You Need A Budget. Seriously. - Dadstractions

You Need A Budget. Seriously.

Apr 20, 13 You Need A Budget.  Seriously.

This week’s theme provided an excellent opportunity for me to talk about something I’ve been wanting to talk about for a while: budgeting.

I always thought I was good with money.  I paid my bills on time, I prioritized what needed to be paid, and I made sure there was money in my bank account to pay the bills I needed to pay.  Yes, that was my sorry definition of being good with money.

My folly finally caught up with me and it was time to get serious about debt, savings, investing and budgeting.  My wife and I have a moderate amount of credit card debt so I wanted to tackle that first, but I really had no idea how to budget.  I did a lot of research and investigating into budget planning and software and I found one that I thought could help me learn how to budget appropriately and tackle my debt.  The software and philosophy is You Need A Budget (aka YNAB).

You Need A Budget is pretty simple. It’s honestly more about the method than about the software (but the software is pretty nifty). In order to budget the You Need A Budget way, you need to follow 4 simple rules:

Rule 1:  Give Every Dollar a Job
Rule 2:  Save for a Rainy Day
Rule 3:  Roll With the Punches
Rule 4:  Live on Last Month’s Income

There is no rule that is more important than the other; they all have to work together in order to achieve the right budget/life balance.

Rule 1:  Give Every Dollar a Job
This is as easy as it sounds.  When you set the budget each month, make sure there is no surplus.  You want to make sure that all of the money you have available is working for you in some fashion and is there, ready to be used.  Trust me, you will never run out of categories to put your money into.

Rule 2:  Save for a Rainy Day
This is for the known unknowns.  You know something, sometime, somewhere is going to happen but you don’t know what, when or where.  You need to save some money and make yourself a cushion to handle these known unknowns.  Not only do you want to have a true “emergency fund” but you will also want to budget for “car repairs” etc… You know someday you will need repair your car, but you don’t know when or how much those costs are going to be, which leads to Rule 3…

Rule 3: Roll With the Punches
You are human, you will make mistakes. This rule is here to tell you that it’s OK to make mistakes and to adapt and overcome.  So, those car repairs finally came along and you are $200 short in the “Car Repair” category.  That’s OK; you tried.  If this happens, you have a few outs: 1) allocate some budgeted money from another “rainy day” fund to help make up the difference for the car repairs; 2) borrow the funds from your “emergency fund” (though this should be last resort); or 3) you can borrow against next month’s income.  That’s because…

Rule 4: Live on Last Month’s Income
OK, I lied – this might be the most important rule (at least from a budgeting standpoint).  You will have a built-in buffer while budgeting because you will essentially be living off of last month’s income.  When you first start YNAB, you enter the amount of whichever bank accounts you will be budgeting from and you use it in the month you are currently in.  Then, as paychecks come in during that month, you allocate them as NEXT MONTH’S INCOME.  That way, when you go to budget at the start of next month you will have a clear idea of how much money you have available because you are essentially living off the money you earned last month.  Honestly, this was the breakthrough rule for me.  Following this rule was what really made everything “click”.

This used to be me trying to pay bills.

This used to be me trying to pay bills.

We’ve been using YNAB since November 2012 and we can definitely see an improvement in the way we budget and spend.  We no longer feel like we’re struggling to pay bills, or those “surprise” costs because we are budgeting for them.

For example, we have categories made up for bills/services we need to pay monthly, quarterly, and annually (as well as a lot of other categories).  Having these categories allowed us to make sure we had the right amount stored away to pay our car insurance, our car registrations, pay to have someone come in an do the annual cleaning on the furnace and sump pumps, etc… It has also allowed us to actually SAVE MONEY FOR CHRISTMAS.  This is no joke. We would constantly be behind on saving money for Christmas, guessing how much we had, using credit cards to get the gifts and pay them off after Christmas.  Yuck.  We have two categories, one for Christmas specifically, and another catch-all category for Birthdays and Holidays.  We started budgeting for Christmas 2013 in Nov. 2012.  We can now SEE that that money is there, available for Christmas purchases.  We know we won’t be scrambling and fretting about money when Christmas time rolls around this year.

Don’t misunderstand, this is not an easy fix.  Just purchasing the software and adding and subtracting money from it will not fix your budget.  You will need to be aware of the budgets you have set for yourself (or with your family – who also needs to make sure they are abiding by the budget) and spend accordingly.  Everything about entering purchases/deposits/withdrawls into YNAB is manual.  Some people look at this as a drawback but it’s actually a positive in the budgeting process.  This way, instead of YNAB just passively monitoring your bank accounts, it is YOU who are entering the info.  That way, YOU are constantly aware of EXACTLY what is going in and coming out of your bank account(s).

We’ve been budgeting actively for five months and things are looking good. Our finances are in no way completely fixed but we can now see that there is a plan, and the plan is solid.  We rarely use a credit card and, if we do, it is paid off during that pay period.  We took all of our existing credit card debt and put it on a 0% interest card with an introductory offer and I have set the budget to make sure we’re paying that card off enough every month so that it is paid in full by the end of the offer (so we don’t get whacked with a load of interest).  Our goal is to be credit-card-debt free by March 2014 and we are well on our way to realizing that goal.

A word of warning: moving your credit card debt to a 0% interest card is not advised unless you have a structured, detailed, committed plan in place. The interest from the cards was killing us and preventing us from paying and finishing off the balance.  After we moved all the credit card debt to the 0% card, we cut out credit cards (almost) completely.  When we DO use them, we take the money that was budgeted toward that purchase and use it to pay off that credit card before any interest accumulates.

The YNAB software is very intuitive, and there’s even a smartphone app to help track your spending.  Entering purchases/bills into YNAB is easy and effortless.  Once you have the software and budgeting set up (with categories, etc…) then all you need to do is add a transaction, chose the category that the purchase/bill applies to, enter the amount, and save.  Once you see the charge clear on your bank account, you go back into YNAB and mark it cleared (this keeps the accounts balanced).

YNAB is so good, that I rarely look at and fret over the amount of money in my bank accounts any longer.  Now, I just keep track of my fiances in YNAB and I know exactly how much money I have available and how it is being spent/saved.

The last thing about YNAB: there is a free 34-day trial period to allow you to set it up and use it for a month to see if it works for you. The software also comes with a nine-day course (by email) to help guide you and go over the methods/rules.  Finally, they provide free training courses (via conference call or recording) to go over the software and many other topics.  The support they offer was the deciding factor in us choosing YNAB over other budgeting plans. We’ve used the training courses a few times and I’m blown away by the customer service this product offers.

If you choose to try out/purchase YNAB after reading this, please use this referral link: http://ynab.refr.cc/QSGPJ59 .  It will save you $6 and give me a small kickback. Thanks.

Do You Need A Budget?  Have you found that flying by the seat of your pants works for you financially?  What was the deciding factor in you finally sitting down and making a budget for yourself?  Let me know!

prompts are fun

Because Prompts Are Fun #13
Presented by Tales from The Nursery and iNeed a Playdate.

Note: I was not compensated for this review, nor do I have any connection to YNAB in any way. I was not asked to write a review. I honestly use this product and really believe in it.  When I use something and like it, I like to tell everyone I know about it so they can start using it too.