So many times I hear people talking about this special order they should be using to payoff their debts. Some of these debt-ridden individuals are now just dead-set on paying down their debts according to the highest interest rate first. This makes mathematical sense. Or does it?

Other people, Dave Ramsey included are proponents of a payoff scheme where you payoff the smallest balance first - attacking it with intensity.

Both of these methods assume you are using a snowball approach. The question really is the order of the payoff.

Well, I used my Debt Payoff Calculator to get to the bottom of this never-ending debate once and for all. (The calculator comes as a bonus with the YNAB System purchase.)

The debt calculator’s results are pretty interesting.

My first test involved several fake debts in a payoff order with the highest interest rate debt first. An initial snowball amount of $100 was used. The setup looked like this:

The resulting calculator screenshot shows the (many) months it will take to payoff this debt:

Alright, with an initial snowball amount of $100, a debt load as seen above, and a payoff strategy using the highest interest rate debts first, it would take you 31 months to pay off your debt. This is all according to the calculator.

So, let’s take the same debts, and simply re-order them from smallest balance to largest. We’re still using the $100 initial debt snowball amount. This is the second calculator setup:

And once again, I took a screenshot of the debt payoff calculator’s result using the smallest-balance-to-largest scheme:

Yeah, this is the same screenshot. I didn’t want to make the server load up two different screenshots when the calculator’s results were the exact same. I was expecting a difference, at least minimally, but from this result we know that the debt payoff times are within a month of each other (the debt calculator rounds).

I was getting ready to talk about how the important part of a debt payoff scheme is to go at it with intensity and not worry so much about your initial order (once you do set it up, commit to it). I was going to even go as far as to say that a few months difference didn’t really matter that much - as long as you’re attacking it with intensity.

The calculator’s results, however, make my job a whole lot easier. The difference is virtually null! Think about this for a second. Instead of worrying, analyzing (over-analyzing), and stressing about what order you should use to payoff your debt, simply start doing it! That’s the key. Sending extra money to your creditors will get rid of your debt. Selling things you don’t need, getting rid of a car that was too expensive (even if you’re upside down), managing your money - all these things will bring you closer and closer to your debt payoff date.

Don’t stress the order. Stress the intensity. When your intensity level is high, your debt will be gone in no time.

Lately I’ve been on a little kick with CNN Money that’s had me reading their site virtually every day.

Today I landed on an article about controlling debt and thought I should make a few comments. I’ll put all of CNNMoney’s comments in bold or italics throughout this commentary.

First off, the title is interesting: Controlling Debt. I would name the article “Abhorring Debt” - there’s no reason why you should simply control it. Get out of debt now! As fast as possible! Once you manage to stop paying creditors, and begin paying yourself, you’ll be on the road towards wealth, fianancial peace, and security.

Alright, let’s get into the article.

Americans are loaded with credit card debt
The article states that the average American household with at least one credit card has nearly $9,200 in credit card debt. Ouch! This debt is sucking away the wealth-building power of all of these Americans. Imagine the wealth you could build if you no longer had to make a credit card payment? It would be in the several hundred thousand, if not millions of dollars, when invested wisely.

Some debt is good.
Borrowing for a home or college usually makes good sense. Umm, I can’t quite agree with that one. I would maybe say some debt is permissible, but I would never say debt is good. Imagine this scenario. You take out a 30 year mortgage to purchase your first home. However, instead of taking 30 years to pay it off, you make several extra payments per year and pay it off in 15 years. Now, once the home is paid off, you just don’t feel something is quite right. I mean, here you sit with this money eacy month that used to pay the bank. So, because having house debt is good, you decide to take out another mortgage.

While that may seem like a silly example, a mortgage is permissible, but having no mortgage at all is oh so much better.

I don’t really want to get into borrowing to get through college, but I do want to say this: I am a graduate student who is debt free. I live among other college students who are not debt free. I am not debt free because I make more money. I am debt free because I manage what I make, which results in far less spending. This is not to say I’m in any way better. I’m only making an observation based on several years of this college experience. College students live like their parents before they should, and this causes them to think they need to borrow money (we won’t go into how the parents are living).

Some debt is bad.
Don’t use a credit card to pay for things you consume quickly, such as meals and vacations, if you can’t afford to pay off your monthly bill in full in a month or two. If the credit card company is making even a penny of interest off of you, you should immediately cease using your card(s), and pay off all balances immediately. Get out of debt NOW.

I would rather hear them say: “Debt is bad. And some is even worse than that.”

Get a handle on your spending.
Here they hit it on the money. Write down everything you spend for a month. Bingo. I discuss this principle here and here. When you start writing down what you spend, your spending will drop.

Pay off your highest-rate debts first.
To be honest, if you’re really attacking your debts with intensity, if you really want to get out of debt NOW, it honestly doesn’t matter a whole lot which order you use to pay off your debt. Dave Ramsey suggests paying them off from the smallest balance to the largest for the motivational factor. He likens it to trying to lose weight and deriving a lot of motivation from seeing those initial pounds (small debts) drop rather quickly.

I tend to agree with him, but if you’re set on paying off high-interest debts first because it makes “mathematical” sense - go ahead. The important thing is extreme intensity and the desire to get out of debt NOW.

Don’t fall into the minimum trap.
We really don’t even need to talk about this since we addressed it above. If you’re carrying a balance, you’re not making a wise financial choice. And if you’re just paying the minimum? You’re committing financial suicide.

Watch where you borrow.
If you don’t go into debt you will never have this problem. NEVER EVER take out a home-equity loan. You’re digressing financially if you do this. NEVER EVER take out a loan against retirement. You’re playing with fire when you mess with your retirement. Be patient. Save money for whatever it is you need. Be patient. Save money. Be patient. Remember, the objective is to get out of debt NOW - not to prolong your slavery to debt.

Get help as soon as you need it.
If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances.

No! To consolidate your debt is to not admit that you have a serious problem. For the sake of not repeating myself again and again, I’ll go ahead and do it again: Get out of debt NOW. You got in. You can get out. You will survive. I discuss the Illusion of Debt Consolidation and debt consolidation companies in other places.

The article did offer a few tidbits of good advice, but they lack the guts to tell America that they have a problem. Get out of debt NOW. Keep your money. You work and sweat for it. It should be yours to build wealth. Stop lining the pockets of the credit card companies and get intense about getting out of debt NOW. You will not regret it.

There’s a great article on CNNMoney that sparked a bit of desire in me to write. Society is getting further and further into debt, and once people realize what they’ve done, they go about it all wrong when trying to get out. The internet is full of debt management programs that give you the option of getting on a payment plan. The company negotiates your debts down, negotiates a lower interest rate, and gives you “peace of mind” - as long as you pay them.

What actually can happen is pretty scary, and that’s where this article comes in. It discusses different red flags that should come up when you’re weighing your debt management option.

The article gives the following seven red flags when evaluating a company as your possible debt management option:

1. Have an ‘unsatisfactory’ record with the local BBB.
2. Don’t spend more than 30 minutes conferring with you.
3. Don’t let you review your contract before signing.
4. Automatically enroll you in a debt-repayment plan.
5. Expect an upfront fee equal to one month’s debt payment.
6. Require ‘voluntary’ contributions.
7. Pay your creditors late, despite your making on-time payments.

Now you’re probably saying to yourself: “Oh man, you’d have to really be naive to still sign up if you saw stuff like this.” I couldn’t disagree more. These salespeople are very skilled at what they do. They recognize that you are in a very tight situation, your emotions are probably running on high, you’ve already really had an internal battle just making a step towards resolving your debt issue, and you want so bad to see some change in your financial picture. It doesn’t surprise me at all that people get sucked into these schemes in this kind of emotional state. It’s actually pretty understandable.

The article continues with 8 tips on how you can evaluate and work with a debt management company:

1. Check with the Better Business Bureau.
2. Mind the fees.
3. Look for easy-to-understand contracts.
4. Choose a company that can help with all your accounts.
5. Check out the agency’s credentials.
6. If a counselor uses a stopwatch, run.
7. Make sure they pay when they say.
8. Do the math.

The only problem with these 8 tips is that it means you’ll actually be using a debt management company as your option. I have a completely different notion for you:

After all the math is done, remember that it’s your behavior that caused this problem in the first place. If you had not been living paycheck to paycheck, but instead had been living within your means, and possibly even had an emergency fund, you would most likely not be in the mess you’re in now.

Debt management is not an option. 99% of the time you will be better off just hacking away at the debt the same way you got into it. One bite at a time.

A debt consolidation equity loan is one of the most touted financial products on the internet (not just on the internet, but it’s pretty rampant here). Why is this so? Because so many people are up to their eyeballs in debt. They get paid, and creditors take the majority of their paycheck.

The most common reason people have too much debt is because they are not living within their means. It’s a recipe for disaster. If your credit card balances are ever-growing, you are spending more than you make - period.

So after a few years of this obnoxious behavior, you take a look at all your different credit card statements, car payments, house payment, etc. and you realize that you’re a bit tight on cash flow - to put it nicely. Why? You might have even experienced a raise or two. Why is money so tight? Because your debt’s aggregate required minimum payment is now so high (along with nasty interest rates), that it’s sucking away your money before you ever even get to see it.

You’re in deep, deep debt.

So you head out onto the internet to find out how you can handle your debt problem. You probably run into a site like this that teaches you all about credit, refinancing, getting loans - all from professionals - and everything to do with debt.

Quite artfully, you’re talked into one of the biggest CONS of our age: debt CONsolidation, usually in the form of an equity loan. I love this line in the “Debt Consolidatioin” forum description: “Is Debt Consolidation good for you? It is however the most popular method to get debt free.” I’m not sure exactly what they mean by “however” but I loved the second sentence:

Debt consolidation is the most popular method to get debt free.

As a rebuttal, please allow me to quote one of my favorite debt crusaders, Dave Ramsey:

“Debt CONsolidation-it’s nothing more than a con because you think you’ve done something about the debt problem. The debt is still there, as are the habits that caused it; you just moved it! You can’t borrow your way out of debt. You can’t get out of a hole by digging out the bottom…I feel debt is the symptom of overspending and undersaving.” (emphasis added)

- The Total Money Makeover

It gets worse though. As Ramsey suggests a bit further on page 48, the debt CONsolidation is “appealing because there is a lower interest rate on some of the debt and a lower payment.” What you discover however, is that it’s not because the rate was negotiated down, it’s because the length of the debt was extended. In short, this means you’ll be in debt longer, most of the time paying even more interest.

I also discussed the illusion of debt CONsolidation here.

The only time debt CONsolidation would possibly be an option is if you have totally changed your habits. If you haven’t used credit cards for at least one year, you’ve been attacking your debts with intensity, and you have a good handle on how you manage your money. Only then could I maybe say it would be okay for you to go ahead and get a lower interest rate. This is, of course, under the presumption that you would continue to pay the same amount toward your debt that you had before. This little maneuver, remember, has not gotten you out of debt. It has only saved some interest.

The most important thing to do when faced with the option of debt CONsolidation equity loans, is to walk away and mull over it for a while. Have you really changed your habits? Are you getting out of debt already? Are your balances already on the decline? Are you budgeting?. Lest I repeat myself a third time, I won’t say it again.

But just one more little hint: 99% of the time, debt CONsolidation equity loans are just that CONS. Avoid them. Whittle away at your debt the old-fashioned way: blood, sweat, and tears.

Being in the business of helping people with their personal budget, I peruse many, many websites for the latest-and-greatest when it comes to personal budgeting. Usually what you find is the same information - just packaged slightly different. That’s perfectly okay! The important thing is to recognize the good from the bad and ugly.

I decided to review CNNMoney’s “Top Things to Know” about a personal budget. Let’s see if I can help separate the wheat from the chaff.

The bold or italic points are CNNMoney’s, the rest is just me.

1. Budgets are a necessary evil.
I’m offended! They do come around right after that nasty statement and mention that a personal budget is the only practical way to get a grip on your spending. Thank you.

2. Creating a budget generally requires three steps:

* Identify how you spend money now.
* Evaluate your current spending…
* Track your spending…

Bingo. Couldn’t have said it better myself. It is imperative that you first track your spending for a while before you start getting up-tight about sticking to a budget. Man, you haven’t ever had a budget and all of a sudden you’re supposed to be great at it? Yeah right. And I picked up golf last week and now am expecting to win one of those green jackets…It takes time, patience, and perseverance.

So here I agree with CNNMoney whole-heartedly. You track for a while, you do a bit of quick analysis, and you track again. Repeat forever.

3. Use software to save grief.
I address the issue of software making things worse in a different article. So what I’ll say here is this: MS Money and Quicken do not yet have flexible, easy-to-use, budgeting tools. If they did, I never would have constructed the YNAB system in the first place. MS Money came free with my laptop and I still don’t even use it. Take that for what it’s worth.

4. Don’t drive youself nuts.
CNNMoney makes a good point here about giving overzealous attention to detail. I couldn’t agree more. Stick with some short-term goals, focus, go after them with intensity, but don’t get caught looking at a single tree and missing the forest. Keep your entire financial picture in mind.

5. Watch out for cash leakage.
It’s an ongoing debate, whether people spend more when they have cash or plastic (be it a credit or debit card) in their pocket. I personally like to think I’m not influenced by the medium of exchange. I’ve talked with several people who have told me that cash will just slip through their fingers because when it’s not in the checking account it’s already “spent”. If this is the case with you, take the necessary action and operate on a purely debit card basis.

6. Spending beyond your limits is dangerous.
The article brings up an interesting statistic, citing it as a government figure, whatever that means. They mention that many households with total income of $50,000 or less are spending more than they bring in. Okay…I don’t think I would mention that right after I caution the reader about overspending. Sometimes citing these “facts” gives people reason to not act. If everyone’s in the same boat, what’s the big deal?

Well, as Dave Ramsey says, “If broke is normal, I want to be weird.” Well put.

7. Beware of luxuries dressed up as necessities.
A personal budget will help you catch these tendencies. Your budget is like a radar, and these incoming torpedoes will make a pretty loud noise if you’re diligent about looking at the screen every once in a while. Watch out for spending that’s rising faster than inflation and cut it back where possible.

8. Tithe yourself.
The article mentions saving 10 percent…for your big picture items. I guess they mean retirement there. I suggest 15% at a minimum. Please don’t count on Uncle Sam to help you out. Do it yourself and you’ll be safer, securer, and richer.

9. Don’t count on windfalls.
Whenever my wife and I receive a windfall it’s just gravy. Plus, one of the Main Rules of the YNAB Personal Budget is that you spend after you earn. Basically, if you haven’t already received it, you can’t budget it.

10. Beware of spending creep.
Your annual income will rise. Don’t consume these increases straight-off. Tithing, as mentioned above, does a pretty good job of making sure your savings increase along with your income (you commit to saving 15 percent, not some fixed amount). My wife and I have discussed the possibility of living one year behind raises. I haven’t thought it through completely, but we’re thinking of someting like this:

I’m making $45,000 per year. I get a $2,000 raise. For the next year we would sock that monthly surplus created by the extra $2,000 into retirement. The next year, let’s say I get a raise of $2,500. We would then increase our living standard up to $47,000 (after the first raise), and sock the $2,500 into retirement.

It’s just something I’ve been thinking about. Granted, this doesn’t account for any cost of living increases for the year, so if we were living close to the edge, and gas prices sky-rocketed, we might feel it. However, I think the principle is important. You cannot and should not consistently consume all of your increase. It lends itself too easily to living beyond your means.

So, there you have it. Ten ways to help with your personal budget.

Here’s a bit of free advice on credit repair. Do it yourself.

Of course, some people say free advice is worth what you pay for it - nothing.

Before I get into your credit report and possible credit repair, I thought I might disclose why I’m writing this article. The other day I did a search for credit repair (did you know that (according to Overture) the term “credit repair” is searched more than 200,000 times each month?) and saw tons and tons of results from companies wanting to repair your credit - for a fee of course.

So I did a bit of research on credit repair and came up with some great information.

One of my intents in writing this article is to try and appear in the search results so people will become educated about credit repair before committing to some contract where their hard-earned dollars are taken away from them.

So I hope some people see this article, think about it, and decide not to participate in any type of credit repair program. Here’s why:

First off, why do you want to repair your credit? There are two possible reasons:

1. There is an error on your credit report.
2. You’ve made some fiscal mistakes and have some bad marks on your credit.

If you fall under category #1, then you have a valid reason to want to fix your credit report. There is an error, made by either the credit bureau or a creditor, and it needs to be repaired.

If you fall under category #2, then you do not have a valid reason to repair your credit. There is nothing to repair. The credit report is true and accurate. All you really can do is wait the 7 years to have the bad marks removed naturally (or 10 years if we’re talking about a bankruptcy).

So, category #1 people, here are some steps you can take towards repairing your credit. These were taken from this article at BankRate.com:

1. Order your credit reports.
2. Examine your reports carefully.
3. Double-D strategy — dispute and document.
4. Solve and dissolve debt.
5. Add stability to your credit file.

Steps 1-4 are great. Follow them as outlined in the article. As you can see, I do not agree with step five.

You need to remember that if you want a good credit score then you’re going to have to borrow money. BankRate mentions in the article to “remember [that] a bad report costs you money.” A bad report will cost you a bit more on your car insurance, and homeowner’s insurance premiums. This is a fact of life. The issuing companies use credit reports to determine your insurability. It’s all statistics.

The only other significant way it will cost you money is if you borrow again, because you’ll have to borrow at a higher rate (you’re a riskier investment for the creditor). Why don’t you just consider not borrowing money anymore? Credit repair then becomes null. That’s the free advice.

Don’t worry so much about your score. As Dave Ramsey says, “I refuse to worship at the altar of the FICO score.” This is just his way of saying, “hey, I’m not going to get hung up on my stupid credit report because I’m not going to borrow money.”

If you’re worried about applying for a mortgage, but you have really bad credit, then maybe you aren’t ready for a mortgage? Just a thought. However, if you have come around fiscally, you can always get certain mortgage lenders to do manual underwriting. This means they actually think about you and your personal situation before dropping the gavel on their decision. It’s a much more intelligent way to lend money, and it allows people who really have cleaned up their act to get a mortgage they can afford without having to wait such a long time to have the dings fall of their credit report.

To recap: if there are legitimate errors on your credit report, credit repair should be done. But take this free advice: do it yourself! The only entities that can make changes to a credit report are the credit bureau and the creditor. Consider that before you sign a check to some company promising ‘miracle removals’ from your report. It ain’t gonna happen.

If your report is legitimately tainted because you screwed up in the past, then just focus on getting your finances in order through budgeting, getting out of debt, saving an emergency fund, and mastering your money. With a mastery of money, you’ll be more concerned about where you should invest your money so it works for you. You couldn’t care less about what some company thinks about your financial situation. You’ll know the truth.

I hope this free advice on credit repair was worth more than you paid for it.

I’m going to attempt to answer the age-old question: 15 vs 30 year mortgage: which is best?

And I hate to break this to you, but it all depends (and I’m not even going to mention taxes here).

I want to start off with a table (it’s the accountant in me) outlining some basic assumptions when answering the 15 vs 30 year mortgage question. Hopefully this sheds a bit of light on these different mortagages right off the bat:

Alright, if you only looked as far as the payment line, you might’ve received a bit of a jolt. The 15 year mortage requires you pay out another $401 per month for the life of the loan! Take a deep breath. You don’t pay anything else on the 15 year mortgage after 15 years (makes sense eh?).

If you checked out the last two lines of the table you might have received a jolt in the other direction. If you do a 15 year mortgage you will save $104,894 verses the 30 year mortgage!

Clearly the 15 year mortgage is the best option? It depends.

One thing you absolutely have to consider with the 15 vs 30 year mortgage question: opportunity cost.

Consider this: what if you did indeed take a 30 year mortgage, saving $401 in monthly cash flow, and invested that $401 each month for the life of your mortgage? If you invested it in a mutual fund earning 9% (let’s not get into a debate about potential stock market returns at the moment), that investment would grow to $734,181!

So clearly your best option is to pass up the 15 year mortgage, stick with the 30, and invest the difference in savings. Not quite.

First off, you have to remember the extra interest cost (remember, I’m not including taxes in the analysis), of the 30 year mortgage: $104,894. So you’ll need to reduce that investment amount from approximately $730k to a more appropriate $555,024.

Well, still another half million dollars makes the 15 year an inferior choice. No, not quite.

It’s not fair that you can invest the difference in savings for those 30 years without looking at the 15 vs 30 year mortgage question from a different angle. If you take the 15 year mortgage, you’ll have that entire payment available for investment once you’ve paid off your house.

So, in actuality, we need to compare the two side by side. Taking the 30 year mortgage allows you to save $401 for the life of the loan. If you take the 15 year mortgage, you’ll not save anything for the first 15 years, but then you’ll have $1,385 to invest for the last 15 years. What does that investment equate to? Again, using 9%, $1,385 invested monthly for the second 15 years results in a value of $524,017. Does that mean the 30 year mortgage is about $30,000 (555,024-524,017) better? Nope. You’ll need to take the interest cost out of the 15 year mortgage value just as you did with the 30 year. With this analysis, the 30 year mortgage outpaces the 15 year mortgage by $105,271.

Ah ha! Clearly the 30 year mortgage is the best choice for your finances. Um, maybe.

We have assumed a 9 percent return on your investment of that $401 monthly savings. What happens if the actual return were only 5 percent? You would lose money. I used Excel’s “Goal Seek” tool to give me the required rate of return that $401 monthly investment would need to make someone indifferent (meaning you would break even) with the 15 vs 30 year mortgage question. The break-even rate of return is 7.82 percent. Basically, you would need to make sure you had a return 2.41% above your 30-yr fixed rate (assuming these BankRate.com numbers of course) to make sure you at least broke even. Any return below that and you would have been better off with the 15 year mortgage.

But we really should slow down and take a look at the personal side of personal finance. We really should be talking a lot more about peace of mind and a lot less about the numbers.

Consider this question: How much is your peace of mind worth? I personally believe one derives a lot of peace of mind from being debt free (I am completely debt free by the way). Is your peace of mind worth $105,271 over a 30 year period? Maybe I should break that down a bit. Is your peace of mind worth $292 per month? What I’m trying to get at here is this: to be debt free is something quite out of the ordinary - quite extraordinary in our day. The 15 vs 30 year mortgage question should be answered considering your peace of mind.

Honestly answer these questions:

1. Would you really invest that $401 savings?
2. Do you feel certain that if you did, your money would give you a return greater than 7.82 percent?
3. How would it feel to be completely debt free?

I ask you these questions because I think these answers will ultimately help you find the answer to the 15 vs 30 year mortgage question. If you answered “No” to question one or two, then I strongly encourage you to choose the 15 year mortgage. It guarantees you get out of debt in 15 years.

I personally have chosen to be debt free. It’s worth it!

Setting up a personal budget is not rocket science. In fact, it’s downright simple. At most it involves a bit of thought, discussion with your spouse, planning, and diligence.

One mistake people make when setting up a personal budget is the order in which they do the steps. Most people sit down, write down their income, then begin listing their expenses. This is effective to a certain point - but the process begins to unravel as you get more into the “gray” area of your personal budget - setting yourself up for failure, disappointment, and budgetabandonment (no it’s not a typo, it’s a fairly common disease).

A typical budgeting mistake
For example, John sits down to begin the process of setting up his family or personal budget. John makes $4,000 per month on salary (this makes the salary part easy, the variable income question is handled here). What’s the next thing John writes down? His mortgage. That’s also an easy expense. Perhaps then he writes down his car payment (ouch), health insurance premium, internet charge, etc. Eventually, John will have exhausted his fixed expenses (and possibly forgotten a few). Next comes the variable expenses. This includes groceries, utilities, entertainment, miscellaneous, restaurant, etc. Here’s where the budgetabandonment sets in! How the heck will John know what to budget?

His steps are all wrong. Simplify the process of setting up your personal budget by just switching the order around a bit:

Steps for Setting up Your Personal Budget

1. Write down every penny you spend for one month.
2. Take a look at your spending - analyze the historical data.
3. Based on your analysis, forecast what you will spend in the coming month.

Do this every month and you’ll be set.

Some people really get hung up with the order of these steps. Maybe right now you’re thinking: “But I want to begin budgeting now.” While I admire your desire to attack it and really get on a written spending plan, I just want you to be patient. If you want to budget effectively you need to be comfortable with the budget being an evolutionary process - not a one-time thing.

I recommend writing down every expenditure first because you will need to understand what you are really spending. Until you understand that, your budget will be off the mark. That’s what leads to the disease I just mentioned above. Now, if you’re really fired up and want to set something up right now, go ahead. Then write down everything you spend to compare it with what you originally thought. It will be enlightening to say the least.

Most people spend way more than they think they spend.
It’s always fun to see the reaction of someone once they finally tally up their entire purchases for one month. They’re shocked at all the money they wasted. This is the power of making step one your first step in setting up your personal budget.

Be patient, take your time, learn about your spending, let your budget evolve.

The YNAB System’s Four Rules of Cash Flow Management keep you in line even when your budget is a bit off.

Remember, when setting up a personal budget you need to make sure you are patient with yourself. If you’ve never done a budget before you cannot realistically expect it to be even close the first couple tries. Be patient. Take your time. Learn about your spending. I can promise you, from personal experience, that there is power in writing down every single purchase you spend. That data becomes very, very valuable to you. Use it wisely and grow wealthy.

I’ve never heard anyone say, “I just want to live a boring life.” It’s not really in our nature probably. Everybody wants some excitement, some new happenings, some big news to come their way. Everyone likes to have things to look forward to, anticipate, and enjoy. There’s probably a little bit of a kid inside each of us that still longs for a good, old-fashioned roller coaster ride.

Except when it comes to one thing: personal finances.

In our personal finance life, everybody probably wants a bit more consistency, less ups and downs, the ability to anticipate a bit better what large, unexpected happenings are coming their way. We all would like to have our personal finances be regular and - let’s face it - boring.

A Zero Based Budget is Boring
That’s right, a zero based budget is about the most boring, uneventful thing you can possibly imagine with your money. It’s so simple, anyone can do it (possibly even the government, although they’re hard-pressed to actually implement it). As boring as a zero based budget is, it is extremelly effective when applied to your personal finance situation.

Zero Based Budget Basics
Basically, a zero based budget means that you allocate all of your budgeting dollars to different categories. If you have $100 to budget, you might budget $50 to food, $25 to clothing, $15 to toiletries, and $10 to entertainment. You now have zero dollars left to allocate (and later spend). If you decide you want $15 for entertainment, then you had better pull $5 from one of those other categories (this is where the government begins running into a bit of trouble).

So, let’s pretend your take-home pay is $36,000 per year. That equates to $3,000 per month. At the beginning of each month, you would take that $3,000 and allocate it to all of the different spending categories you’ve decided to use. Many people use the Envelope System in conjunction with a zero based budget. I personally operate zero based a little differently, as can be outlined by Rule Two of my Four Rules of Cash Flow Management.

Either way you cut it, the zero based budgeting approach is extremely effective in helping you reign in your spending, and spend with a plan, instead of just shooting from the hip.

Disadvantages to a Zero Based Budget
Well, I think I just developed writer’s block. I’ve been sitting here at my keyboard staring into space, trying to think of one single disadvantage to operating zero based. I promise I’ll update this article if I think of one.

Do you see why the zero based principle is so powerful? Every dollar must be accounted for and assigned a job. You do not let one single penny slip through your fingers without first being “assigned a home” (Dave Ramsey). The real work comes about when you have a variable income - although in all honesty, the variable income problem can be easily solved.

Keep things simple when you start operating zero based. Don’t worry if your budget needs to be altered. That’s a fact of life. If you’re really having trouble sticking to budgeting money you haven’t yet earned, consider lagging behind one month. You’ll operate your budget zero-based with a full knowledge of exactly how much money you have to allocate each month.

Above all, once you’ve allocated where those dollars belong, stick to your budget. If you budgeted $50 for entertainment, then by all means, go out and have $50 worth of entertaining fun and don’t feel guilty about it. That’s the point of the zero based budget. You decide what you want to do with your money, you do it, and you feel great about it.

Most of us really do have the desire to manage our finances. Most people really want to see their assets grow and their debts decline. Most people, at one time or another, contemplate using some type of software (Quicken, MS Money, etc.) to help them on their path toward financial peace.

I’ve been there.

I checked out Quicken first, and actually used it during high school (yes, I was a high school student that actually tracked what I spent - and yes, I was a normal high school kid in every other way). I just tracked my checking account transactions there, used the fancy charts now and again…

Later on in life, just before marrying, I realized that Quicken would not cut it. The alternative option did not look very appealing (MS Money, which actually came free with our computer purchase and we STILL don’t use it). So in my search for an alternative to quicken, I actually thought I would try something else that would be free to me - Excel.

Looking back I realize that using Excel as my quicken alternative was hardly free. I spent tons and tons of time perfecting what became mine and my wife’s budgeting system. Excel filled the one large, gaping gap left by every piece of software I’ve seen (whether it be a big-house brand like Quicken, or a much smaller program):

The ability to budget.

What I’ve found most people are looking for (even if it’s not free), is something that will help them manage the ins and outs of their cash. Quicken does a great job of showing you what your ins and outs were, but doesn’t offer much in the way of planning what they will be.

Excel as your alternative to quicken, can be built just how you like it - because you can make it. If you want Excel to track what you spend, make it happen. If you want Excel to track what you bring in? Make it happen. And most importantly, where Quicken fails, if you want Excel to be able to help you plan where your money will go in the future? Just make it happen.

My wife and I have been using Excel for several years now. We’ve developed our own template system that we actually sell. If you don’t want to purchase a pre-made Excel system, I really encourage you to build one on your own (provided you have the free time). Not only will you end up with a customized personal finance package made just for you, you’ll also become more proficient in Excel - which is helpful just about any way you cut it.

UPDATE: We’ve abandoned our Excel system to use the unbelievably powerful YNAB Pro stand-alone version. YNAB served us well. YNAB Pro is serving is even better.

One alternative to Excel, but along the same lines if you want to avoid Quicken (I’m not saying it’s bad, I’m just saying it doesn’t do everything, or it does too much depending on how you look at it), is to download a free spreadsheet program called Calc from OpenOffice.org. This way, you avoid the cost of Excel and the cost of a fancy personal finance package. The only thing that will still cost you will be your time (remember, that’s not free either).

Have a go at it. Build your own alternative to Quicken.

Above all, rembmer this one thing: regardless of how fancy your system is, it must help you to always: spend less than you earn.