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Why Most Budgets Fail but YNAB Succeeds

Why Most Budgets Fail but YNAB Succeeds

You have no money

    Chances are at least one of your New Year’s resolutions had to do with money. So how are you doing on your budget?

    I can’t count the number the times I’ve created budgets only to throw in the towel and decide that they just don’t work. Usually my frustration is due to any of the following:

    1. The amount assigned to a category just isn’t realistic. After figuring the numbers and seeing I had a little distribution problem, I determined I could eliminate entire categories or set them unrealistically low. I let my excitement and determination to save money and get out of debt cloud reality. Amidst visions of picking up second-hand clothing at Goodwill and planning to cook all meals from scratch using basic pantry staples and spending $100 a month on groceries, I just knew I could make this strict budget work! A month later I was discouraged and feeling like a budgeting failure.
    2. Projected income for the upcoming month never manages to be close to actual income. If you’re salaried, this becomes easier. If, however, you’re an hourly employee or an entrepreneur, it’s much more difficult to predict what you’ll make next month. Without fail, a project will fall through, you’ll have to take days off work, or whatever. I’m sure Murphy has a law about this. Just know it will happen.
    3. Projected expenses are never accurate. If you do manage to come near budgeted amounts in many of your categories, there will be some unexpected expense that hits you and throws the whole budget off. Your car needed a new radiator. Your child had to be taken to the urgent care center.

    Once any of these things happen, it can lead to questioning your entire budgeting philosophy. If you suddenly need to pay toward your insurance deductible this month, do you then take that money from another category? Eventually budgeting can seem like a science that is only for those who have some special know-how, a surplus of income, or are likely living in straw bale houses and making cheese from their goats. All-or-nothing syndrome sets in, and you determine you’re just a free spirit, incapable of being fettered by the tedious nature of budgeting. It occurs to you that since you have some debt already, what’s a little more debt going to matter?

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    How I stumbled on the software You Need a Budget (YNAB), I cannot recall. I imagine it was likely in my search to find answers to these basic questions above. Spreadsheets, budgets on paper, Quicken, Microsoft Money–all of these just weren’t addressing my budgeting issues. After perusing the web site, I decided had nothing to lose by downloading a trial copy. After only a few days, I was so impressed that I purchased the software.

    While you’ll find that YNAB has the same features of charts, graphs, downloading statements directly into the software, etc., that software like Microsoft Money does, you’ll immediately note that YNAB has one major difference: It actually gives you a plan with education and support to help ensure your success.

    The YNAB Plan

    1. Stop living paycheck to paycheck. That’s what all budgeting advice says, but YNAB takes a different approach that I think is the key to making a budget work. With YNAB your expenditures in the current month are based on your last month’s income. So there’s no guesswork about what you think you’ll make or spend next month. You’re working with what you have.
    2. Give every dollar a job. Since you’re working with last month’s income, you will be portioning that money to categories. Every single dollar will be planned for a particular category (or job).
    3. Prepare for rain. It only makes sense to set aside money so those unexpected expenses don’t crash your budget.
    4. Roll with the punches. I like this one. It promises you will fail! Failing is part of the program. Microsoft isn’t going to tell you that. How many times do we quit because of an all-or-nothing tendency? YNAB makes small adjustments if you overspend in a category. And since failing occasionally is part of the program, you can pick yourself back up and resume your budgeting, knowing you’re still on track.

    The company further supports you by offering a free PDF book (upon purchase of the software) and free videos and information on topics of budgeting.

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    One of the keys to the YNAB philosophy is that you must get a month ahead on your income in order to have last month’s income at your disposal for this month’s expenses. This is the hardest part, but if you look at it as a challenge and take joy in watching your savings grow, it becomes easier. Accumulating a month’s savings is expected to take several months.

    A Chat with Jesse Mecham, CEO and founder of You Need a Budget

    I have my own ideas on why budgets fail, but I was curious to see how Jesse Mecham, CEO and founder of YNAB, would answer some questions related to YNAB and the challenges of budgeting in general:

    Q: Jesse, what gave you the idea to create YNAB with a budget based on last month’s income? I am unaware of any other software that does this.
    I was using spreadsheets before marriage, and then after becoming married, I had this idea. I knew I wanted to assign money to categories, but I wondered how I could possibly know how much to assign without overdrafting or getting ahead of myself. When asking someone to create a budget they often don’t even know what they’re spending in the first place. If you go over budget, just keep moving.

    Q: So what would you say is the reason that most budgets fail?
    The biggest reason is people don’t see a reward that matches their work and their input. So there’s a lot of work and thought up front, and for most people the budgeting process is fairly unnatural. What happens is people don’t see the results they’d expect from the work they put in. It’d be like eating really well for three months and not seeing a change.

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    Q: How, in this economy, can people get a month ahead in income? Is that advice still feasible? This seems like the hardest step.
    It’s definitely is the hardest part, and with the hardest part comes the most rewarding part as well. Consider sales of belongings. The goal is not so much having a month saved. What you’re really trying to do is just last an entire month without touching that month’s paychecks. Look to your current employer first; do some overtime. Most of the time it’s people ridding themselves of clutter that makes the fastest progress.

    Q: I was using your software before being surprised with a diagnosis of cancer in my 30s in 2007 (I’m cancer-free now, thanks). For individuals and families facing major financial crises, what advice would you give them for making budgeting work when there simply isn’t enough money available for expenses? Can YNAB still somehow work for them?
    That is tough. First, make sure every dollar has a job. There are parts of the budget that can be done even if you’re in the red for long periods of time. No matter what you do, still record everything you spend. Maintain some awareness as much as possible. When people get in emergency mode, they lose control and awareness. The best way to fight back is to simply record what you’re spending. It’ll rein you in much quicker than not doing it at all.

    Q: Your web site states that YNAB makes small adjustments to your overspending. How does it do this?
    YNAB is like a virtual envelope system. The software wants you to maintain your savings but still have money for Christmas or your vacation you just borrowed for, so when you bring in money for the next month, you take that wad of money and drop that back into other envelopes that need replenishing. Every overage is automatically deducted from next month’s income.

    Q: I do see you have a 60-day money back guarantee. Do you also have a free trial?
    There are both. The trial is not advertised. People were getting the software and not understanding the why behind it. Weekly webinars are available with a live teacher to see. However, if readers want the free trial, they can go to http://www.youneedabudget.com/test-drive .

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    Q: It doesn’t appear that YNAB automatically downloads transactions from financial institutions on a regular basis. Is this feature coming?
    Technically it’s not very difficult, but it is very expensive. That expense would either have to be passed on to the customer or we would have to find another revenue source to support it. Banks and credit cards want to keep us separate from what we’re actually spending, which is contrary to YNAB philosophy because it reduces awareness. The feature is planned, but we also want the customer to look at the methodology. As far as time lines, the new Mac/PC version is first priority. After that, we would look at implementing automatic downloads of transactions.

    Q: I see that you have the guide in the form of a PDF file. I really like the idea of a paper book. How long before this is available?
    I’m currently trying to see where the book is fitting the overall system. We are considering a paper book.

    Q: Are there any new features in the works that you’d like to share?
    Our next software version will be using Adobe Flex AIR technology. The methodology will be the same, but the design will be different. The interface will be easier to use. Reporting will be much more dynamic and flexible. We hope to have that in beta in May/June.

    Q: Is there anything else that we haven’t covered that you would like to add?
    If people don’t want to worry about the 60-day money-back guarantee or purchasing the software yet, I’d recommend they just sign up for the free budgeting course at http://www.youneedabudget.com/course. It’s not a sales pitch. In 10 days people walk through the methodology and get down to the nitty-gritty of budgeting, money in relationships, why cash flow is sometimes so stressful, how it can be made easier, talk about rule number four, and discuss why people don’t talk about budgeting.

    The Downsides?

    I haven’t found many, but they are:

    • No integration with a handheld device. If you like to enter purchases on the fly on your smartphone, it can’t currently be done with YNAB. According to Jesse Mecham, YNAB wants to store the data online so people can get to their transactions and category balances through possibly an SMS approach, mobile web interface, and/or an iPhone application perhaps the middle of this year or later.
    • Since the company has never taken any funding or loans, some major features like integration with a handheld device tend to take a bit longer to roll out.
    • YNAB Pro is not Mac-compatible (the basic version is). However, a new Mac and PC version is expected to be available in the summer of 2009.

    The Bottom Line

    YNAB’s philosophy and software features combat many of the reasons bugets fail. It’s inexpensive, bug-free, and worth checking out. YNAB ($24.95) and YNAB Pro ($49.95) can both be downloaded from http://www.youneedabudget.com. The software comes with a 60-day money-back guarantee. If you want to try it out first, a trial version is available at http://www.youneedabudget.com/test-drive. Both YNAB and YNAB Pro include a free copy of the PDF ebook “The YNAB Way.” The Pro version comes with bonus features, such as a car maintenance schedule, income tax forecaster, and more. The developers are very responsive to customer feedback and will support you with visual and written materials that help you understand the psychology of successful budgeting.

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    Published on January 8, 2021

    How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

    How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

    Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

    The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

    Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

    What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

    Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

    1. Pay More Than the Minimum Credit Card Payments

    Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

    Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

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    You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

    The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

    2. Start With High-Interest Credit Card Debt

    If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

    First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

    At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

    3. Revisit Your Budget

    Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

    You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

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    Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

    If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

    4. Avoid Using Your Credit Cards

    Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

    The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

    It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

    5. Start a Side Hustle to Boost Your Income

    You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

    If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

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    Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

    It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

    6. Sell Your Used Items for Extra Cash

    Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

    A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

    Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

    When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

    7. Know When to Seek Help With Your Debt

    Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

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    There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

    In extreme cases, the debt solution can be:

    • Debt relief – where your debt is partially or wholly forgiven
    • Debt consolidation – taking out one loan to repay others
    • Debt settlement – the creditor forgives a significant portion of your debt
    • Bankruptcy – legal process for seeking relief from some or all your debts

    It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

    Wrapping It Up

    Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

    So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

    More Tips on How to Pay Off Debt

    Featured photo credit: rupixen.com via unsplash.com

    Reference

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