Getting Out of Overdraft
One of YNAB's fundamental concepts is to budget using only the dollars that you have right now. If your bank account is negative, though, you don’t have any money to assign to your categories.
So what do you do?
Rather than assign money you don't have, you're going to create a plan and track your spending. This will help you work your way out of overdraft. For good.
An important note: this plan is designed for overdraft accounts without a borrowing limit. If you have what we call a "permanent overdraft" where your balance is always negative, such as a HELOC, it's important to understand what limitations exist when it comes to using YNAB with that type of account. Reach out to our Support team so we can chat about the best set up!
Here are the steps you'll be taking in your budget:
Once you have a plan in place, you can start tracking your spending, and then covering it when money comes in. This will get things moving in the right direction, and with a little diligence you'll be out overdraft and headed towards taking control of your money.
Create Your Plan
The first thing you'll want to do is to create a plan by adding your expenses into categories and setting up target amounts. Targets tell your budget how much you want to dedicate to a given expense. The more detailed you can get, the further you'll think ahead and the easier it will be to get on top of your spending. If you haven't fully thought through your categories and added targets to each one, do that now! Its okay if you can't remember each expense - you can still add categories as they come up - but the more you can plan for, the better.
- Create a category and target for each of your expenses.
- Create a repeated scheduled transaction for each bill. This is helpful to do even when you've already set up targets, because you'll get some additional information about the scheduled transaction within the Budget category.
- Now it's time to consider how realistic your plan is. With no categories selected, look at the Underfunded amount in the Inspector, which is what we call the right side panel. That's how much money you would need to fund every category that you set a target or scheduled a transaction for. Based on your monthly take-home income, can you actually afford your plan?
If not, that's okay! By identifying that your expected expenses are more than what you can realistically afford, you've already saved yourself some financial stress. From here, proactively adjust your Target amounts until your budget better matches your income, and check it against your priorities.
At this point, your Budget should be full of useful information, even though you haven't assigned anything yet. Don't let the yellow in the Available column worry you – it's there as a guide, and will help you move forward. You'll also see the balance of the overdrafted account at the top of your Budget.
If you've made it this far, you can ignore the button that says Next Steps (you're taking those steps now!) . After you're out of overdraft, that button will change to help ensure that you're only working with the money you currently have on hand.
Track Your Spending
Once you've got your plan laid out, you're already off to a good start! If you haven't already done so, you can add your other accounts. Start recording your spending as it occurs. When you spend in your overdrafted account, you'll see red in the spending category's Available column, which represents cash overspending. If you spend out of a Credit Card account, you'll see yellow which represents credit overspending. These negative numbers are just telling you that you haven't covered that spending yet, but once some income comes in, we'll cover that spending.
If an expense comes up that you didn't anticipate in your original plan, don't fret! You're learning as you go, and thats what the YNAB method's Rule Three: Roll With the Punches is for! Add a new category that fits that expense, and then categorize the relevant transaction there. That way you'll be able to anticipate it in the future.
As you spend, your goal is to keep the negative figures in the Available column as low as possible. The less you spend now, the less you'll have to cover with your next paycheck, and the more you'll have left to assign to future expenses.
If a new month begins before you're paid again, your Available amounts will reset to $0.00 in the new month. Last month's (red) cash overspending will be summed and added to the outstanding balance at the top of your Budget, and (yellow) credit overspending will be added to the balance of your credit card. This monthly "reset" will still keep you accountable (by the red number at the top).
Assign New Money
When income is deposited into your overdraft account, it will first go to covering the overdraft debt you owe plus any fees. Record that income in YNAB as a transaction, categorized to Inflow: Ready to Assign. You'll see any remaining funds at the top of your Budget in Ready to Assign, which means it's time to give those dollars jobs! You can use Auto-Assign, or you can assign money to each category yourself. If you're doing the assigning, follow these steps:
- Budget to cover any overspending first by assigning money to those overspent categories. That money is already "spent" (or is due to your Credit Card company), and we want that to be reflected in YNAB. Be sure to stop when Ready to Assign reaches zero.
- If you have money left after covering the overspending, using the Targets you set up when creating your plan, ask yourself, "What does this money need to do for me before I get paid again?" Again, make sure to stop when Ready to Assign reaches $0.00.
Now you have a plan for the dollars you have on hand. Next time you're deciding whether or not to make a purchase, use your Budget to make that decision. Is there money available in that category? If not, and you find your priorities have changed, that's okay – roll with the punches by moving money from another category, and you'll be back on track.
If you end up going back into overdraft, lean into tracking your spending and keeping the negative figures in the Available column as low as possible. Question your spending as you track and you'll find places to cut. It's important to only spend on your most critical expenses until the overdraft is gone, so you don't end up paying money in fees that you could be using for your expenses. Seeing less red will let you know you're making progress!
Once you're paid again you'll repeat the process above. Eventually you will make it permanently out of overdraft, which is a huge accomplishment! What's next? We suggest you start getting ahead on your True Expenses, which are larger non-monthly expenses that you know are coming, and you may or may not know when. Create categories for the expenses that tend to catch you off guard (such as a semi-annual insurance payment or a car oil change/repair), and next time they come up you'll have money waiting to pay your bills, instead of bills waiting for money.
Want some personalized help?
We know getting out of overdraft can be a challenge, and we're here to help. Send us a message at any time, and one of our support specialists will assist you with your Budget. We're here to help you be successful in budgeting, so don't hesitate to reach out!