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Why Most Budgets Fail but YNAB Succeeds

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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.

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    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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    Last Updated on July 20, 2021

    Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

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    Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

    Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

    Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

    Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

    In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

    Break Free of Your Finances

    Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

    When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

    Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

    Though it seems hard to believe, it is really very simple to get financial freedom.

    To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

    While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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    Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

    1. Stop Unnecessary Spending

    We often spend money inwardly, instead of objectively.

    For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

    To stop this habitual spending, log down all your spending over the course of a month.

    Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

    This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

    2. Plan a Monthly Budget

    This is a great opportunity to get serious.

    Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

    Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

    3. Cut-up Credit Cards

    Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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    If not, you may want to consider ridding your life of the burden that credit cards bring.

    Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

    Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

    4. Increase Savings

    There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

    It’s good practice to save up to 15% of your income.

    Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

    Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

    5. Invest Wisely

    Consider investing in funds.

    Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

    To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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    Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

    6. Invest in Gold

    There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

    You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

    Another way to invest in gold is through ETFs (Exchange Traded Funds).

    These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

    With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

    7. Stash Emergency Funds

    Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

    If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

    Make it hard to get your cash.

    Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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    8. Find Fabulous Mentors

    Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

    If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

    There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

    9. Be Extra Patient

    Patience is the key of financial success.

    Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

    So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

    Financial Freedom for All

    Anyone can achieve financial freedom, regardless of their financial circumstance.

    Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

    Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

    Featured photo credit: rawpixel via unsplash.com

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    Reference

    [1] Hartford Gold Group: IRA Retirement Accounts

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