George Santayana has been quoted as saying, “Those who cannot learn from history are doomed to repeat it.” There is quite a bit of value to be gained in the ability to look back at your spending and learn from trends, isolate mistakes, and highlight quality decisions.

Looking Backward
The current trend in money management software is to do just that — all under the banner of automation. Software solutions are appearing at a rapid rate that have you up and running in just a few minutes, syncing with your bank account information, downloading transactions as fast as they appear, and categorizing them for beautiful reports. Visually stunning and technologically appealing, the first pass usually gives you the feeling that, “[fill in blank] will definitely help me manage my money.”

And they will.

If you are looking to make marginal gains in your money management, these should fit the bill nicely. If you’re looking to make huge strides, there’s a better way.

Moving Forward
Economically speaking, there is no such thing as a free lunch. And that principle applies here as well. You’ll get out only what you put in.

What you’ll find in money management is that looking backward will only get you so far, while looking and moving forward will you bring your finances to a whole new level.

Consider these two separate scenarios:

Scenario 1: I spend a total $100 at various places for various things. A few days later I login to my traditional money management software and see those transactions categorized automatically for me. I note that I spent some here, and some there, and muse about my spending over someplace else as well…

Scenario 2: I have $100 in my pocket. Before I do anything with the money, I think for a few minutes about what the money needs to do for me. Pay bills? Buy food? Be saved for a rainy day? Based on this thought exercise I write down my plan for this $100.

Given those two different scenarios, which offers you the higher likelihood of bringing your spending inline with what your true needs, wants, and values are?

Benjamin Franklin said, “A penny saved is a penny earned.” I suppose what I’m here to tell you is that a penny budgeted is a penny well-spent. I’m confident in saying that budgeting brings about better spending because a person being honest with him or herself will not knowingly create a plan that is contrary to what is truly wanted. When you sit down with your paycheck, your spending categories, and your value system, your budget is going to be a reflection of you and your priorities. I suppose that’s one thing that’s automatic about this system.

The money management system I’m proposing is one of looking forward, projecting, and planning. Instead of looking back at what you’ve done, you decide beforehand what you would like to do, and then you execute based on that plan. You do this monthly and you do it manually. When you attempt to do this with less frequency and more automation, the level of benefit drops significantly. Why not have both? Look back at your spending and learn, then take that learning and plan.

A great life tips blog, DumbLittleman, featured an article I wrote about Rule One. Just wanted to share if anyone’s interested in popping over. The blog’s got some great articles running the gamut of personal development.

Take away my computer, my software, and every and any other financial tool available to me and leave me with nothing except a stack of blank paper and a pen and I will still be able to win financially.

I would take that pen and craft a weapon fit for wielding against any of my financial enemies (temptations of easy money, the procrastination of retirement savings, the allure of a flat-screen TV mounted on a wall connected to a Nintendo Wii — for bonding time with the boys, among other things).

That mighty weapon would look a little something like this. Time invested: 25 seconds:

I would diligently record every single purchase I made. Every time money flowed out of my life there’d be a record of it. I would not just record the “significant” purchases because I would know that every single purchase is significant. It’s the aggregate of all your financial decisions that matters most, and every time you spend money, you’ve made a financial decision.

Once my paper was full, I would write down the beginning and end date at the bottom and total the spending. I would then create another similar weapon and follow the same process. I would write down everything I spent. Every time.

This little exercise, occupying perhaps one hour of my time each week would plant a seed of awareness inside my brain with the potential to grow into a mighty oak of financial prowess. It would only take a bit of nurturing and protection.

Software Can Destroy Awareness
Why are financial tools a potential threat to your finances? Because they quickly desire to move in the direction of the software doing more so you can do less. Less doing means less awareness, and less awareness means your progress will be slowed tremendously. As a software developer, I’m keen on giving customers what they want. They’re happy and tell their friends about the software, which in turn makes me happy. The merry cycle continues. However, where I see a potentially new feature threatening the users’ awareness of their financial decisions you will find me kicking, screaming and dragging my feet.

I dragged my feet when it came to software importing transactions. I was wrong on that one (though the slope is slippery). I’m dragging my feet with auto-categorization of imported transactions. Time will only tell with that one. I refuse to offer the ability to let users set one budget for the year. I want users to revisit their budget often — very often. I’m vehemently opposed to software automatically linking with banks and syncing transactions for you whenever you want if that software purports to help you spend less money and make wiser financial decisions. It may do that to a degree. But its impact is weakened substantially.

Banks Work Hard to Destroy Your Awareness
Banks have worked hard to destroy our awareness. That seed that you plant when you start to become aware of your financial decisions is fragile and exposed to external forces that want so bad to destroy it. Banks have been extremely successful in selling us on swiping instead of digging into our wallet and counting (don’t underestimate the counting that used to be required when you spent money). How do we fight back? We go home and go through the psychological process on our own, recording exactly how much we spent and why we spent it.

Automatic billpay is a great time saver and I’m a big fan. But I only remain a fan because I go through each of my financial decisions several times per week and record how much I spent, and why I spent it. I fight back. I protect my awareness.

When you Let Awareness Do Its Thing
When you actively nurture that seed of awareness, ensuring that you’re recording every financial decision you make, the seed will eventually grow into a mighty oak, immovable by any force (regardless of the offer, OAC of course..[written with searing sarcasm]).

That might oak will represent your core values. Marketing can’t change them. Social situations can’t change them. Friends can’t change them. They are your core values.

The natural extension of my paper-turned-weapon would be to begin to plan what I would like to do with my money before I spend it. Recognizing a balance between cost (time) and benefit, the planning should happen at least monthly and more frequently if you derive measurable benefit from that. That planning is called budgeting. Forget all of your preconceived notions about budgeting being restrictive, for tightwads, or something only businesses need to do (the logical hole in that last excuse? Big enough to drive a Mack truck through). A budget is a plan. Heck, it’s your plan, so why the beef?

As you write down your spending diligently, you will desire to change things. It won’t be because someone’s breathing down your neck telling you to stop going to the mall so often. It won’t be from some uncomfortable outward pressure. It will come from inside — from your core actually. Your core values will slowly begin to speak to your mind again. Your common sense will emerge from its hiding place. The cobwebs of financial confusion will slowly disappear and you’ll have financial clarity.

Notice here I said clarity. I did not say peace. I did not say bliss. I said clarity — the close cousin of reality. For too long you’ve been muffling the voice of your core values and ignoring the pleas of your innate common sense. You’ve earned and spent and earned and spent, walking on a treadmill leading absolutely nowhere. Now that you’ve increased your awareness, those core values and common sense aren’t quite so afraid to speak up again. They’re anxiously awaiting an opportunity.

That opportunity for your core values to speak is during the planning process. You sit down with the clarity that you now possess, with Common Sense sitting on your shoulder, and assess your situation. Through the lens of clarity you now see things as they really are. You now see reality. Inside reality you’ll find you make the absolute best decisions. You may decide you can put off the desire for X and Y, so you can focus more on paying off all of the past desires of A through W. You may, through that lens of clarity, receiving whispers from your common sense, and feeling your core values (finally) actively participating, realize that your financial future is actually in your hands. Goals will begin to crystallize and you’ll feel that you’re headed in the right direction.

It’s important to realize, once again, that being headed in the right direction is not the same thing as being in the right place. You may have taken a long detour through La La Land before you finally realized that what you were doing wasn’t working. Take comfort in knowing that you’re correcting course and going where you want to go. The beauty of the whole situation is that you will feel content with your situation. Money may still be tight, health problems may still strike, prices may still go up, but you will be operating from your core values and you will be content.

All of this from persevering with a pen, a paper, and a plan.

One of my resolutions is to write more and one way I’m going to do it is to make sure that I participate in the weekly bloggers’ Carnival of Personal Finance. #142 is hosted over at Baglady’s blog, with a homeless theme (that I really enjoyed). If you want a heavy dose of personal finance, just take a gander through those great articles!

In times past, access to financial planners was something for those already well-to-do, with money that needed some direction. Thankfully, with the advent of the internet and the scaling that’s possible, professional financial planning is right at your fingertips for a fraction of the cost.

A financial planners’ job is to gather information from you about your current financial situation and your desired future situation. You take your goals and aspirations and you build a roadmap for how you’ll get there. eFinplan does just that with a straightforward web interface.

Knowing the best way to learn is by doing, I spoke with a co-founder of eFinplan, Kent Irwin, and he let me give the software a test run. Because the software is so straight-forward, I’m not going to talk about how to navigate it or anything like that. If you’ve filled out a form online before, then you can use the software. What I’d like to talk about, and the part that got me so excited, was the end product.

When I finished entering my financial information into eFinplan, I was given a 63-page comprehensive financial report. Emphasis on comprehensive. It’s broken down into easily-digestible sections so no need to feel overwhelmed. You can just work through it one bit at a time.

To be clear: the document is in no way an advertisement for anything. My first though was, “Oh, they’ll get this information and then be able to refer people to planners or insurance brokers.” I was dead wrong. The report is a plain vanilla report chock full of information.

Section 1: Present Financial Condition
The first section deals with how things are right now: a statement of net worth and a breakdown of capital assets (between taxable and tax-advantaged funds). An example of a tax-advantaged fund would be a traditional or Roth IRA, or a 401k, among others.

You then work through some basic assumptions (which are adjustable, but I recommend you leave them at the default) such as your life expectancy, expected rate of inflation, expected expenses at retirement and a slew of others. Just stick with the defaults and you’ll be fine

Section 2: Future Goals
Section Two is where things start getting fun. You work through your future goals (Maui+Golf, just for instance) to see if you’ll be able to fund those goals.

The great thing about eFinplan is that it’s not just a data output (from what you just input). It actually walks you through and explains the what, why and how of the whole plan. That’s where the value really is — in the education.

Continuing on with the goals section, it breaks down each of your retirement years and shows how your cash flow situation might be. If you worked things into your plan like funding college for kids (can you say expensive, hello?!), you’ll see a breakdown of how much you’ll need to contribute to meet goals for each of your kids, how much tuition is expected to be, etc.

As part of the college funding section, they give you a nice, consolidated report on the different funding opportunities available (529, UGMA/UTMA, etc.). It was nice to have all of that presented in one place instead of spending an hour on Google. It even educates you on various tax credits and deductions that make college funding easier.

As part of your future goals, you may have some milestone such as the purchase of a home (that was ours). That will be factored into your situation to make sure you don’t overestimate your retirement nest egg by not considering that hit.

At the end it gave a brief synopsis of my goals to:

• Retire at 40 (13 years away)
• College education for the (now three) kids
• Buy a Home

Section 3: Investments
Section Three is all about your investments. the eFinplan does a great job of teaching you about risk tolerance, diversification, risk vs. return, etc. It’s like having a financial planner teach it to you, but you can refer to this forever without having to pay again

You’re taught about the various asset classes (large cap, small cap, foreign, bond), selecting the right security (bond, stock, etc.) and timing the market (don’t!). You’re then instructed with great summary information about how different risk tolerance plays to different asset classes and their historical performances.

You’re then presented with what your asset allocation is verses what it should be. The eFinplan goes through rebalancing (there are funds that do this for you automatically).

Section 4: Risk Management
The eFinplan looks at your emergency reserves, property and casualty insurance, life insurance, etc.

The eFinplan gives great advice on cost saving tips for property and casualty insurance and when it comes to life insurance the information simply blew me away. It’s not that the information is secret or anything like that, it’s just that they present the different insurance options (term, universal life, variable universal life, and whole life — as an aside, I recommend term for 99% of people) with a brief descriptions and advantages/disadvantages of each one. Again, the information provided is stellar - it’s a great future reference.

The risk management section continues with disability, and long-term care insurance (again, with great comprehensive information).

Section 5: Your Spending
This is the section where YNAB comes into play as your method of aligning your spending with your values. The eFinplan analyzes your debt-to-income ratio and lets you know where you stand (I’m a fan of no debt), gives you solid advice regarding credit scores, taxes, trusts, health care, etc. The list goes on.

Section 6: Legacy Planning
This is the section where you’re reminded to get a will, a power of attorney, a living will, etc. Vital for anyone that would leave people behind over which you have financial responsibility.

Section 7: Implementation
The eFinplan report then walks you through which advisors you may need, and gives you great advice on how to select them. At the end of section 7 you have a consolidated report of action steps necessary for you to meet your goals.

The nice thing about how the report is organized is that each section has definable action steps that you should take, with a checklist to make sure you don’t miss anything. The eFinplan, for me at least, served as a great reminder of where I am, what I want to accomplish, and how I can get there. In comparison to the cost of a financial planner, it’s an absolute bargain.

I’d encourage you to check it out. I spoke with Kent just yesterday and he said they were doing a tax season promo, knocking the price down from $149 to $98, billed semi-annually, and they offer a 30-day moneyback guarantee. I’m not sure how this is not a no-brainer. Consider it an experiment. You won’t be disappointed with the end product (though you may get a kick in the pants telling you to start taking more action — but that’s a good thing!).

10% Discount for YNAB Users
Oh, and one more thing, Kent hooked us all up with a 10% off coupon, so instead of $98, it’s knocked down to $88. The coupon code is CDD98 and it’s good until March 10th. I thought it was a bargain originally at $149, so hacking 40% off is a steal.

Click here to check it out

If you’re budgeting’s going well, your logical next step is planning. It’s basically what you get to do with that cash flow you’re finding!

It’s not very often I simply post to the blog to send you somewhere else, but this post over at NCN (No Credit Needed) summarizes my feelings of late exactly.

It’s definitely worth a read.

“A man reaps what he sows” is a passage taken from the book of Galatians (chapter six, verse seven if you’re wondering). And while Paul may have been intending to address his readers’ spirituality, the Law of the Harvest can be applied across the board–spiritually, politically and financially.

Here we’re going to focus on the financial aspects of reaping what you sow.

Consider the process that a farmer goes through to bring his crops to harvest and finally see the results of his intense labors. The soil must be cultivated and prepared, the seed must be planted, the crop must be protected to the extent possible from the elements, it must be watered conistently, protected from weeds and other parasites, harvested and finally sold.

From idea to money in the farmer’s pocket, the process is a long one. When you combine the long process with the manual labor that’s required throughout, one could say that a farmer exhibits certain traits that enable him to successfully apply the law of the harvest:

1. Hard Work
2. Persistence
3. Optimism

In financial situations, the law of the harvest is alive and well. The only question is whether you choose to live it.

Hard Work

Naysayers of the YNAB software cite a learning curve (which I try and mitigate as much as possible) that is relatively steep. This, unfortunately, keeps many people from never really giving the software a full-fledged effort. A few days ago I decided I would see how difficult it was to get Quicken up and running. I bought a copy and went to work. And it was work! I still haven’t finished getting everthing up to where I’d be comfortable with it (and frankly, I’ll never get comfortable with it because it doesn’t have the Rules), but I made some headway.

Dismayed users of YNAB cite the difficulty in building their Buffer (one month’s expenses that you live on so that next month, you can live on last month’s paychecks), or the nuances of Rule Four (it’s subtle, but so important!).

Others just say the setup guide isn’t too helpful (I take full responsibility for that one).

As a result of this learning curve, with the attending dismay that it brings, I wrote The YNAB Way–my attempt to separate software from methodology with the hope that a thorough understanding of the methodology would make the software’s functionality intuitive.

The forums, another great resource, have helped me understand where new users are coming from and have also helped the veterans relate to the new users so that everyone can find a solution to their specific situation.

A new setup guide is in the works, and the tutorials have been a great success.

All this in a quest to make that steep learning curve more like a gentle slope. And I say all this to drive home a point that’s probably been lost a bit in this tangent:

Despite all the helpful tutorials, documentation, wiki, faq, and friendly people at the forums, adoption and full benefit of the YNAB methodology and accompanying software will require some hard work on your part. You will reap what you sow, however.

Several weeks ago I was asked why I don’t make the software more “mainstream” so I could broaden its market appeal and “make a lot more money.” As I thought more about the question I came to a clear realization. For me, YNAB has never been about selling software–it’s been about helping people see and manage their money in a new, more effective, efficient way. When asked what I do for a living? I help people learn to manage their money.

I guess the marketing approach is depth instead of breadth. Impact in people’s lives rather than impact on the bottom line. For some reason, I have this feeling that they’ll both converge at some point and I will be right on both counts.

When I first approached my wife about selling our budgeting system to the world, she said it wouldn’t work. I ignored her and went about doing it anyway and soon realized the potential roadblock that I was facing in my marketing pitch. I was going to have to tell people that they should save one month’s expenses (get their Buffer!). It seemed to be a fairly mean catch-22, staring back at me. People were coming to the site because they were probably operating with a very small amount of wiggle room in their finances, and here I was supposed to be coming in waving the banner of Financial Freedom with the simple instruction: Save your money.

‘Save your money’ to the guy that’s been operating in the red for several months is not too encouraging.

I plowed forward anyway, hoping people would see the benefits of Rule One–and I was right.

The success of the YNAB methodology is because it requires you to change. Can you use the software sans Rule One? Absolutely. Do I recommend it? Absolutely. But you better be straining and stretching to get your Buffer in place. You better be working at it.

So regardless of whatever great ideas the community comes up with to help new users with that learning curve (wiki and tutorials? both the community’s ideas), there is still going to be hard work in the newness of the whole idea, hard work with the implementation, and hard work with the ongoing tasks required of you (that’s right, you write down what you spend — every penny).

And all that hard work? I don’t think that’s such a bad thing. You reap what you sow (examples found here).

Persistence

While the world is full of cute sayings plastered onto inspirational posters of sunsets and sailboats (a journey begins with a single step, if you see a man atop a mountain–he didn’t fall there, etc.) the actual nitty-gritty of getting something done and making change is much less glamorous.

You don’t feel glamorous when you have a pile of receipts on your left, and some dorky budgeting software staring you in your face (on that face? an expression of perplexion). But those moments are when things get done.

If you’re a spouse “flying solo” because your significant other isn’t (yet, see optimism below) on board, you don’t feel so glamorous doing the above with them smirking or muttering–or both.

There certainly isn’t anything glamorous about putting a few things back at the grocery store once you see that your total is over budget. An embarrassing situation for most of us.

But you persist because persistence is key to change.

You may not feel especially successful when you first begin this process of change. Think about it. You’re possibly reversing years of bad habits. While I’d love to tell you of (and sell you, ha!) a fairy godmother, that would wave her magic wand and make you the savviest shopper, wisest budgeter, and sage-iest sage of investing…

Alas, that won’t happen. Ever.

You must persist in doing things that are good for you. You have to want the change more than you want those new tools, shoes, and gadgets. Persist!

To sharpen focus, I will give you three things which you must persist in doing until you are physically no longer able:

1. Write down everything you spend. Guage how freuqent this needs to be for you and then never ever ever stop doing it.
2. Plan, at least monthly (with each inflow if necessary), what your money should be doing.

Need software for that? Absolutely not. Any excuses worth mentioning? Absolutely not. Any reason why you can’t start today? Absolutely not.

I’ve persisted long enough with this, so I’ll end with my favorite quote about persistence, worthy of any picture of sailboats and sunsets:

That which we persist in doing becomes easier, not that the task itself has become easier, but that our ability to perform it has improved. - Ralph Waldo Emerson

Optimism

Our farmer is optimistic about the future. He believes that the weather will fare well enough, his work with the soil has been good enough, and that the seeds he has planted will grow.

You too can be optimistic about your financial future!

Be wary of damaging your optimism by comparing. Don’t compare yourself to anyone except your past self. Don’t worry if you have mountains of credit card debt when someone else doesn’t, that you make less than Joe or Jane, or that you couldn’t take your kids on the fancy vacation that your kid’s friend went on over the summer (and don’t try and puff yourself up by assuming it was all on credit card debt–just don’t worry about it at all). A sure-fire way to feel down about yourself is to compare to others. Realistically, the only person you really can compare yourself against is your own self. Financial situations are far too unique to be comparable to any degree of meaning.

When you work hard and persist, you have a right to be optimistic. You don’t have a right or guarantee of success. I heard it phrased once that we believe in equal rights, not equal results. So hang onto the right you do have. Based on the law of the harvest, you have a right to be optimistic. Be just that!

The law of the harvest stipulates that what you sow, you will reap. I believe that law is unequivocable. I’ve seen it in action. I’m certain you’ve seen it in action. Put in the necessary hard work. Learn the YNAB methodology and implement it. Persist in your efforts! Be optimistic that you will achieve those goals you have in mind. When you sow the seeds of sound money management, you will reap the requisite rewards. You’ll be debt free, your retirement contributions will be on autopilot, your emergencies will be small speed bumps, and you’ll be on your way to financial peace of mind.

I’ve long said that time should be spent managing the budget, not managing accounts (if you take care of your budget, the account balances take care of themselves). However, YNAB users wanted an easy way to make sure that what the bank was doing was what they were doing. After quite a bit of thought, I came to the conclusion that we truly could have the best of both worlds: simple account tracking with an extremely effective budgeting methodology laid across the top.

As a result, YNAB Pro 2.0 was born.

Managing your money just got easier.