re thinking about where an expense belongs, ask yourself the following question:
- Will my life start to really, really suck if I don’t budget money for this?
- If yes, it’s an immediate obligation. If no, it’s a true expense or something else.
Using that single question, we can begin to place expenses into the right categories. Let’s look at a few examples.
Do these expenses belong in Immediate Obligations or True Expenses?
For each of this, let’s ask the question: Will my life start to really, really suck if I don’t pay for ___________?
Mortgage/Rent: Yes. Immediate Obligation.
Netflix: Probably not. You can live without it. True Expense.
Internet: It depends. Do you depend on internet to work from home? Do you need internet to pay bills? Immediate Obligation or True Expense.
Car Insurance: Yes. If you get in an accident without car insurance, your life will instantly suck. Immediate Obligation.
Electric Bill: Yes. If your lights get turned off, you won’t be able to see at night. You might trip and fall. Immediate Obligation.
Home Maintenance: Probably not – at least not immediately. True Expense.
Related Reading: Beginner Budgeting Tips: Getting Started with Monthly Budgeting
True expenses should be things you can get rid of if needed.
It’s important to place things in the right categories in YNAB. If you do, you can always glance at your budget and see where you can cut spending.
Immediate obligations are typically things you can’t live without. You need to allocate money in the budget to make your house payment and keep the lights on. On the other hand, you can live without Netflix for a few months if you have to.
For certain types of bills, you may be able to place them in True Expenses. For example, with student loans and some medical bills, you can defer payments for a few months if you call your lender.
Try to be strict with what you place in immediate obligations and true expenses. Your budget is a great tool to track spending and reach financial goals. If you start putting things like Netflix under Immediate Obligations, you won’t have an accurate picture of your minimum budget for the month.
How long can your savings survive if you only pay for immediate obligations?
That’s the ultimate goal with budgeting. It helps you ask the question, how long can my money survive if I only pay for essentials? If you lose your job or suffer a different kind of emergency, you can quickly make adjustments to your budget and know where you stand.
For example, let’s say you do lose your job. You have $5,000 in savings and your immediate obligations total $1,000. If you adjust your budget and keep your spending at bay, it’s reasonable to assume you have five months to find a job.
In that situation, your money will theoretically last for five months. That can help put your mind at ease – at least a little bit while you search for a new job. Without a budget, you won’t really know until you run the numbers.
Related Reading: Conflict Free Budgeting for Couples: 5 Steps to Avoid Money Fights
Remember, immediate obligations are things you must pay in order for your life to not suck. True expenses, on the other hand, can be avoided if an emergency pops up.
You should be proud of yourself for showing interest in setting up a monthly budget. Budgeting is a tactic used by the majority of millionaires. It’s something you need to do to keep an eye on your spending.
Living below your means is important when you’re trying to build wealth. Budgeting helps prove to yourself that you’re actually doing it.
If you’re just getting started with YNAB, I recommend taking a look at YNAB’s getting started guide. Reading as much as you can about YNAB will teach you the ways of the envelope budgeting system and get you started on the right track.
Try not to get discouraged. Budgeting isn’t always easy depending on your situation and your background. If you stick with budgeting, you’ll eventually learn and get a handle on your finances.
And by the way, if you ever need any help, feel free to send me an email.