A Budget Fail

A funny thing happened to me recently.  I realized that I was never hitting the budget numbers I expected.  Things like AC repairs, car repairs, etc kept coming up, but there was something else.  I noticed that every time I project the timeline for our solar loan payoff, it would end up needing another revision.

I don’t think we overspend as we always have money in the bank to pay all of the bills and we never carry a credit card balance (except for the 0% short-term solar loan mentioned above).  We also use credit cards for almost 100% of our spending in order to maximize travel rewards.  I have read the studies about how it’s harder to spend cash then credit, but again that is not really our problem as I watch the spending and we discuss it periodically.

The real problem is that I am guilty of making a budget and trying to get my wife to stick to it.  She never really had any input on the savings rate, categorization of the expenses, or amounts in those categories.  While I would try to entice her with vacation plans and such, I did not involve her in the decision making process.  In fact, I even told her the plan to eliminate her student loans in 2013/2014!

Telling her how much to spend on groceries and household items was not a good plan.  In retrospect, I should have shown her the data and we could have decided as a team what our goal was for that category.  We both would have been invested in the process and believed in the goal.  Instead, I believe my arbitrary goal has actually impeded the process as she does most of the grocery shopping and the vast majority of the cooking (about 95%).

I came up with an ideal spending plan and tried to pretend it would work.  The problem is I didn’t always leave room for the expected unexpected like sick kids, car maintenance, etc.  As a result, we were set up to fail for the most part.  The result is I would shift the “overspending” from the credit card payoff into other categories.  Our high income protects us from not being able to make ends meet, but it also allows me to set savings goals to aggressively.

The good news is that we are still in pace to max out a 403b, 457b, Roth IRA, and Traditional IRA this year plus the maximum $2,000 for each of the kids’ Coverdell ESA plans.  The bad news is that our cash reserves have not really been increasing and the solar loan payoff is taking longer than I planned.

Decision Time- Why I purchased YNAB

I really need to replace the flooring in our house (the carpet is not surviving two small boys and it was not high quality to begin with).  That requires us to get rid of the solar loan and compile some cash.  We have a few options.  We could cut back on entertainment, vacations, eating out, etc.  We could try to increase our already significant income levels, or we could try a new approach to budgeting.ynab rules

Enter YNAB.  YNAB stands for You Need a Budget and it is not just for people that are just scraping by with lots of debt.  I think it will supercharge our finances by giving us prospective visibility to the dollars in our cash accounts.

YNAB Explained

It is easy to use free tools like Mint and Personal Capital.  In fact, I have recommended both in the past and still do!  YNAB is just more graceful in its execution of tasks.  It just plain works faster, too.  I think us having to make the choice of moving $50 from vacation saving to the groceries category to cover and overage will be the right kind of painful to make us change.

YNAB has a different approach than the standard monthly estimated budget.  It has a couple of rules to follow, but I think I can simplify it even more.  Every penny is accounted for when you RECEIVE it, not when it is spent.  For example, if you get a $100 check in the mail for your birthday, you would record it as income.  Now you get to assign it to categories.  Do you put it all in entertainment, use it for groceries, or put it towards debt?  By assigning it to upcoming bills or goals, you know how much you already have set aside for everything (don’t worry it can also include fun money as a category).

It really turns your checking and savings accounts into a plan.  In the past I tweaked our budget each month, but only checked at the more macro level if things were working.  Using YNAB, I will know at the end of the month if my vacation savings increased and also if we set aside the $50 for car insurance that is not due for several months.

It is easy to think you actually save that $50 each month for insurance, but when you have to write the check, was your checking account balance the $300 higher that it should be versus 6 months ago? I think in most cases, people get comfortable with a checking account balance and a savings account balance.  I have always planned to have some monthly accruals that build up, but it never seems to work out that way.  Today is a new day and I expect that things will be different going forward due to the requirement that I give each dollar a job when it comes in to my accounts.

I expect that seeing the balance grow for donations, birthdays, Christmas, and vacations will be very motivating.  I think, to a lesser extent, seeing the home maintenance, car repairs, and emergency fund will also be motivational.  Those last three are probably more peace of mind knowing we have the money set aside than motivational, however.  We have extra cash now, it’s just not tracked as an emergency fund, per se.  I tend to be cash poor on purpose, but I want to relax that a bit.

ynab screenshot

Not my actual numbers, but an example of how you allocate dollars when they come in.

Summary

This method is not for everyone.  Some still prefer spreadsheets or the free tools I previously mentioned, a combination of tools, or even something completely different.  We will continue to use Mint to monitor accounts (watch for fraud and see the macro level).  Personal Capital is also in the rotation for its excellent investment tools (I particularly like the investment check-up to look at my portfolio fees and structure).

How will I measure my success?  I think I know the answer to that.  If our accruals for things like insurance, vacations, and home and car repairs all grow then we are succeeding.  If those accruals are growing, that means our cash balances are growing, too.  YNAB has a goal to live off last month’s income and I think that is a great goal.  I don’t think we are too far away from that right now.

I also challenged a friend to try it.  Hopefully, I will be able to post an update that includes both my progress and also his experience with the software.  We have some similarities in our situations, but he is not a finance person and doesn’t use Mint or Personal Capital currently.

YNAB has a 34 day trial that is fully functional.  It takes some time to set it up, but if you get used to using it at the point of sale, there is very little work outside of reconciling to make sure you captured all transactions.  Their customer support and tutorials are outstanding and much more robust than what I remember from other financial software that is similar to it.

Ebates Coupons and Cash Back

Just to note, that YNAB link saves you 10% and could result in me getting a few bucks.  This is not a sponsored post and was not intended to make me money.  I included the link just in case someone might decide to try it and like it.

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10 Responses

  1. Kyle says:

    I’ve had friends try to convert me to YNAB but I’m still a spreadsheet guy. But my friend also has a wife and two kids, I have none of those. I do see the benefit for some people. Friday i got unexpected car maintenance: my clutch is going in my car, was hoping it would hold out another 30,000 miles. It’s very rare I don’t work on my car myself but I think I’ll let an expert do this.

    • vawt says:

      I am a spreadsheet guy too, but my wife isn’t. I do like how it allocates your funds no matter what account we have them in.

  2. JSFlyer says:

    Hello, really enjoy your blog and your insights! I’m a psychologist, so I have found the research that shows people are more responsive to a “spending plan” than a “budget” totally fascinating. The two names are obviously referring to the same thing but how we frame it (reward or punishment) has significant effects on people’s behaviors. Because of that I cringed a little at the potential use of “punishment” in your method above (i.e., look, if you spend money here now, we have to take it out of the vacation fund.). Trust me, I’ve tried to use that method on myself because I am the spender in the relationship. And it just has not worked for me (I’m likely very weak-willed, I’ll give you that!). I think it has to do with the reward of ‘vacation’ being so far off (humans are generally not that good at delayed gratification) compared to item right in front of us. Although…I do find it interesting that your wife goes over budget on groceries. I wonder if the budget is set too low for rising food prices or if she is buying small rewards (e.g., this orange juice tastes better. the kids will be so happy to get this ice cream treat.) that you’re hoping she’d cut out. Between making the kids happy (hypothetical example) frequently now vs. a family vacation down the road, the choice may not be the family vacation, in terms of what feels good. Sorry, I went on a little psychology tangent. I meant to tell you that I am using goodbudget.com which does the same thing that you say above. It’s the “envelope” method. What I love about it is that I set budget goals every month for the more variable parts of my budget or the ones more at risk for overspending (groceries, dining out, entertainment, my ‘fun’ or leisure money). It has a smart phone app. Every time my husband and I make a purchase in those categories, we input it and we can see real-time progress (there’s a progress bar). It has been helpful because we can see our progress during the month and adjust our behaviors as necessary. I still keep a spreadsheet that has an overview of all of our after-tax/after-401K pay and where it all goes. And I do build into the budget some variations (e.g., grocery bill goes up in the summer because we tend to have more cookouts and invite friends, dining out bill goes up around Christmas because of get-together with friends, etc.). I also put some things in there that we usually come in under budget for. So it doesn’t feel like we are always “being bad” about our budget. It feels fun to put purchases in and see how we are doing. It’s like a little game we play.

    • vawt says:

      I hear you on the reward vs punishment piece. I think we have some other goals to save for that are more tangible than the vacation, too.

      For groceries, we will be reviewing how YNAB is working next month. If we find groceries are really a bit more than I hoped for, we will just increase it a bit. Me eating out less for lunch should more than offset it.

      Thanks for the insightful reply!

  3. Hey Vawt,

    I have definitely been in your shoes. You for sure want to have some sort of system in place that gets you and the wife on the same page. You know what they say “happy wife, happy life.”

    For a while I was setting budgets and I still have them set up in Mint. But they are not so much to control our spending as they are to make sure expenses get bucketed in the right category. That way we can see exactly where our money is going.

    I have heard about YNAB, but it seems way to manual for me. I am a automation nazi.

    Like you, our high household income, makes it really easy to save a lot and pay all our bills regardless of what budget we set. We naturally spend less than we earn. That is not to say that spending can’t get out of hand, that is why I have tools like mint and personal capital. That way we can stay abreast of our spending habits.

    But like you I had set these very aggressive savings goals without any input from my wife. Until recently I realized that I was being a dictator. So we sat down and went through goals and came up with a very simple rule. We save 50% of our gross income and can spend whatever is left after bills and taxes on whatever we please without guilt.

    This works great because it keeps the focus on the income side of the equation in our household. Because my wife has lots of projects she wants to do around the house. So she is super motivated to bring in more income, because it gives here more money to spend.

    And it works for me, because the more income we bring in, the more we get to save and invest.

    Looking forward to see how this new system works out.

    Cheers!

    • vawt says:

      Yes, I don’t want to be a dictator! I think our personal spend funds could probably be a little higher, but we have some home upgrades to save for as well (paint, flooring, etc).

      YNAB is manual, but it just feels different. I work in spreadsheets all day, but I just like the interface and its forward looking nature.

  4. Such an important realization you had, that money management has to be shared among partners! It’s important for your wife’s vision to be reflected in the spending targets you set (especially since, if she does all the shopping, she’s the one who actually knows how much things cost!). Most of all, if partners don’t share the vision, there’s bound to be resentment long term, and you guys don’t want that. Hopefully you’re using YNAB together and are working toward targets that work for everyone! 🙂

    • vawt says:

      I am trying to give up some control, but it can be difficult. I want my wife to be aware of the finances and ready to take over should the need arise (she has Mint, so she can see all of the accounts).

  5. I’m not really a budgeter at all, but absolutely love to track and monitor our finances with my own personalised spreadsheet. My wife is not really interested in the slightest, and just wants to know she can buy whatever groceries she wants and can plan our future holidays with a reasonable budget – thankfully shes very sensible with any other spending. So I know her ‘natural’ spending level, and have to work around the other parameters of my own spending and income 🙂

    • vawt says:

      I think we are in the same boat. My wife can now see how much money is waiting to be used for groceries, clothes, gas, vacations,etc. YNAB seems to be working for us so far!

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