YNAB Quick Tips – Starting a New Month

The most tedious part of a budget is creating it at the beginning of every month.  What I do  within YNAB is create a generic budget that is what we typically use to budget as a starting point each month.  I just adjust all the numbers for where we expect to spend our money that month.  This gives us a quicker starting point to filling out the budget, and is really easy to do.

To do this, create your “starting point” budget in next month’s place.  Before you start budgeting for the month, just use the “Use Last Month’s Budget” feature to pre-fill the next available month.  This will copy exactly what you have for your template into the next month’s budget.  Then you can start adjusting the numbers for the month you’re actually budgeting.

There are a few exceptions that occur that are worth mentioning as well.  What about items you plan on budgeting for a few months, then the monthly amount changes? Or what about saving for a particular item, and you know you will be done on X month?  To handle those situations, I just go to the month where the changes occur, and fill out the one category to be the new amount.  By using the last month’s budget feature, it won’t overwrite values already pre-filled, so this technique works great.  As far as the savings goes, I just go to the month after when it’ll be done, and put one penny in the budgeted amount.  Then you’ll know to just take that out when you get to it.

YNAB Quick Tips – Handling Business Reimbursements

Most things work well within YNAB, but there are a few exceptions.  When your work decides to send you on a trip, and they expect you to pay for everything on your card, how does that fit into your budget?  You shouldn’t have to budget for something that’s not even in your personal budget, especially since you will be reimbursed once you return.  And what happens if it takes them a couple weeks to pay you back, and your budget rolls over to the next month in the meantime?  How do you handle a situation like that in YNAB?

Here’s what I do.  I have a category called Work Expenses, and I budget exactly $0 each month to that category.  When I get sent on a trip for work, I put all my expenses in that category.  I change the Overspending Settings (click on the dollar amount in the remaining column to see it) to “Subtract it from next month’s category balance.”  Warning: use this setting with caution, as it can really wreak havoc with your budget.  In this case, it works perfectly though.

With this setup, you can just throw everything you get that’s a work expense into that category and not have to worry about how it impacts your budget.  Even if your work takes until the following month to pay you back, you don’t have to worry about it.  And the negative balance will be your reminder that you need to bug your work to pay you (or fill out your expense report!).

Getting Started with YNAB – Credit Card Debt

Since I’ve been using the software for years, I get asked questions about YNAB all the time.  I got asked a good question today that I thought might be useful for people just getting started with YNAB.  That question was “How do I handle credit card debt?”

If you have a balance on your credit card, and you want to pay it off over time, my recommendation is to take the card out of your wallet/purse, and put it somewhere safe in your house.  The idea is to not have it with you when you need to make a purchase, so you don’t use it anymore.  I’ve heard of people locking them up in a safe, or putting it in a bowl of water and freezing it (so you have to have time to think about the purchase while it is thawing out before you can even get the card).  Whatever works for you, just make sure you don’t have the card with you when you make purchases.

Now for the YNAB part.  Since you won’t be using the card, treat it like any other debt.  Put it as an Off Budget account, and create a category for Debt Reduction in your budget.  Pay your card out of what you budget into the Debt Reduction category, and just adjust your balance once a month (or once every few months if you prefer).  Then, when you get it all paid off, move the account to be On Budget, and start tracking your purchases again (once you thaw out your card, of course).

As far as how much to budget in the Debt Reduction category, that all depends.  What we do is make a minimum budget for our essentials, then put everything extra that comes in into that category.  Even extra bonuses and random forms of income that I budget for the existing month goes in there, and I just leave the balance until the beginning of the next month.  Once we do our new budget, I put the extra in the Debt Reduction category, and then make one payment for everything in there.  I repeat that process every month.  It’s been working out well for us since we’ve been doing it a few years ago.

YNAB 4 Review

I have already reviewed YNAB in the past, but YNAB just released a new version this week.  YNAB 4 offers a few new features, but there’s one feature that stands out more than all the rest combined: cloud sync.  This is the one feature YNAB has been missing, since it was created as a desktop app.  I’ve been using YNAB 3 since the day it came out, and have had it in my Dropbox account for a long time.  I’ve never had any issues, but I have always made sure to close out of one computer before opening it on another.

YNAB 4 uses the Dropbox service as it’s cloud sync.  You might ask what the difference is, since I was using it before.  The key difference for me is that the Android and iPhone apps sync up with it as well.  I’ve got an Android phone, and it’s pretty amazing to automatically be up-to-date with my desktop version at all times.  No more manual syncing to get the two lined up.

Another difference with how Dropbox works on YNAB 4 is that you can supposedly have YNAB open on multiple computers/phones at the same time, and it won’t ever give you a conflict.  I haven’t ever run into that in the past with my day-to-day usage, but it’s good to know I never have to worry about it now.  The cloud sync service is a real game changer for YNAB.

They made some other adjustments, too.  The look and feel has gotten a complete overhaul, and it’s mostly positive.  The only negative I see is that you have to look at the next month to see how much you’ve overspent for the current month.  The rest of the design is nice though.  They paid a lot of attention to usability, and it shows.

They enhanced the reporting quite a bit, but with how YNAB’s structured, it doesn’t make much difference to me.  I find myself looking forward through the budget way more than looking at past data.  I can quickly see my average for any category over the past 3 or 12 months with one click from the budget, and that’s mostly how I used to use reports back in the old Quicken days.

If you haven’t signed up for YNAB yet, do so here (You can go to their site to sign up, but I do get a little commission if you click on the link).  YNAB is the only piece of software I’ve ever used that pays for itself ten times over.  You might think I work for them, but I don’t.  YNAB is simply the greatest piece of software I’ve ever used.  If you stick to it, using YNAB will change your life.

Marketing Tactics of Car Commercials

Have you noticed the way car companies show pricing in their commercials over the past couple years?  They heavily advertise the low monthly price ($159 per month!) but never mention any other terms of the loan.  If they even show you the fine print (I’ve seen some that don’t even show that), the loan is usually for something ridiculous like 80 months!  I’ve even seen one that went up to 84 months!  How about a 7 year loan on a car?  Are you kidding me?

Of course, you should just ignore the monthly price for anything you see advertised.  The only thing that matters is the price of what you’re buying anywhere else, so why is it different for cars?  You need to find out the price of the vehicle you want to purchase, then you can worry about getting the best deal on a loan (if you need one).

Really though, you should not take out a loan on a vehicle.  You should just save up until you have enough cash on hand to pay for it.  It should be treated just like any other expense: if you don’t have the money to buy it, you can’t afford it.

Now, I know we’re not all perfect.  I have a car loan.  We shouldn’t have done it, but we did.  And now we’re working really hard to get it paid off before our second child is born.  We should have it paid off in just over 2 years though.  We wouldn’t have even been in this position if we just kept our old car for a couple more years.  But the plan is that will be the last car loan we’ll ever have.  We are going to start saving for a new car as soon as that’s paid off, and we will only spend what we have saved.  That’s what we should have done before, and what most people should do.

Wondering how you can set the money aside?  Using YNAB, it’s really easy.  You just create a category, and treat a car savings fund just like a car payment fund.  Decide how much you can afford for a car “payment,” and put that much into the car savings fund every month.  It’ll automatically build up every month, and when you reach the amount you want to pay for a car, you can go get it without a loan.

If you aren’t using YNAB, you can still set up a savings account, and set up an automatic transfer to it at the beginning of every month.  Still too hard?  Set up the automatic transfer on the day you get paid, but make it for half of what you want to save for the month.  This will even get you a bonus savings of an extra month throughout the course of the year (assuming you get paid every two weeks).

So don’t listen to those stupid car commercials.  If you’re looking for a new car, follow my post on how to buy a new car.  If you’re looking used, try to find the best deal you can that fits your budget.

Thankful for Being on a Budget

Listening to other people talk about finances makes me happy we’re on a written budget, living on last month’s income.  Sometimes we just take it for granted on how easy it is compared to most people.

Earlier this week, I had a conversation with someone about paying bills.  They said they sometimes get in trouble with their bill payment because their spouse wants to pay off some debt, which means they don’t have enough to pay off their bills (resulting in late fees).  This individual was frustrated by it, as it happened recently.

I immediately thought of how this would never happen to us, due to the system we have in place.  Since we live on last month’s income, we always have a cushion in the bank.  We also know exactly how much we are putting toward debt at the very beginning of the month (again due to living on last month’s income).  We know exactly how much money we will spend for the month at the beginning, since we know exactly how much income we have to allocate.

They also mentioned that they checked the balance of their checking account to see how much money was available to spend.  I rarely look at my checking balances, because we don’t base our spending off of what’s in our account.  That’s just a bucket of money being held that’s already allocated for something.  I look in our budget to see what’s available to spend for that particular item.  This is much, much more peaceful.

So, if you’re not living on a budget, you should create one.  Make sure you get to the point of living on last month’s expenses, as it is a huge difference for your peace of mind.  If you’ve read most of my other posts, you’ll know that I’m a huge fan of YNAB, but any budgeting tool should work.  Get to work on your budget, and solidify your financial situation.  There’s no better time to start than right now.

YNAB Releases App for Android

Today YNAB released an application for the Android phone.  I’ve been waiting on this app for a long time, and am really excited that it’s finally here.  It’s an extension for the desktop application, but it allows you to record everything on the go and sync it up later.  Not familiar with YNAB?  Read up on it here.  It’s the engine behind my finance behavior.

Since this is the first version, they didn’t allow for split transactions to be entered.  The iPhone app was the same way at first, then they added that necessary feature shortly after it was initially released.  They are planning on doing the same for the Android version. 

I absolutely love the app, but am disappointed in the syncing.  You have to go to the desktop YNAB, then click on a menu item to sync the two versions together.  I’m lazy, and that’s too much work.  I’ve got the version for the iPhone (on my iPod), and it works the same way.  I end up syncing it once a month or so, so my iPod is always out of date.  YNAB has mentioned syncing to the cloud at some point, so that could solve that issue.

I think I’ll end up syncing my phone up more often though, because I always have it on me.  I think I will end up using it more than my iPod, which stays at home a lot of the time.  I have only paid for a handful of apps on my phone, but this one is well worth the $4.99 price tag.  I just can’t wait until it’s been around a little longer, so they have time to make it even more amazing.

My Typical Monthly Financial Routine

Everyone has routines in their life.  I thought I’d share my financial routine with everyone.  I budget everything month to month, and live off last month’s income.  So I get to start with a clean slate at the beginning of every month.  Here’s how my typical budgeting routine goes throughout the month.

Sometime within the first few days of each month, I go through each account’s transactions online and make sure I’ve got everything recorded in YNAB.  I check every transaction with each bank/credit card and make sure I’ve got everything recorded.  This includes all our paychecks for the previous month, as that’s what we use to budget for the current month.  That way we know exactly how much money we have to spend for the month right when it begins.

Next, I check the budget for the previous month.  I try to make sure we don’t have any overages in any specific category, and I shift from excess categories to fill in the overages.  I could let it bleed into next month (with YNAB’s awesome Rule 3 – Roll With the Punches), but I try to prevent that from happening as much as possible.  I include a category I call Buffer that I use to spread across the overage accounts.  I do this for two reasons.  First, I intentionally make our tempting categories (i.e. eating out) lower than what we typically spend.  It’s a psychological game.  If we see a higher number in the eating out category, we’ll spend more.  Second, if we do happen to go over in categories, I’ve got some extra cushion to cover it.  My goal is to not spend more than what we’ve got in our buffer.

Once I adjust the previous month’s budget, I look at the new month’s budget.  I like to keep a “typical” month’s budget in place for the next unused month.  I stress typical, because there is no such thing as a typical month.  So when I get here, I copy the current template to the next month.  YNAB has this cool feature to copy the previous month’s budget to the current month’s budget, so this takes me seconds.  This allows me to save for semi-annual or annual purchases (like car insurance, life insurance, etc.). 

Once that’s copied over, I start making the adjustments to the current month, based on what our plans are for the upcoming month.  This is the part where I bring my wife in, so we can plan the month out together.  That helps promote good communication, and makes sure you are both on the same page.

So now that we’ve got a budget for the month, I go through and pay off our student loan debt.  All our extra income goes to one of the student loans, so paying these off first allows us to do a “pay yourself first” type of budget.  If things get tight at the end of the month, we can’t decide to just pay less toward debt, because it’s already paid.  It’s just another psychological move that works for us.

Once I’m done with all that, I go to www.networthiq.com, and update our net worth.  YNAB has this built in now, but I’ve been doing it longer at networthiq, and I like their graph.  The goal of this exercise is to try to get our net worth to keep going up over time.

That’s my routine for the beginning of the month.  During the rest of the month, I just record receipts and try to stay within our budgeted amounts.  Once or twice during the month, I’ll make sure everything lines up with all of our accounts, so it takes less time at the beginning of the next month.  If we go over in a category, I’ll take some out of the buffer to cover it.  If we get to the point of the buffer getting low/empty, I’ll shift some allocated money from excess categories to cover the overages, and the items in those categories will just have to wait until the next month before we can purchase them.

How do you budget your money?  Leave me some feedback in the comments below.  Do you have something formal you do every month/paycheck, or do you just spend the money as you get it?

Creating Your First Budget – Part 1 (Create Categories)

Note: This is the first of a multi-post series that goes into detail on how to set up your first budget.

So you’ve finally decided you want to take the plunge and create your first budget (or spending plan, if you prefer)?  Ok, so where do you start?

First, you need to determine what you will use to keep track of your budget and spending.  It could be something as simple as a spreadsheet, or a more elaborate solution like Mint.com or YNAB (my personal choice).

Next, you need to decide how you want to categorize your spending.  You can use something as simple as The Balanced Money Formula, where you just have three categories: Wants, Needs, and Savings.  You put 50% of your money toward Needs, 30% toward Wants, and 20% toward Savings.  You could go to the other end of the spectrum, where you have thousands of categories, even including one for toothpaste.  Or you could pick something anywhere in between.  I am very detail oriented, so my budget includes a lot of detailed categories.  I’ll get to my categories in a minute.

If you are going to create categories for items such as groceries, gas, housing, etc., make sure you look at more of a long term approach.  Don’t just look at how much you spend on a month-by-month basis, but look at your year-long spending.  In other words, try to think of all your expenses you pay semi-annually (car insurance) or annually (Christmas gifts, taxes, homeowners insurance, etc.).  My recommendation is to save some extra money in a general category for the first year to accommodate any irregular expenses you might have forgotten about.  Trust me, it’ll happen.

Wondering where to start with picking categories?  I’ll show you what my categories are right now.  I adjust them as time goes on, but this is what they look like right now.  Maybe it’ll help give you an idea on where to start.  Remember, you don’t have to be as detailed as I am (or you can be more detailed if you like), but this is just a starting point to make sure you don’t forget most items.

– Church
– Misc.
– Hers
– His
– Hardware
– Software
– Student Loan 1
– Student Loan 2
– Groceries
– Restaurants
– J.D. Lunch (I have a special plan for this because my work has a really cheap and healthy lunch)
– Misc. (used to accommodate birthdays, weddings, etc.)
– Christmas Decorations
– Christmas Gifts
– Halloween
– Furnace Filters
– Furniture
– Household
– Improvements
– Lawn & Garden
– Mortgage
– Dentist
– Doctor
– Medicine
– Optometrist/Contacts
– Safety Deposit Box
– Sam’s Club
– Web Site Domain
– Web Site Hosting
– Cosmetics
– Hair Cuts
– Life Insurance
– Miscellaneous
– Toiletries
– Tools/Woodworking
– Taxes
– Food
– Grooming
– Heartgard/Frontline Plus
– Other
– Toys and Treats
– Vet
– Entertainment
– Vacation
– Buffer (used for any over spending of other categories)
– Big Item (changes from month to month, but is basically any large item for which we are saving)
– Emergency Fund
– Roth IRA – J.D.
– Roth IRA – Megan
– Car Insurance
– Car Payment
– Gas
– License Plate Renewals
– Repairs & Tires
– Service/Maintenance
– Drivers License Renewals
– Satellite
– Internet
– Electricity
– Gas
– Phone
– Trash
– Water & Sewer

We don’t budget something to every one of these categories every month, but we do for most.  I know it might be overkill for most people, but I like having some smaller categories I don’t use much, just to make sure I have money in there when I need it (like furnace filters).  Some of the categories have a target amount we try to reach (like doctor, dentist, vet, emergency fund), then we just keep that money in there until we need it.

Spend some time thinking about what categories you want to use, and then I’ll cover what to do with them in Part 2 – Tracking Expenses.

Marriage and Finances – Some Real World Examples

I went to a bachelor party for a really good friend of mine this past weekend, and something unusual came up during dinner.  A couple of his friends I’ve never met before started talking about how they treat finances in their marriage. 

The one friend – let’s call him John – said he makes twice as much as his wife, so he splits their expenses to where he pays for 75% and she pays for 25%.  The other friend – let’s call him Steve – said that his household has three checking accounts: a joint account, one for him, and one for her.  I brought up the fact that my wife and I share a joint account, and we pool all our income together.

John’s plan makes sense, right?  He makes more, so he gets more money.  The problem with this approach is that once you’re married, all your expenses legally become both of yours.  Say John’s wife brought $50k in credit card debt into the relationship, and John has no outstanding debt, other than the house they just bought together after they got married.  Now that they are married, they have $50k in credit cards, not just her.  What’s hers is legally his.  Even outside the legal system, this debt needs to be paid off somehow, and what’s the easiest way to do that?  Put all extra money toward it.  In this case, there are two sets of incomes, so they could pay down the debt faster.  But, according to John, his wife would have to pay all of it on her own, while he could go spend money on whatever he wants (like a new car or a boat).  Does that seem fair?

Ok, I know what you’re thinking.  “But we don’t have any outstanding debt, so that doesn’t apply to us.”  Think about this then.  Say John’s wife’s car breaks down, and it will cost her $1000 to get it running again.  Since she only uses her income, she doesn’t have enough to cover the repairs.  John, on the other hand, really wants a fishing boat that costs a couple grand.  Since it’s his money, he can just get the boat while his wife doesn’t have a car to drive to work.  Or maybe he can be “generous” and give his wife some of his money to cover the repair.  Now, does she need to pay him back?  Is it a loan, or a gift?  See how it gets really complicated real quick?

So what about Steve?  Sounds reasonable that he has his play money and his wife has hers, right?  They share the majority of the expenses in the joint account.  He says he would get mad if his wife would buy a pair of shoes out of their shared money, but he likes buying larger items like golf clubs.  So the dual account fixes that problem, right?  Not really.  He mentioned something else that inevitably happens when you have two separate accounts.  He got a raise at work, and decided not to tell his wife.  Instead, he just put all the difference of the raise into his own account.  As I’ve mentioned before, hiding money from your spouse is never a good idea.  This leads to mistrust, which could eventually lead to a divorce.  Money is the #1 reason people get divorced.  He even mentioned that he can’t trust his wife with money.  If you can’t trust your spouse with money, how many other areas can you not trust him/her?  How long can a marriage last when you hide money and can’t trust your partner?

None of these issues exist if you share all your money, and talk about each major purchase.  You and your spouse should be on the same page about your money.  Creating a budget helps us out a ton.  YNAB has been a real lifesaver, and I realize that all the time.  Having this conversation makes me realize how far our finances have come since we got married.  Both of those couples have only been married for about 6 months, so they are still figuring things out. 

Hopefully my good friend will figure out something that works for his marriage.  I’m sure he will, as he’s always been good with money.  I offered my advice if he wants it too.  As for those other two couples, I hope they get things worked out in the long run, for the sake of their marriage.