Category Archives: Finance

You Need A Budget

I’ve noticed that my YNAB post from 2011 has been getting quite a few views in the last couple weeks, so I figured it’d be a great time to write an updated version. In the last 3 years, YNAB has released a mobile app and a whole new desktop version, and in those 3 years I’ve learned so much from using the software. About personal investing and day to day finances, but also in a very real sense, how to be an active participant in my financial well-being. I can’t recommend this software and financial methodology enough, and I want to briefly break down what about it I find so awesome.

YNAB_logo

YNAB stands for You Need A Budget (this is a referral link to the site, same as the link I post at the end), and while I’m not in love with this product name (sorry, Jesse), it clearly communicates what the company and product is about. The methodology is anchored by The Budget, and it asserts that without a budget, you can’t gain financial independence.

This might initially turn people off, but it’s YNAB’s whole concept of The Budget that is different than what you’ve ever seen before. Before YNAB, the word “budget” made me think of strict and rigid checkbook balancing, diligent reconciliation down to the penny every day, with zero flexibility on what or where you spend your money. It sounded miserable. YNAB is the cure for the misunderstood budget.

The YNAB methodology has four rulesynab four rules

  1. Give Every Dollar A Job
  2. Save For A Rainy Day
  3. Roll With The Punches
  4. Live On Last Month’s Income

1. Give Every Dollar A Job

The main idea here is to make sure your money is working for you, and working exactly as you want it. Even if you quit reading after this rule, you’d gain a whole lot of value out of this rule. Every dollar you own is like an employee in the company of You. If you don’t give every employee a job, you aren’t gaining the most efficiency out of your workforce. Some employees are taking too many breaks, or going home early, or too many are focused on one project. Following this rule basically means assigning every single one of your employees/dollars into a budget category, like rent/mortgage, car payments, groceries, fun money, Christmas presents, retirement, etc. Once every dollar is assigned to a category, you know where they all are and that they are all doing what you want.

2. Save For A Rainy Day

This rule is about being more forward-thinking in terms of your financial life, but in a slightly short term way. Car insurance bills are a perfect example of this. Most people pay their car insurance premiums every six months. If you aren’t using this rule, the month this ~$500 bill comes due is going to be stressful, because out of nowhere you’ve got to find $500 in your budget that you normally don’t have to put towards insurance. With this rule, you see this bill coming down the road six months out and split it up accordingly. $85 once a month for 6 months is a lot better than $500 all at once.

And that’s the beauty of this rule: “rainy day” expenses no longer cause you the same amount of stress because you’re mindful of them and have been preparing for them. This can include expenses you know are coming (car insurance) to expenses that aren’t as regular (car repair). Last month, I unexpectedly had to buy new tires for the Kia, get the power steering fixed, and replace the wipers and a brakelight. All in a freakin’ month. It put us out about $700. And I didn’t break a sweat because I’d been putting money in the car repair category, getting ready in the event that something like last month would eventually occur.

3. Roll With The Punches

This is where I think YNAB really shines. This rule is designed to keep you from giving up on your budget due to burn-out or perception of failure. Using a traditional budget strategy, when I spend more money than my budget says I’m “supposed to” on eating out or clothing or car repair or whatever, I feel like a failure because my budget is rigid and inflexible. The solution to traditional budgeting is always, “If only I had more money…” Unfortunately, more money doesn’t solve money management problems (which the makers of YNAB thankfully understand).

With YNAB, if you spend more on gas than you expected this month, that’s fine. You’ve got some options. You can either move some money from another category (ex: I drove more than I expected and didn’t buy any new clothes, so I’ll move some money from “Clothing” to “Gas”) or you can leave your category amounts the same, and YNAB will deduct the amount you overspent from the next month’s amount of money to budget. That way, you don’t start next month with a big red X of where you’ve overspent. You start that month clean, with a fixed amount of money that you’ve got to do your jobs again. It’s like a clean slate, which offers you a huge amount of freedom in how you use your money.

4. Live On Last Month’s Income

I’m realizing I like each of YNAB’s rules more than the last. So after you’ve got into the habit of Rules 1-3, you can work on what YNABers call The Buffer. The Buffer is when you’ve got enough money saved that you can start spending last month’s paychecks this month, rather than spending this month’s paychecks this month. This can be confusing, but think of it as NOT living paycheck to paycheck. Reaching The Buffer means that while you’re working/living/spending/earning money in the month of February, the money that you’re spending is what you already earned in January, and the money that you’re currently getting paid in February will sit in your checking account until you’re ready to spend it in March. Then, in March, while you’re spending what you earned in February, you’re earning money that will go towards April. Make sense? Your checking account is always one month ahead.

What this translates to is a truly unbelievable amount of financial freedom. When you get your February cell phone bill, you don’t have to wait for your next paycheck to take care of it. Since you’re spending what you already earned in January, you can knock that bill out immediately. All the strategic calendar planning of when you can pay certain bills based on this month’s paychecks can be thrown out the window. Your bills, your groceries, your fun money, it’s all been earned, and you can spend it as you need. It’s fantastic.

My previous post on YNAB included screenshots, and a much more in-depth explanation of how the software worked. I want to ease up on that, and let the YNAB site walk you through that. I want to stress that every question and doubt I had about the software was immediately alleviated once I started to use it. They’ve already thought of everything. The software is really easy to use, and with the introduction of their mobile app, tracking your spending is so simple.

Do you have a lot of debt? YNAB is set up to deal with it in your budget. Do you have accounts at several different banks, and your finances are kind of all over the place? YNAB has ways to deal with every kind of weird account you can possibly think of, and it will also provide a centralized place where you can keep track of everything.

On top of that, the software offers more reports than you could ever want. Whether you’re a budgeting newbie or a long-time CPA, the reporting function offers an easy way to look at your financial life from many different angles. It’s been a great way for us to analyze our spending and identify gaps and roadblocks on our way towards financial success.

Aside from the awesome desktop software and mobile app, YNAB offers tons of free online classes on getting started, making your budget work, how to handle credit cards, etc. Along with that, a few months back, I joined an email course (basically just emails sent to you that you can read at your leisure) on personal investing that was given by Jesse, YNAB’s founder. It was incredibly informative and broke down the previously scary/intimidating subject in an easy to understand way. It gave me the confidence to dip my toe into the personal investing waters.

And there’s tons of support online, blogs, discussion forums, help topics, direct staff contact, and it’s all free.

At the core though, this is why I think everybody should use YNAB (aside from a killer methodology and a product that backs it up): YNAB is created by people who want you to succeed financially. And it shows, through the amount of support given, to the care shown in the design of the product itself, to the interactions between staff and customers. They’ve fostered this awesome community of people who want to look at their finances differently, and you can really feel that as you start to get involved.

I’ve been using YNAB for two and a half years now, and it is the tool that completely changed my family’s financial outlook and situation. I’ve spent a lot of money in my life, and without a doubt, YNAB is one of the best $60 I’ve ever spent. I could show you screenshots and walk you through the software itself, but YNAB’s website does such a fantastic, accessible job that I’ll let you go to them for a closer look.

The link below will take you to a place where you can try a full-featured 34 day demo before you buy it. Full disclosure, if you purchase YNAB through the link below, you’ll save $6 and I get $6. Just a little perk for the both of us.

Buy YNAB and save $6!

Even if you don’t use that link, seriously, try YNAB. You won’t regret it. As Jesse tags each podcast and blog post: “Follow YNAB’s four rules and you will win financially. You have not budgeted like this.”

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What is wealth?

Disclaimer: In this post I use two links to YNAB (they have * by them) that are specific referral links, so if you buy YNAB through one of those links, you get $6, and I do too. Likewise, if you sign up for Betterment through the link I use below, I get $10 and you get $25. If you don’t want me to get extra money but want the services, simply Google either site. Moving on.

Lifehacker posted a story recently that got me thinking about finances. Actually, I’ve been reading lots of articles on personal finance, using your personal skills to make some money on the side of a normal 9-5 job, paying down debt, increasing wealth, how our society defines wealth, etc.

Let me start with the ol’ “debt snowball” that Dave Ramsey fanatics love to talk about. This is the Lifehacker story I referred to before: they’ve posted a link to an Excel spreadsheet that calculates how much money one would save (or pay in interest) and how long it will take to pay off debt that’s input into the spreadsheet. Pretty slick. Having just bought a house, I played around a little bit with it, inputting house loan and car loan info. It can show you how payments play out if you use the debt snowball method (paying off lowest debt balances first) or highest interest method (paying off debt with the highest interest rates). It’s not the perfect spreadsheet; there is a bit of a learning curve but there are a lot of comments on the spreadsheet itself that help clear everything up. I haven’t seen anything else that allows you to make these sorts of calculations so quickly, so it’s pretty handy.

And it’s downright shocking to see how much one ends up paying in interest alone, even at decently low interest rates. Personal finance company YNAB* (more on them in a second) has an extremely thought-provoking blog, and as you’d expect, they write a lot about being in debt and how to get out of debt. One of their recent blogs on debt centered around this idea that we really need to learn to hate our debt. Not in a self-shaming way, but in a way that motivates us to change our lifestyles so as to break free of the current American mindset that debt is just a part of life and something with which we all must deal. Wrong. Debt should not be a given in your life, but rather it should be a given that our lifestyles reflect that debt is bad and we need to be free of it. Ramsey’s debt snowball method is a great way to pull that off.

But what happens after you’ve broken the chain of debt? How do you handle your finances then? Are we stuck with the cash-in-envelopes method that Ramsey preaches? Another Lifehacker article recently discussed the advantages of a zero-sum budget; basically, a budget where you allocate every single dollar you own to a specific category, like mortgage/rent, gas, entertainment, clothes, groceries, etc. To be honest, I didn’t give this the most thorough read because I already live by a zero-sum budget, and I cannot stress how much it has reshaped my entire financial world for the better. I use a software called You Need A Budget* (YNAB for short…I honestly just can’t get over how horribly named this amazing product is). At it’s core, the financial strategy of YNAB is zero-sum; give every dollar a job. Assign all the money you have to specific categories with none left over. The idea being that with a paycheck-to-paycheck lifestyle, you’re paying your bills as your paychecks come in, and the “fun” spending money (or basically everything not bill-related) just stays in a checking account that you use as needed. When you give every dollar a job (e.g. put every dollar towards specific categories), you have a much clearer, holistic view of your financial state. You see exactly what you’re spending your money on, where you can cut back, and where you can afford to splurge. No dollar goes unchecked.

Needless to say, since this isn’t the first time I’ve written about YNAB, I’m a gigantic supporter of their mission and their product, and I can’t speak highly enough about their financial method. The other three rules are very simple and allow for so much budgeting flexibility that I hesitate to call them “rules.” Suffice it all to say, if you haven’t checked out YNAB, and you feel like you could use even the slightest bit of help in the budgeting department, please please please check them out! Such a fantastic program.

Heading even further into the financial rabbit hole, last spring I took an email course on personal investing offered by YNAB (for free. Again, check out this amazing product…). Very simply, they broke down the basics of investing: why invest, differences between different investment vehicles like stocks and bonds,  how to get started, etc. In the how to get started section, they discussed a few options, and one was an online financial services program called Betterment*. When I checked out the site, I was immediately hooked. It cleared away all the mystique surrounding investing and made the entire process so incredibly easy. And I believe in their investment strategy: namely, trying to “win” the market is foolishness, and the most tried-and-true way to make money through investing is a set-it-and-forget-it mentality. None of this trying to read the market or invest in the hot new stock tip. Just diversify, don’t freak out when the market drops, and be patient. This is not a get-rich-quick scheme, but rather a build-wealth-slowly method.

What else is great about Betterment? Two things: first, you don’t have to be a millionaire to begin investing with them, and they aren’t going to charge you millionaire prices. They are by far the cheapest personal investing option I’ve found, which I was happy about. So if you don’t have an extra 10 grand sitting around waiting to be invested. And second, they also have an incredible advice platform to springboard your start into personal investing. It is such an awesome user-interface and it very clearly outlines how changing certain factors (like fund allocation, amount you invest, length of investment, etc.) changes the probability of you reaching an investing goal. My words do it no justice. Please take my word for it: it is an absolutely awesome system and I highly recommend you check them out.

What I really want to discuss is this concept of wealth, as discussed in a recent post on the Betterment blog. The blog was entitled “Why You Should Live Paycheck To Paycheck.” Fightin’ words! This seems directly contradictory to everything about YNAB’s budgeting method, and on a larger scale, contradictory to what our society deems acceptably wealthy. Basically, it talks about wealth being a concept that we directly (and subconsciously) connect with comparison. As a culture, we define wealth based on what our neighbor has. Or our parents, or in-laws, or friends, or insert whoever you want. I don’t feel wealthy unless I’ve got as much as my friend.

This is an overwhelmingly flawed and backwards perspective, but it permeates our society. It’s a disease. The problem with wealth comparison is that you can’t ever win. You will always, 100% of the time, find someone who has more than you. Your friend will always have a newer model cell phone than you. Their car will be newer. And so on, forever. Now let’s go back to the living paycheck to paycheck idea. Is living paycheck to paycheck such a bad thing? The example given in the blog is a couple that both net high salaries but don’t feel wealthy cause they don’t have excess cash to spend on whatever they want. However, the details of their situation reveal that allocation is the key to this whole thing. The couple is debt free, they put money towards their main expenses, they store money away towards savings (emergency fund, retirement, down payment for a house), and the excess money is what they’re living on “paycheck to paycheck.” Yet they are plagued by this backwards point of view that if they don’t have extra money to splurge whenever they want, they aren’t wealthy.

In reality, they are much better off than the majority of Americans. They just need to readjust their perspective a little bit. Not having excess money to spend on a big new TV or a killer Hawaiian vacation doesn’t mean you aren’t wealthy, especially if you’re allocating your funds towards financial stability, both in the present and in the long-term. What I want to strive for is a concept of wealth that isn’t based around how many things I have or if my things are better than your things, but whether or not the things I do have can create a home and a lifestyle that is conducive to my values. Is my financial lifestyle consistent with my values? Often for me, the answer is no, and that’s a sobering realization to have. But it is this realization has motivated me to get away from the myth I’ve accepted that says wealth translates to a number and to work even harder on planning for stability in the future while maintaining contentedness in the present.

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You Need A Budget

About a month ago I stumbled across an online budgeting software called You Need A Budget (YNAB). Some Facebook friends had a little discussion online about it and it intrigued me so I downloaded the one-week free trial. Turns out it was pretty sweet. So I bought it. Here’s how it works.

The core principle that the program is based on is this: your budget for next month is funded by the money you make this month. This way, you know exactly how much money you have to budget and you can give every dollar a job. All too often people make their budget paycheck to paycheck (we did before we started using this program). Not that everybody that does this is scraping every last penny to get by, but it’s most common for people to budget the money they get in each paycheck for that upcoming two weeks until their paycheck. What is awesome about this finance strategy is that it eliminates any ambiguity of how much money you have to budget; what you made in November will fund your budget for December. It also allows you to assign every single dollar to a specific budget category: bills, rent/mortgage, groceries, etc. That way you see exactly where your money goes and where you overspend and underspend and you can adjust accordingly. Super great.

At this point, you might be asking, “If the money that you make this month goes towards next month’s budget, how are you supposed to start this program? Just not spend money for one month?” I asked the same question when I first researched this program. Obviously the answer is no. What is done is that you can enter in all the assets and debts you have to your name: checking/savings accounts, credit cards and lines of credit, mortgages, etc., and choose off of accounts you want to have your budget based. SCREEN SHOT TIME:

If you enlarge this picture, you can see how the main budget screen is set up. On the left column you’ve got all your accounts and assets listed, and then the main portion is your budget for November, December and January. I have no totals listed in any of these categories yet, but we’ll get there. So if you’re just starting the program, the goal is to take all the money you have in your checking account currently and budget it. Put every last dollar towards a category, so that your Available to Budget total is $0.00. The point of giving every dollar a job or a category is that it makes it easier to spend only what you actually need to spend rather than making impulse purchases, going out to eat every meal, so on and so on. And as you go through the month of November, all your paychecks will be put towards December’s budget rather than getting spent right away.

What’s great about this software and this financial strategy in general is that it accounts for real life. Not many people have one month’s salary just lying around so odds are you’ll probably overspend for the month you start. That’s alright, because the program will automatically take what you overspend out of next month’s budget, automatically adjusting your total buffer amount. Nifty huh?

Here is what the account screen looks like:

Enlarged, you can see it’s very flexible, and looks very much like most online banking applications provided by banks. You can add/edit dates, payee names, and you can put memo notes on transactions. Super important as well, you can do split transactions. So you go to Wal-Mart, spend $75 on groceries and then realize your vacuum cleaner is broken and you need to get a new bottle of Ibuprofin. No problem, when you enter the transactions, you can actually split it up so $75 goes towards groceries, the vacuum amount goes towards misc or whatever, and the meds can go towards meds. This allows you to really see where your money is being spent.

Back to the budget. Much like the overspending function, if you underspend in a category, the program carries that remaining balance over to next month’s budget. This way, if you have $50 budgeted towards car repairs each month, but you don’t have any car repairs, your amount in that category will grow each month. If five months down the line you have car trouble (and you haven’t readjusted that category’s balance to another category), you can use the $250 you have saved up to put towards the car. That’s what I love about this program. It encourages us to ease spending as much as possible so that when unexpected things crop up, we’ve got money to cover it.

So here is the budget screen again but with categories filled in. A few cool things to notice. Up in the top center, under the November ’11 tab, you can see that it shows how much income we had for this month, and how much we budgeted below. I budgeted all of it except $10, which the program will put towards next month’s buffer total unless I budget it somewhere. If I don’t, it will be there for me to budget for next month. Another thing to note is that I underspent in both the groceries and restaurants categories, and the remaining $20 in each category has been carried over to the corresponding category for next month. For December, you can see that our starting buffer is the $500 I made in November plus the $10 I didn’t budget from November, and I have $510 available to budget that I haven’t put into any categories. Good stuff.

So that’s the program. There are a lot of features I haven’t really touched yet, like credit accounts or investment accounts, and the ability to download transaction history from your bank. There is also a great online community for users who want tips on how to get the most out of the software, how to budget intelligently, how to handle debt, etc. Lots of great resources that I haven’t checked out.

Criticisms? The main critique I have is that it is pretty labor-intensive. I read some reviews that said the transaction downloading feature from your bank website didn’t not work as well as desired, so it was important to double check things or just add them in manually. For me personally, I enjoy the time I spend entering in totals and making sure everything balances correctly. I would also say, personal finance is important enough in our human life that people shouldn’t complain about it being too much work to balance their checkbook. It’s not as hard as it might seem. Just yesterday my boss at the bank gave me an update on my balance sheet: for the last three months, my drawer has balanced perfectly every day I’ve worked. Toot, toot.

So check it the program out at their website. You can download a week-long trial version of the software, and at the end of the week they offer you a trial extension. You actually get to choose how long your trial extension is; I asked for two weeks and they said no problem. You should try for longer!

-Jon

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