6 (More) Tips for High-Income Earners Using YNAB
Daniel is a FinTech executive in Silicon Valley and he uses YNAB to help him make better financial decisions. You can read our original tips for high-income earners using YNAB, written by Daniel’s former Junior Achievement mentee Ivan Smirnov, here.
Personal finance is incredibly personal. Your situation differs from mine, and laying the groundwork for making the right money decisions for yourself takes effort and experimentation.
When you’re a high-income earner, your financial life is likely more complex, since there are more things to track. I’m well familiar; I have 15 different brokerage accounts at seven different banks! Without a clear and easy process to stay on top of your finances, it can be tough to make informed day-to-day decisions—everything from when you should pull the trigger on which investments to determining how much to spend on date night.
To bring clarity to my expanding financial situation, I use YNAB, Simplifi by Quicken, and Personal Capital: YNAB for budgeting, Simplifi for reporting, and Personal Capital for investments. These tools give me different perspectives on my finances and make it easier to make financial decisions with my wife, Loretta.
If you’re a high-income earner looking to manage your finances in YNAB, here are six takeaways that I use that might help you too.
1. Use Tracking Accounts for Your Investments
If you have cryptocurrency, self-directed IRAs, 529s, brokerage accounts, or investments in private equity like venture capital, you can add them as Tracking Accounts in YNAB. This means the amounts aren’t added to your monthly budget, but you can track your balances to see if the results are aligned with your goals.
I find having this view especially helpful for checking in on asset allocation and risk tolerance. Knowing that I have a strong base of less volatile investments like target date funds and cash allows me to swing for the fences with a smaller portion of my portfolio.
Each month, I go through my brokerage accounts and manually reconcile with the corresponding tracking account in YNAB (Since last month, I’ve been using the iOS app to reconcile). I use fair market value when possible, or my cost basis if an estimate isn’t available (for illiquid investments like private placements). This gives me a realistic view of how much I’ve got where, together with a clear picture of their growth (or decline) over time.
2. Plan for Tax Time Punches in YNAB
If you under-withhold taxes from your paycheck, get bonuses, earn commissions, or have consulting income, tax time can be nerve-wracking. You might get hit with a huge tax bill, and it’s hard to know how much you owe until the moment you finish your tax return.
The IRS has a helpful calculator so you can forecast your actual tax bill, which I use throughout the year to make sure I’m not in for a nasty surprise. I usually check my math with my CPA just to make sure I’m not missing anything.
Once you compare how much you think you’ll owe vs how much you’ve already paid, you’ll know if you need to play catchup or not. If you need to pay more, you can set up an Additional Taxes category in YNAB to make sure you’ve saved up the right amount for tax time. You can also take the same approach for property, corporate, and self-employment taxes.
Let’s say I expect to owe an additional $7,000. I’ll add a Taxes Payable liability account of $7K, and at the same time, I’ll set up a line item in my budget called Additional Taxes that has $7K in it, ready to pay the tax bill when it comes due. This planning helps me stay worry-free come tax time.
3. Create a Next Month Category
If you have extra cash not yet assigned to a budget category, it can be tempting to leave that money at the top of your budget without a specific job. But your To Be Budgeted category should always be zero. If mine is above zero, it means I haven’t planned my money, and I’m missing out on the power of scarcity to force me to prioritize. I don’t let a day pass without assigning this cash to a budget category or transferring it to a tracking asset account. If none of my current month’s categories need extra funding, I’ll stash the extra cash to cover the next month.
Here’s how this looks in my budget: I create a Next Month budget category and park money there whenever I have excess. Then, on the first of the next month, I move all the money from the Next Month category to To Be Budgeted and assign that money.
What’s great about this approach is that I always get a high-level view of whether my monthly spend (including my true expenses and savings) is on track or not. After my Next Month category is fully funded, I’ll also plop cash into a New Investments category. Every quarter, I’ll transfer this amount to my tracking investment accounts and deploy the capital to rebalance my portfolio — effectively dollar cost averaging my asset class weightings.
You could also use these funds to make early balloon payments on a mortgage or as part of a gifting strategy to fund your kids’ education or charity. Although I could automate this by setting up automatic transfers, I prefer this method because it gives me an additional cash cushion when the world goes crazy (like it did in 2020).
Budgeting means figuring out what your priorities are and assigning your money to them, in order of importance and urgency. Since no one has infinite money (money is always scarce!), you always have to prioritize.
My wife and I both work at startups, so our first priority is funding our current month, then having a well-funded Income Replacement category. We’re always talking about trade-offs and budget observations. The transparency and visibility keeps us honest with ourselves and each other.
4. Set Aside Your Unpaid Capital Gains Tax
If you buy and sell stocks, property, or crypto, you know the headache that comes with unexpected capital gains taxes. Here’s an easy fix: I set up a category in my budget called Capital Gains Taxes Payable, and I move 30% of my gain in cash when I sell a chunk of something (most of my gains are long-term; your rate might differ). I let this build throughout the tax year so the pot of money is always ready. I also don’t deduct tax credits for capital losses, as a way to be extra safe.
5. Use YNAB to Make Decisions
YNAB gives me an enormous amount of mental comfort by providing a living, breathing plan for my cash on hand. It’s a great decision-making tool for both small daily decisions and big ones.
I fund my savings goals pretty aggressively, and I avoid stealing from them to cover day-to-day expenses. This includes pre-funded True Expenses like my vacation fund or buying a replacement car. These amounts are pretty big and take time to build up (for example, a luxury safari trip for the whole family or paying cash for a pre-owned Tesla). By the end of the month, I have to make frequent choices: Would I rather order pizza delivery or leave that $50 in my vacation fund? I’d rather leave it in my vacation fund. Easy decision.
I also keep an Overflow budget category with $500 in it for times when I forget to budget for something. I check the activity in this account each month and update my category goals accordingly. It’s so important to roll with the punches!
With YNAB, I can easily see what every dollar is for, and it’s so easy to quickly make trade-off decisions based on what’s most important to me and my family. I keep my most-used spending categories (Shopping, Dining Out, and Groceries) on the home screen of my iPhone with widgets!
6. Focus on Growing Your Savings
The primary wealth-building tool for most Americans is their paycheck—and making the most of what you earn. Sometimes, it’s more fun to talk about investments but we can lose sight of what really matters (income, spending, and saving). To me, focusing too much on investments is like trying to make a fire burn brighter by fanning the flames. This can help, but in the long-term you’re better off adding fuel to the fire by saving more rather than chasing outsized returns.
I use YNAB to make sure I’m adding logs to the fire so that it will burn brighter and bigger. Before I started using YNAB, I sometimes felt oblivious to how much was wasteful spending vs. what was truly aligned with my priorities. In my 20s when I got my first six-figure job, I also ran up credit card debt and took out personal loans to fund my excess. This meant that I lost out on growing my assets by spending on things that weren’t really important to me (in hindsight, that $7,500 43” plasma screen TV wasn’t a great idea especially since I couldn’t afford it without debt).
Today, my wife and I keep individual Splurge Fund categories in YNAB to spend on anything we want, no questions asked. We fund this $100 per month, and it does a great job of keeping us on track while also letting us act on impulse now and then. We agree to check with each other for anything big ($1K or more). This model has helped us build trust over the past 25 years.
Since I’ve started keeping a budget, I’ve seen a noticeable decrease in monthly spending—in the last two years, our household savings rate has grown from 7% to 25%. That’s mostly from tracking my money and using YNAB to make better financial decisions holistically and in an informed way.
Personal finance has more to do with your priorities, values, and individual situation than numbers and tools. If you don’t think about the fundamentals and what they mean to you, it won’t matter what tool you use. If you start slow, adopt a mindset to learn, and ask others for help, YNAB is the best budgeting tool to help you create prosperity.
Want to reach out to Daniel? He’s here on LinkedIn and on Twitter @chenthusiast.