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.
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.
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.
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.
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.