In the investing world there is a number known as “beta”. Investopedia defines beta as follows:

A measure of a security’s or portfolio’s volatility, or systematic risk, in comparison to the market as a whole. Also known as “beta coefficient.”

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2 it’s theoretically 20% more volatile than the market. (emphasis added)

The other day I was studying something entirely unrelated to personal finance when the concept of beta jumped into my head. Only this time, I wasn’t thinking of beta as relating to a stock, I was thinking of beta as it relates to how to manage your money.

I’m not talking about a fund manager asking himself how to manage your money. I’m talking about you asking yourself that question.

Notice the bolded part of the quote above: “you can think of beta as the tendency of a security’s returns to respond to swings in the market”. Let’s replace a few words and restate it:

You can think of beta as the tendency of your finances to respond to swings in life..

What’s your personal beta?

Nobody (well, almost nobody), wants a personal beta that deviates far from one. It causes stress on the job, at home, in your marriage, family, and other relationships. It can possibly keep you in a job you don’t want, doing something you don’t like, for people who treat you lousy.

The best way to move your personal beta toward one is to set up a personal budget. A budget reduces risk in your personal finances. It smoothes your income and expenses, and decreases the height of the crest and depth of the trough in the financial waves that may bear down upon you.

A budget is a benevolent dictator when it comes to how to manage your money. It is firm when it feels its power being taken from it, but it will also give you some slack - when asked politely.

Did you notice the term “systematic risk” in the definition above? Let’s go into that a bit deeper with another definition:

The risk inherent to the entire market or entire market segment. Also known as “un-diversifiable risk” or “market risk.”

In order to apply this to your personal finance situation, we’ll alter the definition again slightly:

The risk inherent to your finances or entire life. Also known as “un-budgetable risk” or “uncontrollable risk.”

This is a fancy way of saying its the risk of living day to day. It’s the risk that will always be there no matter what you do. You’ll notice as you learn how to manage your money better and better that your personal beta does go down - it gets pretty darn close to one if you really work on it. You’ll notice an improvement from your former, volatile self. This is the unsystematic risk that has declined. It is also sometimes called “specific risk”. And it’s something particular to you, that can be taken care of if you learn how to manage your money a little better - bring things in a little tighter - pay a bit of heed to that benevolent dictator.

However, even the best money managers cannot get rid of risk entirely. No matter how you manage your money, you will still be subjected to the systematic risk of life. You cannot reduce it. You cannot ignore it.

Before you get down on yourself, or maybe even feel a bit depressed about this supposed risky situation that you live in, let me assure you of one thing: Unsystematic risk makes up the large, large, bulk of the stress you may feel when you’ve slacked on your money management. The systematic risk inherent in life is small - tiny - minute. When your personal beta is one, you are feeling good! Life is good! The grass is green! The sky is blue! On your side of the fence!

The budget will show you how to manage your money. It will show you how to reduce your unsystematic risk to nothing. It will get your personal beta down to one. It is the solution to money management stress and worry.

What’s your personal beta?

The #1 question asked of me by those people just starting YNAB is how exactly to get going. As you know, to use YNAB most effectively you should save one month’s expenses (hereafter known as the “buffer”).

I’ll address the following issues or concerns (also, see the setup guide):

• Where should you physically put this money once it’s saved?
• How/Where do you enter it into YNAB?
• Why is this rule in place?

We’ll start with the last bullet point. The reason you want to have one month’s expenses saved is so you can stop living paycheck to paycheck and begin living on last month’s income during the current month.

Consider the following chart. It shows the average annual flow of your money:

Notice in January and February that your expenses exactly match your income. This might be a bit presumptive, as many people are spending $1.22 for every dollar they currently earn. But we’ll work with it for now.

Guess what happens at the end of February? This user discovered the YNAB Personal Budget and has decided they’re going to get their financial act together. Notice in March that a bit of the “Buffer” has appeared. Expenses were forced to decline so this extra cash could be found (you could also increase your income on a short-term basis by working overtime, another job, etc.).

In April, May, and June the user continues working hard to acquire the buffer amount that needs to be equal to one month’s expenses. As you can see above, by the end of June the user has reached the required buffer amount (buffer = expenses).

From that point on, you can go back to expending everything you earn, but what you don’t see from this chart is that the income for July through December is not that month’s income - it’s the previous month’s. (NOTE: Do I recommend you spend everything you earn? No, “Expenses” here in this sense also mean monies that go toward Savings goals such as retirement, college, etc.)

Alright, now let’s take a look at the flow of this user’s money once the buffer is in place. Here’s a snapshot of a typical month:

First, notice the major difference at the beginning of the month. You have a whole previous month’s expenses sitting ready to be budgeted and spent/saved. As the month progresses to day five, notice that your expenses have increased a bit, directly reducting the money you had earmarked to spend this month (that’s all okay though, you’re operating on a plan!). Look at day ten. You’ve now spent half of the money you had available at the beginning of the month.

Day 15 is where it gets particularly interesting. This user is paid on the 15th and 30th of each month. Notice the BLUE amount suddenly pop up (1/2 of the monthly income). That money will just sit there, waiting for the following month so it can be budgeted and spent/saved.

As the month progresses, our money we had at the beginning of the month slowly declines, as our expenses slowly rise. On the 30th we’re paid again, and, sure enough, the current month’s income equals that month’s expenses. But remember - you’re done with this month! The current month’s income is about to become the “previous” month’s income, ready to be budgeted and spent/saved during the next month.

So where do you physically put your buffer money? In your checking account. Here’s what it would be like for me if I had to scrape together a month’s worth of expenses:

I’d get intense, first of all. Remember, I’m living paycheck to paycheck, so any extra I make I’m just throwing into the checking account. The first month I might end up with only $100 at the end of the month. After month 2, maybe I hit it big and saved $400. Month 3 was also strong, and I saved $600 by selling some stuff on eBay. That brings my total at the end of month 3 to $1100. I need another $900. I work tons of overtime, sell some more stuff, and really cinch up the belt on the budget. We manage to get another $900 together that month. At the end of month 4 I have $2000 - equivalent to one month’s expenses.

With my buffer in place, it’s time to start the YNAB Budget at the beginning of month 5. I take the $2000 and I put it in as a SUPPLEMENTAL INFLOW in the YNAB budget. I now have $2000 available to spend during month 5. And I do just that.

But what else is happening in month 5? I’m earning money. At the end of month 5 that money is available to spend during month six. You’re now out of the cycle. Congratulations!

Hopefully this clears up any confusion about getting started when it comes to your personal budget. Of course, if you have any further questions, you can always contact me.

If someone were to ask me to give them one piece of advice regarding their money I would tell them one thing (and I wouldn’t hesitate at all in telling them): Get on a written budget.

And if that someone wanted a tip about budgeting specifically, I would tell them one thing (and I wouldn’t hesitate at all in telling them): Give every dollar a job.

Some other budgeting tips may be to make it simple, ensure that both spouses (if married) are on board, write down everything, etc. But the grand-daddy of all esteemed budgeting strategies is give every one of those grubby little dollars a job to do.

In the old days, devoted budgeters would use envelopes to assign jobs to their dollars. That was pretty straight-forward. That dollar, sitting in the “groceries” envelope, knew exactly what to do, and when to do it.

In our much-more-modernized society (not so much improved on the budgeting front, I might add), we don’t seem to manage too well with a lot of cash. I personally have tried the envelope system with a few select spending categories (groceries was the big one) and failed miserably. I would forget the envelope. Have I ever forgotten my debit card? Not one time.

But must our dollars go unemployed?

Heavens no. Quite the contrary. With spending apparently easier now than in the past (access to credit), it has become even more important that we assign each dollar that comes into our hands a job to do for the month.

For instance. Let’s say that $2,000 comes into your hands during the month. You take every, single, solitary dollar and you assign it a job. Some will go toward rent, and do their job in the month. Other dollars will go to savings, where their job is to recruit new employees and train them to do the same. Some dollars have the job of just being “ready” for an emergency. You’ll have some dollars that sit around for six to twelve months before finally doing something (Car Insurance Premiums, and Christmas come to mind).

Every dollar still does something. No dollar goes unassigned. Ever.

Well, almost never.

You might consider a realistic unemployment rate for your personal economy. Is unemployment better? Certainly not. But it’s realistic. And I’ve found too often that when people are unrealistic with their budgeting, they crash and burn. They give up. Why? Because you can’t do unrealistic things when you’re living in a brutally realistic world.

So what does an unemployed dollar do? Well, my wife gets a few of them, I get a few of them. And we can basically do whatever we want with them. They’re unemployed. They might go buy a book for me from Amazon.com, or some protein powder. Julie may purchase some crochet hooks, or a new shirt. It really doesn’t matter to me what she buys. She doesn’t even have to tell me when she has. Unemployed dollars don’t report to any boss except themselves. (Because of our habit of budgeting, she tells me anyway, but it’s not required and that’s the important point).

When you’re employing every dollar of your personal economy, make sure to unemploy a few too. It will more closely align your ideal world of money with the real world of money.

Where do you eventually want most of your dollars working? In the Savings Department. In that department they’re extremely useful. They find other dollars to employ on their own, and teach these new dollars the ropes (find more dollars, and teach them to find more dollars). The Savings Department is a beautiful thing.

Where do you absolutely need dollars? In the Emergency Department. These dollars aren’t there to find other dollars. They’re simply in charge of your Disaster Relief Plan. They maintain it. They make sure it’s functioning. They shouldn’t be employed in other departments. And they should never, ever be unemployed.

Because we’re in this technologically progressive (and fiscally-irresponsible) society, you need to use something that will allow you to assign your dollars their jobs with ease. I use a personal budget application that has worked well for me and my wife. We know what dollars have come in:

* Employment
* Self-Employment
* Birthday Money (these dollars are unemployed for us)
* Found-on-the-Sidewalk Money
* Sold-Something-on-eBay Money
* etc, etc.

And we assign them jobs. This one budgeting tip will do more for your finances than any other. I guarantee it.

Not all of us are the left-brained-accountant type of person. That does not, however, exclude you from responsible money management. Worksheets constructed just for this purpose can make even a right-brained person appear left-brained to their friends - and isn’t this what we’re all shooting for?

However, I’ve seen some tweakings on the YNAB Personal Budget that are absolutely wild at times - colors, design, layout, etc. It didn’t take me long to realize how a right-brained person had taken some money management worksheets and improved upon them in more ways than one.

If you’re right-brained, you may just have a major advantage when it comes to managing your money. How? You’re creative! Creativity will put some spice into your worksheests, making the task of money management not only more enjoyable, but more effective.

The left-brained person’s worksheets (and I’d say the basic YNAB layout fits this bill) is pretty straight-forward. You have your inflows, your outflows, and a way to manage your spending through the use of some type of budgeting tool. Those are just the basics of an effective worksheet though. Money management can be improved when you invoke the powers of your right brain just a little bit more.

You need to get creative!

It’s obvious the worksheets need those basics as discussed above, but can your right side take them any further? That’s what happened to me when I started out with the YNAB System. I just started with the basics. My right brain told me a few different things that improved the system by leaps and bounds. Your right brain will do the same!

One big change to the worksheets was the use of the previous month’s income. This completely solved the unsolvable problem of “not knowing what to budget because [I] don’t know what we’ll make.” Another right-sided solution was with the overdrafting. At first, simply out of necessity I thought you’d just carry overdrafts through the entire year. Only after really looking at it from my more creative side did I realize that taking the overdraft out of the next month’s income would reimburse whatever surplus categories had “really” paid for the overdraft, and would keep spending in check even further. Left-brained? Not hardly.

Customers have shown me some of their ingenious add-ons to the YNAB system (one person was sick of entering today’s date all the time!) that have improved it for them. And when you’ve made your money management worksheets customized to your needs, you’ll use them - and that’s really all that matters.

Whether you’re building your own from scratch, or improving upon some existing worksheets, money management is something that should follow a few basic rules: 1) quick, 2) simple and 3) effective. As you design (or customize) your own, make sure you ask yourself about those three points. Will using these worksheets make money management quicker? Simpler? More effective? If you can answer yes to all three of those questions then you’ve found yourself a pretty darn good solution. Your right brain will be needed. Don’t be afraid to have it shine when it comes to money management.