You Need a Budget (and so do I)

About a year ago I was at Smashburger with my friend Kirby. After ordering, Kirby pulled out his iPhone and entered something into it. Intrigued, I asked him what he was doing. “YNABing lunch,” he said.

“What’s YNAB?” I asked. That simple question led to me using a tool that’s had a huge impact on my life, my finances, and even my marriage.

You Need A Budget (YNAB) is unlike any other budgeting/financial tool I’ve used (and I’ve tried a bunch). From the time I started my first business in high school, I was an avid user of Quicken and Quickbooks. When Mint came out, I jettisoned Quicken and moved my financial life online. Finding myself deep in debt 10 years ago, I read Dave Ramsey’s Financial Peace, the precursor to The Total Money Makeover, which led to a decade of attempts to use the cash envelope system. But regardless of the tools, nothing helped Amy and I get on the same page about our finances and modify our behavior to actually live consistently on less than I make, until YNAB. Now, a year into the YNAB journey, we’re finally discovering the financial peace that Ramsey promised us a decade ago.

Amy and I loved the idea of Dave Ramsey’s envelope system; we even facilitated a Financial Peace University group. But because it’s built on carrying cash around in envelopes, we found it really challenging to implement in everyday life. As an example, Amy might call me at work and ask me to pick up something at the store. Chances are I would not have the “Groceries” envelope with me (it was inevitably in her purse). So I would use my “Mad Money” cash to buy milk. Then when I got home I’d try to reimburse myself out of the “Groceries” envelope, but I wouldn’t have the right change. Or even worse were the times that I had no money with me so I’d buy the $4 item on my debit card. Then what was I supposed to do? Take $4 out of the envelope and go deposit it in the bank?

I find it incredibly inconvenient in this day and age to use cash for everything. However, pulling cash out of an envelope did modify our behavior. Seeing the cash go away really helped bring clarity to our spending decisions, but we never managed to go more than a few weeks (or maybe a month or two) before we fell off the bandwagon. Another downside of the cash envelope and paper budget system was we continually felt like failures. Every month we screwed something up, and we never managed to get ahead. Clearly, The Total Money Makeover has worked for many thousands of people. We just weren’t disciplined enough to implement it properly, so it didn’t work for us.

Back to Smashburger. Kirby went on and on about how great YNAB was and how he and his wife Steph had gotten out of debt using the system. He explained how with YNAB it didn’t matter what payment method you used, how they met every few weeks for a “budget meeting,” and how they were able to “whack a mole” (more on that later) if they needed to overspend in a category. That afternoon I visited the YNAB website and we started our YNAB journey.

The YNAB system is built on four rules: Give Every Dollar a Job, Save for a Rainy Day, Role with the Punches, and Live on Last Month’s Income.

Rule One: Give Every Dollar a Job

In the past when I wanted to buy something I’d make the decision based on my bank balance. If I’d just received a paycheck and seemingly had plenty of money, I’d feel wealthy and be much more liberal with my spending. If it was a few days until my next check and we were running out of money, I’d hold back because the bank balance said “no.” With YNAB we act very differently. Give Every Dollar a Job is the process of assigning all income to budget categories. True YNABers don’t assign any money to categories until it’s actually in the bank. However, since I know exactly how much I get paid each month, I do break this rule and budget the entire month’s income at the beginning of the month. However, I can definitely see that waiting until money is in the bank before budgeting it would be the best way for someone with an unpredictable income to stay out of trouble.

Amy and I have our YNAB budget broken up into several primary categories:

  • Giving (this has two subcategories: Monthly Giving and Giving Fund)
  • Everyday Expenses (this has subcategories that we spend out of like Groceries, Fuel, Kids’ Allowance and Entertainment)
  • Monthly Bills (this has subcategories that we don’t have as much control over like Mortgage, Utilities, and Insurance)
  • Rainy Day Funds (more on this in Rule #2 below, but it has subcategories like Car Repairs, Home Repairs, Birthdays and Christmas)
  • Savings Goals (Vacation and Car Replacement)
  • Pre YNAB Debt (this is where all the credit cards we’re still paying off are)

Budget categories work similarly to the cash envelope system when it comes to modifying behavior. Say a friend invites me to a movie. Rather than looking at my bank balance to make that decision, now I look on my phone to see how much money we have left this month in the Entertainment category. My bank balance doesn’t matter (it’s actually pretty high most of the time thanks to rule #2, but that money isn’t available to watch movies with).

Rule Two: Save for a Rainy Day

This may be my favorite of the rules because it takes the surprises (the bad kind) out of our finances. It used to be that when I needed to put new tires on a car I had to suddenly come up with an extra $600. Now we just budget a certain amount every month for car maintenance (a subcategory in the Rainy Day Funds section of our budget). And when I buy new wipers or get an oil change or need a new transmission, it comes out of this fund. The money’s already there.

The same thing is true for quarterly tax payments or homeowners association dues. I used to get surprised every time my car registration was due (I know, it happens every year, right). Now I just take the annual amount due, divide it by 12 and budget that on a monthly basis in its own Rainy Day Fund, and the funds are there when we need them.

In Dave Ramsey’s system you have an emergency fund for unplanned crises. With YNAB, you plan for things that others consider emergencies.

Rule Three: Roll with the Punches

I like to think of our budget as a living, breathing document. Rather than assuming that we can predict the future and know exactly how we’ll spend money next month, we do our best to plan, but adjust as needed.

When I went over budget in The Total Money Makeover system, I felt like a failure. With YNAB if you go over in a category, it’s not a big deal, as long as you pull that money from another category in your budget. They call this rolling with the punches, or Whack A Mole (because you get rid of red areas in your budget by whacking the money out of another area of the budget). It’s made living in a budget achievable for us.

Rule Four: Live on Last Month’s Income

Rather than having a big emergency fund, the YNAB system encourages you to get to the place where you’re living on last month’s income. When you enter income into YNAB, it lets you choose to apply it to this month’s or next month’s budget. Over time, as you implement the system and build up your “Buffer” category in your Rainy Day Funds, you’ll get to where you can apply more and more of this month’s income to next month. The goal is to have this month’s budget entirely funded by last month’s income. You have all the money you need for a month at the beginning of the month. Once you’re there, you don’t ever have to think about your bank balance (with the Rainy Day Funds in place, it’ll actually be really high).

One question I am asked by almost everyone I tell about YNAB is, “Does YNAB auto-import transactions from my bank?” My answer is that even if it did do it well (even Mint has trouble with this), you wouldn’t want it to. The magic of the cash envelope system (for all its weaknesses) is that it does help you modify behavior because you see the cash going away (uh oh, I’ve only got $3 left in the Starbucks envelope and there’s still a week left in the month). I’ve found that the YNAB categories have the same magical effect because every time you manually enter a transaction on your phone you see exactly how much money you have left in that category.

Auto-importing would make YNAB like Mint, and the problem with Mint is it’s like using a weight loss app that automatically keeps track of everything you eat and sends you a report at the end of the month telling you exactly why you haven’t lost any weight. To lose weight you need to make decisions about what to eat today, not wait until the end of the month to find out how many calories you’ve consumed. Mint is great at telling you what’s happened with your finances. But in my experience it doesn’t do a good job of changing how you spend your money. There’s power in connecting the action to the consequence in real time (more on that in a future post).

The YNAB app does use geolocation to learn where you spend money. When you pull out your smartphone at Starbucks and enter the $5 latte into the app, it knows where you are and which category you use to track caffeine in your budget. It’s as simple as clicking Add a Transaction, entering the amount, and confirming it got the other stuff right. Then you hit Save and it shows the updated balance for that category.

YNAB isn’t perfect. It should be completely cloud based, but at the moment its central nervous system is a piece of software that runs on your Mac or PC. You use the desktop software to plan your budget and then it syncs to the YNAB app on your smartphone via Dropbox. Rumor has it that they’re working on a fully web-based version . . . I’ll be the first to sign up.

The Duct Tape Test: Will it stick?

A year into using YNAB we’ve paid off more than $20,000 in debt, we are no longer living paycheck to paycheck, and the money to put snow tires on Amy’s van this week came out of our “Car Maintenance” category rather than our emergency fund (or worse, a credit card). This is where what Tim Ferriss calls the Duct Tape Test comes in. Will you actually keep doing this? It turns out that the best financial plan is the one you’ll actually follow. YNAB has been that for us, and we’ve finally found financial peace, too.

Ready to give YNAB a try? Use this link and you’ll get a 34-day free trial and save $6. I’ll get $6 too, which will go straight into my “Spending” category :) .

Review of The $100 Startup by Chris Guillebeau

Every once in a while a book comes along that hits you right between the eyes and changes everything.

For me this happened when I read Tribes and realized that the way business and marketing works had changed and most people didn’t realize it. My life’s work is a result of the change in thinking I experienced while reading that book.

A few weeks ago I was priveleged to receive an advance copy of Chris Guillebaue’s new book, The $100 Startup. ¬†I’m convinced this book is going to do for thousands of people what Tribes did for me. ¬†It’s going to change the way they look at business and work…forever.

In The $100 Startup¬†Chris shares story after story of people around the globe who’ve started businesses based on their passion and providing value to others. ¬†He shares the story of Benny Lewis an Irishman with a knack for learning languages who left an engineering career to travel the world and teach people how to learn languages using his methods. He describes how Michael Hanna was laid-off from his professional job and started a mattress store with a unique twist…he delivers people’s mattresses by bicycle. One day he realized he hadn’t worn his suit in two years so he carried it out to his bike and delivered it to Goodwill.

This book isn’t just a series of inspiring stories it’s also a blueprint for how to start your own business.¬†If you’ve ever wondered if you can be one of the lucky ones who get’s to spend every day making a living doing something you love, the answer is a resounding yes, and this book will show you how. You’ll find yourself and your passion in it’s pages…and you may never be the same.

Chris has been kind enough to provide me with ten copies of The $100 Startup to give away to my readers.

On 5/15/12 I picked 10 winners from among those who left comments. Congratulations to:

Thad, Mark, Sam, Theresa, Jamie, Tricia, Dustin, Todd, Rocco and James who each received a free copy.

The $100 Startup is available on Amazon and everywhere books are sold.

Thanks to everyone who entered to win.

Question: Why would you like a copy of The $100 Startup? You can leave a comment by clicking here.

 

Sabbaticals, calling and the thought process behind Moolala

Many of you know that I’ve been taking a blogging sabbatical while we launch Moolala. In some ways it’s been amazingly freeing but there are other times I’ve got ideas bouncing around that I’d really like to share.

Yesterday I sat down with Kevin Miller for an episode of his Free Agent Underground Podcast.  We talked about figuring out your life calling (one of my favorite subjects) and he got me to share several different stories from my early days in business and a lot about our philosophy in launching Moolala.

Most people will just hear the audio version of this when it comes out as his next podcast episode, but they do a live video feed for his Free Agent Academy members…and Kevin was kind enough to provide me with the recording.¬† So here it is…unedited…for your viewing enjoyment.

Do Not Reply

There are few things more frustrating than hitting reply and composing an email only to realize that you’re replying to DONOTREPLY@wedontcareaboutyou.com.

I think using a DO NOT REPLY address is one of rudest things a company can do. ¬†It’s tantamount to saying “We don’t care if you want to talk to us.”

Just my 2 cents…take it or leave it.

The new capital

It wasn’t that long ago that the most significant investment you could ask someone to make was a financial one. ¬†But something started changing with the advent of the social web a few short years ago. ¬†It suddenly became more critical to get people to invest their social capital (their ability to influence those in their social circle) than getting them to invest their financial capital.

The make or break point for facebook wasn’t getting outside investors to put in money, it was convincing users to to risk sharing a new idea with their friends. ¬†They could raise all the money in the world, but if they couldn’t get people to refer people they wouldn’t succeed.

Thankfully their timing was perfect. We were all hungry for online connection, so we took the social risk and made the investment.  It worked.  Really well. And in the process it made a few people insanely rich financially, and the rest of us much richer socially.

Some of you noticed that I all but¬†disappeared¬†from this blog a few months ago. In September, my brother Matt (who’s brilliant) approached me with an idea and asked me to join him in working on a new project with an incredible team. ¬†He wanted to create an opportunity for people to invest their social capital and see both social and financial rewards. I think we’ve done exactly that.

We designed Moolala to combine the hottest space on the web (Daily Deals) with the most powerful marketing force ever (word of mouth). Rather than spending millions of dollars on traditional marketing and advertising, we’ve designed a system that rewards our users really well when they do the marketing for us.

We launched on Wednesday and the response has absolutely blown us away.

Let me know what you think of Moolala (and yes,¬† it’s an affiliate link).
Please note: If somebody else has already referred you to Moolala, please use this link instead and put their email address in the referral code box in the final step so they get credit for your invite instead of me.

Execution

Lots of people have ideas.  Very few people act on them.  Between having an idea and shipping it is the real work, the execution.

Without the ability to execute an idea is just that, an idea.

Zuckerberg had something the Winklevi did not, the ability to execute, quickly.

The magic is in the execution.

Surplus

Surplus is the extra left over from a transaction.  Surpluses can be leveraged to make change.

There are two ways to leverage surpluses:

Make surpluses in an unrelated way and route them to where they are needed.

or

Do what creates the surpluses.

If you want to make change you need to be doing one or the other.

How do you create surplus?

Winning

Contrary to popular belief, you don't win by coming up with something better.  You win by having a better story.

Here's the rub. You can't just tell the winner's story better than the winner.  You have to tell a different story.

What story are you telling?