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This is me on a budget

May 2, 2013

April was hard, people. We started using a budget. To be more precise, we started using You Need A Budget (YNAB). It’s not that we didn’t have a system before, but it was incomplete. It was passive and reactive. We tracked everything in some financial software, and used a spreadsheet to forecast and plan bill payments. But our expenses were never really examined until after they occurred (if at all), at which point you cannot do anything about them. And many time purchases were made based on the bank balance, not what we could actually afford after all our obligations had been met.

And here’s the really dirty secret: we acquired so much credit card debt after starting the business from scratch that I started to tune it out as a method of self-preservation. I became immune to the expanding negative balances because I had to in order to keep the business open. My husband says that to be an entrepreneur you have to be a die-hard optimist. You have to believe you will succeed. And so I did. We also operated on the idea that we would eventually earn our way out of debt, not knowing when, or if, that would ever happen. The debt weighed on me. I had to spend many days each month figuring out what to pay, when. It is like a puzzle, which is all very thrilling when it works out and I can pay everyone on time, including ourselves, but harrowing when I can’t make the numbers work.

As someone who grew up thinking that carrying a credit card balance was a terrible thing, I had a lot of guilt about doing just that. And resentment that we needed to. I had amazing credit for many years because of my good spending habits. Although I believed that the debt was temporary, and 100% worth it in order to have the business and the life we want, it still felt shameful every time I truly faced it. So I avoided the confrontation as much as possible.

A large part of our debt was built up over the course of my pregnancy. We had health insurance that we felt we needed in case I or the baby needed major medical intervention. While I believe that was the absolute right thing to do, it was incredibly expensive and ultimately unnecessary. Every month the full cost of the premium would go onto one of our credit cards, and we just couldn’t keep up with it. This coincided with some bad luck on some projects that didn’t come to fruition, so we had less and less profit from which to pay ourselves. I am a firm believer in paying debts to others first, so I always made sure our contractors, vendors, and employees were paid before I paid us. More reliance on credit to get by in those lean months.

We finally had to face reality and fire an employee. It wasn’t a good fit, and we didn’t have the work to keep her busy enough to offset the cost of her salary, and all the additional taxes and insurance we were required to pay. Even after we no longer had that obligation, it took several months to see a real reversal of fortune. When you’re living paycheck-to-paycheck, a week can seem like an eternity, never mind a whole month or quarter.

So, we’d been coasting along for a while, paying our bills, paying ourselves what and when we could, and trying to make sense of why it never seemed to be getting better. I had tried other budgeting tools in the past, but they always made me feel like a failure. I could never guess right, and there was never a “normal” month. Ever. Then I saw a post on Facebook that YNAB was on sale for 66% off. A friend was recommending it, so I took a look. I believe that we often find the exact book, film, article, song, [insert soul feeding item here] at the exact time we need it in our life. It just falls into your lap. Perhaps because you are already looking for it. Perhaps because you’re finally ready to see it. Whatever. But you find it, or it finds you, and it’s exactly what you need.

I wasn’t ready to face our finances like this before a month ago. I couldn’t. You can only be so much of a pragmatist when you open a business, or you’ll never go through with it. Plus, having a baby causes you to take another sort of leap into a black hole of spending. There are so many new things you think you need, or you’re told you need, or you actually need. I think I gave ourselves a pass for the first year because I believe it took that long to acclimate to being parents. And then you wake up and realize that you need to start now if you want life to look anything like the life you want your child to have. But, regarding the business side of things, we took a leap of faith, and now that we’re four years in, I am finally ready to look ahead to where I hope we’re going to land.

You might say I’ve drunk the YNAB kool-aid, but I can’t say enough good things about it. It has changed our life and the way I think about money. They teach you four rules to stop living paycheck-to-paycheck, get out of debt, and save more money. The education component is key for me. I feel like they really know what they’re talking about, and they genuinely want your financial life to be less stressful. If you apply the four rules, it will be. The site is full of support. You can use the rules even if you don’t buy the software. But the software totally rocks. It is beautifully designed. It does exactly what it says it does, and does it really, really well.

The first rule is “Give every dollar a job.” When you get this part, the rest falls into place pretty easily. You only budget money you actually have. This was the crucial change in mindset for me. Most other budgets I had tried relied on estimating an entire month ahead of time, but the money was not actually in the bank. This is actually forecasting, not budgeting. YNAB’s method is much closer to my parents’ old-school envelope system. They used to use physical envelopes to track their spending. As wonderfully simple and effective as this is, it is impractical and incompatible with our lifestyle: Who carries the envelopes? Do you have to always carry them everywhere? What about spur-of-the-moment spending? This might work if one person generally does most of the shopping, but we were constantly without the right pile of money, or the wrong person had access to it. YNAB takes this concept and updates it to the digital age.

The first benefit of living by this rule is that you stop the bleeding. We stopped increasing our debt cold-turkey. April is probably the first month in a long time when our net worth rose as a result of our diligent spending habits, not because we had an exceptionally good month and were able to pay ourselves more. We lived within our means, and paid down our debt. This has become our new mantra.

Once you start to only budget the money you physically own, you realize how quickly you want to get to rule four: “Live on last month’s income.” Because our income is so often variable, we have good months and very, very lean months. It is excruciating to budget in a very, very lean month. And almost as excruciating to see all the “extra” money in a good month go toward all the stuff you couldn’t buy during the lean month. It all evens out in the end, but it is the opposite of painless, and oh so stressful. So, this week I moved some planned spending around so that we could start the month with the whole month’s allotment, or what YNAB would call the “buffer.” It didn’t work out totally because one client payment was late, but I was able to pay ourselves enough to cover all of our expenses except for a few at the very end of the month, and I’ll pay ourselves the rest of our May “salary” in a few days when the business gets paid.

Already, I can see what a huge difference this makes. The money is sitting in the bank. We have bills due, and I can just pay them. I don’t have to wait to time them, or figure out which ones to pay first, or which are more important. I know exactly how much we have to spend, and therefore budget, this month. My stress level around our personal finances is pretty much as low as I could hope it to be in our current circumstances. Ahhhh.

The true genius, though, is the mobile app. Available for free for iPhone and Android, it lets you consult your budget on the go, at the point of purchase. It syncs to the computer via Dropbox Cloud Sync, so your budget is always updated wherever you look at it. (You can also install YNAB on as many computers and devices as you want on the same license.) You’re always spending based on the budget, not the bank balance. This makes sticking to your budget so much easier. You never have to guess if you can afford something. You’ve either budgeted for it, or not. Darien does most of the daily grocery shopping because he’s the head chef in our house. He was amazingly receptive to this new process of checking the budget and sticking to our daily target amount. The phone app saved us, and helped reinforce the bigger goals of living within our means and paying down debt.

Making unexpected spending decisions is much easier on this budget. Last month, we were invited to go to the zoo. One of us could get in with Alban for free on our friend’s membership. The other ticket cost $12. Instead of looking at the bank balance, or trying to decide if there was wiggle room among 50 categories, there were only really about five places we could pull from. It became a simple, short conversation to decide whether Darien could wait a few weeks for his next haircut. We decided to go, tweaked the budget. Boom, done.

As far as setup goes, it did take me probably a few hours a day for about a week to get both our personal budget and business budget set up. I had to create all of our accounts (there are too many), and figure out all our categories. Then I had to learn how to budget without a buffer. That said, I’m a little crazy obsessive about this stuff. I am the money person in our relationship, and for the business, after all. And most of that time was spent on the YNAB site watching their tutorial videos, reading their support articles, and learning the four rules. I also attended several free live webinars, and read the sample chapter of their home study guide. Hey, I figured if I was going to spend the money on the software, I better know what I’m doing and really use it right away.

I still use my spreadsheet for forecasting, but I’ve switched over to YNAB to record all our spending, and to do the real work of budgeting. I have also let go of a lot of guilt about our debt because I know we have an actual plan to get rid of it (snowball!). One of the best things about YNAB is how it treats credit card debt. It creates a category called “Pre-YNAB Debt.” It shoves all those negative balances into one place and says, “That happened before. Now we move forward.” It’s really refreshing and encouraging. There’s no judgement or dwelling on it. It’s like instant forgiveness. “Hey, your budget wasn’t working so well back then. Let’s figure out how to fix it from now on.” Yes, the numbers are negative, but they don’t wreck your budget every month. In other programs I’ve used, any negative balances show up every month and constantly scream at you that you went over. Duh, you don’t have to tell me by making my entire month go over when the overspending happened months ago. In YNAB, you start with a clean slate.

As I said, I could go on and on. Perhaps in another four years, I will discover some new way in which this system is lacking, but from where I sit now, this is the answer I need now. I feel so much more in control of our finances, and my outlook is positive. I feel like we have a legitimate, executable plan. And because we are entering transactions as they happen (as opposed to importing a whole month’s worth after the fact), I have a much better feel for the pulse of our spending and financial life. We’ll see how it goes over the next few months, but we made it through April on budget, with 87 cents to spare on groceries.

One Comment leave one →
  1. May 2, 2013 10:19 am

    O.K. Dear, Take me to school! Julia

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