When you’re managing your money, you’re playing an active role in what it does, how it works for you — hopefully aligning it with where your values are. The key to staying on top of the whole thing boils down to one basic principle:

Revisit. And Revisit Often.

At the beginning of last year, I broke down my New Year’s Resolutions into four categories:

1. Physical
2. Spiritual
3. Business
4. Financial

I had two goals per section and wrote them down on a 3×5 card, which went in my wallet (an aside: if your wallet is so huge, because you save the business card from the guy that hands out 300 business cards a day, and your wallet is also your receipt filing system and a source for fire kindling in an emergency, then you may need to stick your goals somewhere else).

At the end of each quarter, I revisited these goals. I had to adjust a few of them because I changed employment situations in a major way, but it was interesting to come to them after just 90 days and see how things had changed. Had I lost focus? Was I on track? These little moments of reflection did amazing things for me this year — it seems I had more clarity in what I wanted to accomplish and how I would get there.

Some might say that a quarterly revisit isn’t frequent enough, but my goals were of a nature that didn’t require anything more frequent than that anyway. I found it to be just right.

One goal, that we later cancelled, was to purchase a home (we cancelled it because we moved to a new state and need to get to know the area, and I also believe the market will soften yet). That’s a large goal. Would I need to revisit it weekly? Hardly.

A goal that I also had was with a specific exercise regimen. I learned quickly that I become bored of specifics, but do enjoy the daily workout — it just needs to be changed a bit more frequently than I had orignally anticipated. Revisiting it monthly may have been slightly better, but quarterly worked just fine.

If you were to set a goal about dieting, you’d want to revisit it frequently because food plays such a common, frequent role in our lives.

The key is to match the frequency of your revisiting and recalibration with the frequency of the goal itself. It will help you stay on track.

If March is all about Madness, then late December/early January is all about New Year’s Resolutions. A very popular resolution is to manage your money better. As with food, money flows in and out of our lives daily. Frequency is absolutely key here. If you decide to make YNAB part of your New Year’s Resolution Solution, then embrace the idea of looking at it often. This will keep you on track and focused on your longer-term goals. Money management is a means to an end, so keep those ends in sight — they’re your motivation!

The other day a group of friends and I were discussing investing and my friend mentioned that he had purchased some stock in Apple Inc. (Ticker: AAPL) back in 2003 for $20 per share. He had invested $4,000 for 198 shares (Disclaimer: I also own stock in AAPL, but alas, I did not get in for $20 per share).

The investment performance has been something like this:

One of the others in the group had an interesting response: “I would have invested in Apple too, but we weren’t lucky enough to have four grand lying around to bet on stocks.”

(As an aside, I discussed with this friend why he chose to invest in a single stock, when most financial advisers advise to diversify. His response was that this was “play” money that he could afford to lose, and that the vast majority of his investing was done in index funds.)

A while back an acquaintance asked if I knew about one of my good friends recently purchasing a very, very nice car (I don’t know how much they run, but somewhere north of $90,000). The acquaintance’s next comment was something to the effect of, “He’s lucky to be able to afford that car — still in his twenties!”

Yes, he’s lucky.

And yeah, my friend who invested in AAPL four years ago is lucky.

They’re both lucky enough to be smart enough to live within their means.

With my investor friend, he had discretionary money lying around that he could afford to lose. Why was it lying around? Because he hadn’t spent it. Why hadn’t he spent it? Because he lives within his means. He doesn’t spend every dime that comes in. So when an opportunity came along that he thought he should take, he could afford to take it.

There are two points of affordability really: the physical and the psychological. Physically, if you have $4000, and an item costs $4000, then you can afford to buy that item. Psychologically though, it’s a whole different ball game — especially with investing. The question you also must ask yourself is if you can afford to completely lose that $4000 and have little to nothing to show for it.

My friend ran the risk of losing virtually all of his investment. But he could afford not only the $4,000 but also the risk attached to the investment. He was comfortable with both sides of the coin. Had he been living on the financial edge, he would not have had the means necessary both physically or psychologically, to be able to make the investment. As a matter of fact, his mind would have been so wrapped up in trying to stay current with his payments I doubt he would have had room upstairs to even think about possible investments.

The second scenario is with a good friend of mine who, while in college, begin helping his friend build a business. While building this business he has stayed in school, married, and started a family. While building the business he (and his wife, who of course shared in all of the building, or demands thereof I should say) wore old clothes, got by with one extremely old car that most of you would be embarrassed to sit in, didn’t go out to eat, didn’t go to the movies, didn’t spend anything extra on anything.

So yeah, he was lucky to have the opportunity, but how good would that opportunity have been if he had been living above his means, loaded down with debilitating credit card debt, used to living the high life (or worse yet, completely dependent on his parents while in college)? I submit that the opportunity would have been passed by, not on its merit alone, but on his ability to take advantage of it.

And your ability to take advantage of opportunities that come your way is directly related to your flex-ability with your finances. The rich get richer not because they’re in some secret club or know some secret formula — it’s because they live within their means (easily). This allows to them afford opportunities when they present themselves.

Go find yourself some luck and manage your budget so you can live within your means.

I’ve been fortunate enough to have the YNAB methodology in full force in my life since April of 2003. We’ve never lived paycheck to paycheck, always lived within our means, planned for larger purchases, and stuck with our budget over time. As a result of the methodology, our money situation has always been just fine, and, more importantly, we’ve been on the same page with our financial goals.

We never had a mountain of debt to conquer, retirement plan contributions to “catch up” to, or a kid that’s suddenly in need of tuition (and books, and fees, and food, and gas money, etc.).

But I’d venture a guess that most people who highly recommend YNAB as budgeting software have had at least one of the aforementioned challenges — probably several at a time.

So what makes someone highly recommend budgeting software? Why do people recommend the You Need A Budget software?

Not a day goes by where I’m not asked the question in an email (or two, or three, or four) about the possibility of YNAB having this or that feature: Does it forecast? (sort of) Will it automatically download transactions to my bank, or will I have to download the file myself? (no and yes) Will it amortize my mortgage for me? (no) Can I use it for my business? (yes) Does it support online bill pay, where I can just write the bill from within the program? (no). Of course, this is all at the time of writing.

I’ll be square with you, and possibly scare a few off, but YNAB is budgeting software. It’s built to help you budget. It helps you manage your cash flow. It only comes highly recommended as budgeting software, not as an all-in-one-all-the-bells-and-whistles-and-upgrade-fees software package like Quicken or MS Money. YNAB cannot be all things to all people, and will never make the attempt. YNAB is budgeting software.

With a piece of software doing just one thing it’s a wonder why it nails things on the review circuit the way it does. Thankfully, I think the reviewers have recognized YNAB for what it is, and what it is not. But I’ve noticed one thing with software, and budgeting software is no exception: When it does one thing really well, that gets noticed.

And YNAB does budgeting very, very well.

But to go a bit further, the real reason, when you get down to it, why YNAB comes highly recommended is not because of the software. Anyone can build an application that clicks and shines, etc. That’s not where the power of YNAB lies (not even with its übersimple interface that I love and adore). The power of YNAB goes back to the beginning of this article. The power of YNAB is its methodology. And one thing I’ve discovered in my accidental journey of YNAB, is the fact that software will be recommended highly when it changes someone’s life for the better. And that is exactly what this budgeting software does.

Yeah, I’ll be talking about Rule One again. Only because it’s so important. Yes, you can use the budgeting software without following Rule One, but my hope is that you follow it as soon as possible.

The other day I was interviewed by the founder of LivingLikeNoOneElse.com (also a fan of acronyms, you can find them at llnoe.com as well). One of the questions asked from the listeners was whether the YNAB software helped you time your paychecks to match with expenses.

Important Budgeting Question #1: How do I time expenses with paychecks?

This really is an important question, actually. Rule One answers this question.

But when you first begin using YNAB, you likely won’t be following Rule One, you’ll:

1. earn some money
2. record it as an Inflow
3. budget it
4. spend it
5. (and hopefully save some of it)

And you do this every single time you bring in any money at all (paycheck, side income, cash you found in the cushions, etc.).

The budget it step is where the timing takes place. Your thought process would probably go something like this:

Alright, here’s my check for $1100. I get one every Friday. What expenses are coming up? Oh! We’re almost out of milk, and eggs, I’ll have to go to the store [budget it]. Did I pay the electricity yet? Oh, here’s the bill in my ‘To Do’ folder. I guess I didn’t [budget it]. The rent is due in two weeks, which means that this paycheck, and the next are the only ones to help with the $1,300. I’ll set aside $650 for it from this check [budget it], and the other half with next Friday’s check…

Rule One comes into play in answering this question because the above scenario is not the ideal way to manage your money. It’s too much micromanaging and ends up taking you much more time than necessary (though I should mention that there are advantages in doing this exercise when first starting out: you learn the software, become acutely aware of your (over?)spending, and build strong habits).

Okay, now let’s assume you have your Buffer in place, and, according to Rule One, you’re actually living on last month’s income. You would have recorded your income as earned, and would sit down at the beginning of each month and budget it. The whole thing. All at once.

Alright, there I have it. $4,400 (four paychecks) of income, ready to take on the month, all sitting in my account just waiting to do its job. Let’s see, the $1,300 of rent is due tomorrow [budget it]. Electricity will probably be about $85 again [budget it]. We’ll need $400 for groceries [budget it]…

And so on. Suddenly, a weekly exercise has become a simpler monthly exercise. The time savings are substantial, and the risk of not being able to sit down one time per month to sort through everything is much higher when you have to find the time four times instead of once.

When you’re living under Rule One, you don’t time your paychecks. Were all your bills to be due on the 1st, you could pay them without even glancing at your checking account. That’s the beauty of the Rule. It shouldn’t be written off so quickly. It’s huge.

Important Budgeting Question #2: How do I cope with a variable income?

I’ve beat on this before, but I’ll do it again. Variable incomes can be challenging when budgeting — if you’re living paycheck to paycheck. But when you’re following Rule One, the challenge is mitigated to, at most, a slight annoyance.

Imagine now, living on last month’s income, that you sit down for your Budget Meeting and look at your (hopefully) big Available number. This is the number that tells you what you have to work with for the month. That’s it. There’s nothing “gray”, “dicey” or “iffy” about it. That’s your number this month. You just need to decide what to do with it [budget it].

Another answer to the Variable Income problem is to prioritize your spending. You basically say, “I don’t know what I’m going to make this month, so when I do bring in money, I’m going to take care of these things (rent, lights, food) first.”

That’s a great strategy. It’s powerful when you see that you ran out of money before you get to the “Clothing : Gucci” category. Perhaps a light bulb just flickered: more money to retirement, less money to crocodiles.

And while Rule One doesn’t take away from this principle of prioritization at all, Rule Two embraces it. A zero-based budget is exactly the same principle. You budget until you run out of money. Obviously it would behoove you to (and reality will slap you if you don’t) take care of “first things first”, as Dr. Covey would say.

Make life easier and start living by Rule One!

Important Budgeting Question #3: How do I handle financial crises and still budget?

When you’re not living right on the financial edge, you’re smarter. While being smart may mean you already don’t operate right on that edge, not operating right on the edge also allows you to be smarter.

The one factor that contributes to more stupid financial mistakes than any other is TIME. Better yet, LACK OF TIME. In sports, timing is everything. In business, timing is everything. In personal financial crises, timing is everything. Operating under the shade-giving awning of Rule One allows you to sit back, completely evaluate a situation, and arrive at a logical, non-rushed, wise, in-line-with-your-goals decision. Only a buffer can do that.

You will have a legion at your command when a financial crisis decides to make its attack:

• According to Rule One, you’re living on last month’s income this month. So in May when something unexpected slams you up against a wall, you’ll have a portion of May’s earnings to buffer you from danger. (Those May earnings are there only because you’re living on April’s!).
• And with Rule Three in effect, you’re setting aside money on a monthly basis for non-monthly expenses (car insurance, property taxes, Christmas, etc.), so again, when you suddenly find yourself on defense, you’ll have money to make your play.
• Finally, Rules One and Three obviously are there for specific purposes (next month, and Rainy Days respectively), so you have Rule Four to guide you in paying yourself back for the disaster. If you can’t ‘Roll with the Punches’ and recover with just a small adjustment, Rule Two’s Zero-Based Budget will tell you very quickly that you need to take alternative action to rectify the situation (drastically cut your expenses, make a short-term increase to your inflow, or perhaps call for an infusion from your emergency fund).

The important thing to note is that you don’t go into debt with the crisis hits, you make a wise choice because you now have some time on your side, and you stay on your feet with the budget, instead of throwing in the towel.

These are important questions to ask yourself when setting up your budget, and now you know. You have the answer to the age-old “timing” question with your paychecks, the variable income that’s always seemed un-budgetable, and the financial disasters that (will) strike, which used to snap your budget in two.

Those are all behind you now. So despite what you make think, budgeting works. And you need one.

One of our beloved forum members, Treasure Chest, decided to give YNAB as a wedding gift. She enclosed the following excellent poem:

My wish for you both is marital bliss.
A long life together, sealed with a kiss.

True love & friendship is already yours;
(So do please remember to divide up the chores!)

When pondering upon what would be the best gift,
I decided ‘t’would be to give your finances a lift.

But alas, I have no big check to enclose,
To help buy you good food, music or clothes.

So instead, I give you the gift of a budget;
To help you hone skills so you won’t have to fudge it.

To plan how to save, in many various ways,
So you’ll both be quite happy in your future golden days.

So I give you the gift of Y.N.A.B.,
In hopes to give strength to your new family.

So please do accept my gift from the heart,
And when it comes in the mail, please give it a start!

You’ll often hear people protest budgeting by saying something like, “If I budget, it will just tell me there’s not enough money” or “I don’t want to see all of those red numbers.” My mother-in-law (don’t worry, she doesn’t read this) claims that if she were to budget, her finances would be a mess, so she chooses to manage her money “on faith.”

I’m not about to dispute the principle of faith, but would like to point out that sometimes we should also…count the cost ((Luke 14:28)).

Yes, it is possible that your budget may tell you that you don’t have enough money — even for some niceties (but not luxuries) — maybe even for some necessities. Bear that in mind as you begin. You just may find out that you are completely and totally broke.

A zero-based budget does tend to highlight the scarcity of your resources. On the flip side, the Budget can also show you how flush with wiggle room you truly are. Though if you’re in that department, you’re probably not one of the budgeting unbelievers!

Rule Two of the You Need A Budget system states that every dollar is given a job. In other words, you’re expected to operate zero-based. If you have $3000 to work with, and you allocate $1000 to a house payment (a wee bit high at 33%) and then are forced to allocate another $450 for your two car payments, and $200 for credit card obligations, and maybe $300 for food (in Utah we manage about $270 for two adults, a three year old and a one year old), $100 for car insurance, etc…It starts to look pretty grim. I didn’t yet allocate the cell phone bill, cable, electricity, internet, eating out, car repairs…

But the point is that you’d begin allocating each of those $3000 to a job. By the time you had allocated throgh food, you’d see that you had $980 with which to work. So you’d chug along, moving down your categories, allocating your dollars. You’d be operating zero-based.

Usually in our Budget Meeting, my wife and I will ask the question again and again, “How much do we need for [category]?” Some of the categories are straight from the last month (rent doesn’t change, some utilities don’t change, the retirement contribution doesn’t change), but many of them need to be tweaked each month. So we move down with special attention on those variable categories and answer the question of how much we need in each category. Without fail, we look back at how much we have Available after doing this allocation and we see we’re in the Red. We’ve overallocated.

It’s the Zero-Based Budget’s way of pulling back on the reins and guiding us back toward reality.

In our case (thankfully) things aren’t usually in the I’m-unbelievably-stressed-because-of-our-money-situation (thanks to following these principles for years), but it’s a reality check nonetheless: “Hey! Guys! You know those dreamy allocations you just made? See how you put way too much in Entertainment? Well, pull some out and be realistic. You can’t afford that!”

There’s a silver lining though.

While we had been following the zero-based budgeting principle (Rule Two) for about a year, we hadn’t yet had the very-stressful reality check yet. We both had been working part-time, our rent was a few hundred dollars, we avoided eating out, we didn’t own a TV — we were living on the cheap. As a result of that on-the-cheap living, things were going well for us and we were able to set aside some money.

Then it all changed when our first son began his nine-month journey into our lives. We had decided beforehand (before we even married) that Julie would be 100% Stay-At-Home Mom. It was a non-negotiable decision the two of us had come to. But that meant that we’d be giving up Julie’s income as well. I crunched numbers for several weeks, forecasting how much we would be able to save up until the baby came, how much the baby would cost, how much a new place would cost (our one-bedroom basement apartment wouldn’t do, plus, I think it had a mold problem), how many hours I would be able to work while going to school, how much longer school would take (two years), etc.

Well, the more I crunched the numbers, the more discouraged I became. My zero-based budgeting idea was staring me back at the face saying, “You won’t be able to do this.” I contemplated working 40 hours per week while going to school but knew my grades would suffer. I thought about taking out a student loan to tide us over — even if just small one — but I couldn’t let myself do that. I wanted to make it through school without anything tied to our financial ankles.

I worked, reworked, massaged, and coaxed the numbers and no matter how I did it, the zero-based budget continued to tell me that we would not have enough. Welcome to Reality. Again. And again. And Again.

One night I came home from school with an idea. I would sell our budgeting spreadsheet online to help us earn some income. I asked Julie what she thought and she said there’d be no way someone would buy our spreadsheet. I went ahead anyway and worked tirelessly on learning how to write webpages, market an online product, and create a user-friendly spreadsheet that could be sold to people wanting to use the same principles we had been using with so much success.

I launched it in September of 2004 — two months after our first Son was born. While it hasn’t been the “hands off” solution I had thought it would be, nor is it some IPO waiting to happen, it did tide us over for those two years of school. And on top of that blessing, starting this business has helped me meet so many other people. I’ve been able to write in my untrained way to hopefully motivate others to manage their money. In starting this little venture, I’ve found that I have a passion for sound money management. I enjoy helping people get a hold of their finances.

None of this would have happened had the zero-based budget not told us way back in 2003 that we wouldn’t have enough. My first big reality check turned into my first big blessing. I am certain that it can happen for everyone. Don’t be afraid of reality. Embrace the problem and find the solution.

Yeah, sometimes it’s not all hot chocolate, matching sweaters, and laughter around the toasty fire when Julie and I are sitting down ready to do our budget meeting. The last one, actually, had a new addition: Julie’s List of Things She Wants / Needs.

She’s becoming quite adept at how this whole budget system works. As a matter of fact, she’s scary-good at it.

Julie knows that living on a budget means living according to what you planned to spend. Living on a budget doesn’t mean you live on ramen noodles and ketchup packets (though it may point you in that direction). To live on a budget means to live in reality.

Yes. Your finances really are that [insert adjective here: good? horrible? shaky? fantastic?].

The key to the budget is to plan. And that’s where Julie’s list came into play about a week ago. She had it there in front of her – removed from its normal subtle spot, which is magnetized to the refrigerator door – ready to plan. You see, she’s so good at this! Her list is so conservative, and she rightly deserves every single item. She just had the problem in meetings past where she would forget that she needed something (like a new pair of running shoes, or a sippy cup for the one-year old).

So of course, when she was out and about later on, she would remember what she needed. But she hadn’t talked about it during the meeting. So sometimes it’s a phone call, or sometimes it’s just a chance for her to exercise some fortitude and pass on the purchase.

We operate on a tight budget – working toward saving for our first house. So we have every reason to pinch a penny.

But alas, now with that list. Living on a budget means living according to a plan, and her plan, is to make sure she has that list so it can become part of the overall plan. And then I can’t say, “Well did we budget for it?” Because we did. Or we should have. Or at least there was a heated discussion about it.

And that’s a long, round-about way for me to get to the point of this whole brain dump. Our discussion during the last meeting was a bit more heated than normal. I saw the list and pulled up the bridge, dropped the gate, threw away the key, and had some of my People add extra water to the moat.

Our budget meeting was anything but peaceful. It took a little bit longer than normal and we came to a consesus in the end. Basically it forced us to reevalute our priorities just a tinge.

So where does the peace come from living on a budget? It comes from aligning your money with your goals.

Peace happens when Money aligns with Goals

And that’s why I didn’t notice any feelings of withdrawal when I spent less money during my experiment as a teenager. I simply stopped spending money on things I didn’t truly care about, and I didn’t miss not having what I didn’t care about in the first place.

There are a few things I care about. I care about shelter for the family. I care about adequate transportation, health care coverage, food, clothing, etc. But you know what? I also care about getting Porter his first bike for his third birthday coming up here pretty soon (it’s a Superman bike, and is so cool). I also care about Julie’s knees not hurting after she runs, which means we need to get her some new running shoes. I care about going on dates with my wife every Friday night — which means we pay a babysitter, or find someone to swap with at least — so we can go out and give her a break.

When I spend money on any of these things, I don’t feel bad at all. But when I spend money on things that I don’t truly value, that aren’t in line with my goals, I get zero satisfaction from them. As a matter of fact, I would say that the net result is dissatisfaction. What a horrible thing: to spend money on something that makes you feel worse.

Living on a budget in the right way means that you take your budget seriously. You assign your dollars their jobs based on what you truly want them doing.

When we sit down and set our budget, we don’t carve the numbers in stone. You can’t reasonably anticipate every happening during the next four weeks. It’s just not going to happen (though its uncanny how regular things are over a longer time period). So when we go over budget, that doesn’t necessarily mean we’re straying from our goals, it may just mean we didn’t see something coming.

The important part about the budgeting process is the conscious decision to have your money do what you actually want it to do. Not what your coworkers want it to do. Not what the bank loan officer wants it to do. Not what anyone wants it to do except you.

And when you find that you truly are living on a budget, then you find that you are living in peace. Because finally…

Finally…

Finally…

You, and your money, are in alignment. And I’ll bet there’s money enough for that.

Hats off to Taylor on this. I finally finished compiling the change log on the upgrade page (you can get to it by starting up Pro — it will detect that your version is outdated and bring you to the download page) and realized just how much work he poured into this new version.

First things first: a lot of bugs were fixed.

Okay, now on to the good stuff.

You can now import transactions from your bank file in both .ofx and .qfx (webconnect) format. This works like a champion. Newly imported transactions are checked against what’s already in the Register for potential matches — they’re marked in bold until you Accept or Delete them.

Honestly, I never really gave the whole import thing much credence. I figured Julie and I already spent such a minimal amount of time managing our money that it couldn’t possibly do much more. Holy smokes was I wrong. Reconciling is a piece of cake. Julie said, “It’s not that it saves so much time with entering transactions, just in going back and checking and re-checking to make sure you included everything from the bank.”

She hit the nail on the head. The time savings is unbelievable. I stand humbly corrected. I’m down with importation. Very down.

Okay, another very cool feature. Every transaction can now be flagged for whatever reason you like. The flags come in various colors. Some are going to want to flag transactions as Not Yet Cleared, or Come Back to This Later, or Why Did I Buy This. It’s entirely up to you. The functionality is there either way.

The Budget and Register now have a built-in drop-down calculator. This is nice for very obvious reasons. Need to figure out how much you should budget for that semi-annual bill anyone?

There are other little things that will make data entry faster. You can now start typing the Master Category of a transaction. When it pops up, just hit the “:” button and the Master Category will automatically be filled in. You can then type to find the Category.

I know I’m forgetting some other features as well.

Thanks goes out to the many active forum members that provided such invaluable feedback. Please keep it coming! We’ll be starting on improvements shortly.

I’m pleased to announce a very quick turnaround for 1.1 of YNAB Pro (there may be more where that came from). With the release of 1.0, many users immediately began asking about the ability to print. Well, that ability is now available in 1.1.

Also, as an added help for those that would like to find a transaction or group of transactions quicker, or reconcile to their bank statements a bit easier, filtering functionality is now included in the Register.

A few other minor bugs were fixed in response to a few crash reports sent in by users.

If you would like to download 1.1, please use the URL included in the email you received when you purchased. If you no longer have that email, you can contact me and I’ll work it out.

Please post it to the forums, at this thread. One of the heavy-hitting personal finance blogs would like to feature some YNAB success stories during the months of January and February. Your help would be very appreciated. I think people are tired of my story so…