Do You Live on the Edge?

Posted on November 2, 2005 by jesse

There was a man who was looking for a stagecoach driver that could transfer his belongings quite a distance. The man had three drivers approach him for the job. He asked only one question of each of the drivers:

“How close can you drive your stagecoach to the edge of a ravine without going over?”

The first man answered confidently, “I can bring the wagon wheel within one foot of the edge, and you will be safe.”

The man let the second driver in.

“How close can you drive your stagecoach to the edge of a ravine without going over?”

The second driver answered confidently, “I can bring the wagon wheel within six inches of the edge, and you will be safe.”

The man let the third driver in.

“How close can you drive your stagecoach to the edge of a ravine without going over?”

The third driver answered confidently, “I don’t know. Whenever I drive a stagecoach, I stay as far from the edge as possible.”

And so it is with…DEBT. Yes, show your sophistication and prowess you man of wit and leverage. Show us how you can maximize your return on equity through sophisticated and complicated borrowings. Show us how to get real estate with no money down. Show us how to get the home of our dreams far before we can truly afford it. Please, show us your wisdom, oh Icon of Interest.

Please don’t.

Be that third driver when it comes to your finances. These are your family finances we’re talking about here. When you take risks, take calculated risks with money you can afford to lose. Sure, be a (calculated) risk-taker, a go-getter, a visionary, but do it with prudence, wisdom, and patience when it comes to the state of your personal finances.

The Secret to Debt Reduction

Posted on November 2, 2005 by jesse

There’s been lots of debate about the best way to pay off your debt. You want to reduce your debt, so you embark on a journey to find the best way to do it. What you find is a bunch of people talking about all of these different approaches to lining up your debts before you begin killing the bloodsuckers off.

The agreed upon method is called the debt snowball by most. You pay your minimums on every debt. On the ‘first’ debt you pay any extra you can. Once the ‘first’ is paid off, it drops off the list and a new ‘first’ is born (a firstborn? no…). You take all of the money you were paying on the first first, and pay it on the second first (this includes the minimum and the extra). Once the second first is paid off, you have a new first, which is the third first, replacing the second first, and first first (twice removed). Your third first is now getting the first and second firsts’ minimums and the extra. Basically it’s getting first³ type treatment. Your third first is picking up steam. Not to be outdone, once your third first is paid off, you apply its extra, along with the first first and second first, to the fourth first. You repeat this process untili your last first is paid off.

Not only have you paid off your debt, you’ve also brought to pass a biblical prophesy:

And the last shall be first, and the first shall be last.

But I know you have a burning question inside. How do I know what the first first is? Well, that’s the debate I mentioned above. How do you order it so you’re out of debt as fast as possible?

Well, silly, of course you take the smallest balance and make it first. Wait – no. Take the highest rate as the first, with the lowest rate being the last to be first. Mathematically that makes perfect sense. Some people have a much more effective (read: complicated) method (whatever works for you works for you) to help them reduce their debt.

Oh, wait. I forgot another method:

this approach is based on the ratio of the outstanding balance to the minimum amount due. Divide the latter into the former, and concentrate your payments on the debt with the lowest resulting value.

The first first is determed by a ratio that gives you full guidance into the most effective debt reduction strategy.

Feel like declaring bankruptcy yet?

The YNAB plan for debt reduction:

(1) Make a plan.
(2) Follow the plan (see #1) with I N T E N S I T Y

If you don’t manage #2, it doesn’t matter how effective #1 is, you’ll never get anywhere.

How to Manage Your Money: Know your Beta

Posted on October 27, 2005 by jesse

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 One Month Buffer: Down & Dirty

Posted on October 20, 2005 by jesse

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.

Budgeting Tip – Give Every Dollar a J-O-B

Posted on October 14, 2005 by jesse

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.

The Right Side of Effective Money Management Worksheets

Posted on October 7, 2005 by jesse

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.

Automatic Entry of the Date

Posted on September 23, 2005 by jesse

Thanks to Sandro for providing this very useful little macro (Excel and Mac compatible) for YNAB 3.1.

Do you get sick and tired of typing in today’s date when entering transactions in the Register? This little macro will do the work for you. Here’s out to get it running:

With YNAB open, press Alt+F11
You’re now in the Visual Basic Editor. On the left side there is a pane called “Project – VBA Project” (if it’s not visible press Ctrl+r). Double-click on Sheet3 (Register)
A white page will open to the right. There are two drop-down boxes at the top of the just-opened page. In the left drop-down box select Worksheet
The right drop-down box should automatically say SelectionChange and you should see two lines that have automatically been entered: Private Sub Worksheet_Selection… and End Sub.
In between these two lines, paste the following code:
If Target.Column = 3 Then If Range("B" & Target.Row).Value = "" Then Range("B" & Target.Row).Value = Now End If End If
Click the Save button in the Visual Basic Editor and close it.

Alright, you should be finished. Now give it a test drive. When you click on a blank “Category” cell, the “Date” cell to the left of it will be filled in with today’s date! Thanks again Sandro!

Stock Market Investing for the Dummy

Posted on September 9, 2005 by jesse

I figured I’d borrow the oft-used title of books for beginners. My focus in this article is to discuss the very basics of stock market investing. We’ll pretty much go a mile wide but an inch deep.

What is a stock
A stock is a share of ownership in a company. In this article we’ll be focusing on public companies, but the same principle basically applies to private companies as well.

As a part owner (you might own one millionth of the company, or one hundredth of the company, depending on how wealthy you are), you have certain rights. One of the rights you have is to vote each year for the Board of Directors. The Board of Directors represents the shareholders’ best interest (hopefully) and holds management accountable to do those things with the company that will maximize shareholder value.

As a shareholder, or part owner, you are also entitled to dividends – profits of the company. If you own one share, and the company has 10 shares outstanding, you own ten percent of the company. If management decides to issue a dividend (distribute corporate profits to shareholders) of $1000, you will receive ten percent of that, or $100.

If the corporation carries debt, and it files for bankruptcy, the creditors are first entitled to be paid. In this way, when you own a share of a company, your investment could (hypothetically) go up infinitely, but can only go as low as zero.

While you used to actually own a stock certificate that you might keep in a bank safe deposit box, today only the information is stored. You don’t actually receive a piece of paper representing the shares of a company that you own.

How are stocks traded?
Stocks are traded on exchanges. One exchange that is very familiar is the New York Stock Exchange, or NYSE. The NASDAQ is an exchange for technology stocks. These exchanges are part of the secondary market – where buyer A purchases shares from seller A. A primary market would be where buyer A purchases shares directly from the company in an initial public offering (IPO).

Whenever a stock is sold, there is a buyer on the other end. Many times people think of selling stock as simply “cashing out” – while that may be accurate, you must rememeber that there must always be a willing buyer to take your shares at their market value.

How are stocks priced?
Stock prices change through basic supply and demand. If stock A is $10, but there is a sudden surge of demand for it, people will be willing to pay a higher price. Perhaps the increased demand brings the stock’s price to $12. On the flip side, if there is a lot of shares being sold (supply, or availability of those shares), the price will decline. Think Tickle Me Elmo. The price went up because the “market” demanded it. There was no other rational reason for it.

What a stock price really comes down to though, is what investors feel the company is worth. That is the key. The number that drives a stock price (in the long run) is its earnings, or profit. So investors can look back historically and see the earnings a company has managed to attain in the past. Using this historical knowledge, they will forecast what they think earnings will be in the future.

Forecasting earnings is more than just numbers. You must look at the type of industry the company is in, macro economics affecting that sector, the industry, and the global economy. You need to look at firm-specific items, such as a change in upper management, a new growth strategy, new products in the pipeline, etc.

Many professional analysts do just what we’ve discussed above, and issue estimates of what they believe a company will make. These estimates are given by quoting the Earnings Per Share (EPS) of the company. The EPS is simply the company’s forecasted earnings divided by the number of shares outstanding.

Basically though, nobody can really tell you the exact reason why stock prices change. People devote their entire careers toward this field – it is large and deep.

How do I Purchase a Stock?
You can purchase single stocks through any number of brokerages. These brokerage houses will charge a commission for each transaction. Some online brokerages, such as Scottrade charge only $7 per transaction. The growth of the internet as a trading medium has exhibited significant downward pressure on the costs of stock trading (and this is a good thing). Some other online brokerages you could look at would be Sharebuilder or E-Trade.

How do I know when to buy a stock and when to sell it?
There are many sophisticated mathematical models, technical analyses, strategies, omens, rituals, software packages etc. that supposedly help you buy low and sell high in the market. And there is no doubt that some people possess a special nack for it. Others lose their shirts.

Some people are big proponents of passive investing as a solid investment strategy. Others totally disagree.

It comes down to what you personally feel good about doing. I wouldn’t even think about investing in stocks unless I was:

1. Budgeting faithfully
2. Out of debt
3. Living with a fully-funded emergency fund

Hopefully this little introductory article gave you a small insight into the world of stocks. There’s a ton to know out there. Good luck on your investing!

Money Saving Ideas for YNAB Rule #1

Posted on August 31, 2005 by jesse

You read that correctly. In order to use YNAB (and to be in compliance with Rule #1 of YNAB), you will need to save one month’s expenses. The typical response?

How the heck can I do that? I can barely make ends meet as it is!

It may seem that way to start, but I’m going to provide you with a few money saving ideas (also, some money earning ideas) that will get you to your one month’s expenses in no time.

Easy Money Saving Ideas – Implementation however…
Alright, let’s get one thing right out in the open: this is not going to be easy. You’re going to really have to get radical in order to pull this off effectively. You cannot expect to reach a whole month’s worth of expenses (your #1 Fund I like to call it) by just haphazardly putting money away now and again. No way – no how. You need to get INTENSE in your desire to stop living paycheck to paycheck and reach deep down inside your soul for some major resolve.

You’re about to do what 70% of Americans cannot manage to do. Live below their means, save for a rainy day, and get out of the paycheck to paycheck cycle.

I’m providing these money saving ideas for you to implement not mull over! You must ACT on these ideas! ACT!

A List of Ideas to Save (or Earn) Money
1. Work overtime. If your job allows it, put in as many hours as you possibly can until you get your #1 fund. Remember, this is a temporary fix for a long-lasting solution (no longer living paycheck to paycheck). You may see a bit less of your family for a short time – but that’s okay. What you’re doing for your family in terms of getting your finances in order has a much more profound and far-reaching impact.
2. Get a part-time job. You can make a thousand bucks a month delivering pizzas. Do that for three or four months and you’ll have your #1 fund. Be diligent and have a smile on your face (more tips)! Check out possible temp jobs, graveyard shifts, UPS, etc.
3. Start a small business. Some people laugh when I share this idea with them. I don’t say it to be funny. I have a cousin that built up a lawn care business in one summer. It’s been a couple of years since he’s put anything into it, and it still makes him money every month. Imagine what it could be doing if he was actively going after it? If you mow 8 lawns for 8 weekends at $20 a pop you’ll have a nice stash. Don’t forget car washing, window washing, dog walking, etc.
4. Have a garage sale. That’s right – get rid of the junk you don’t need but think you might. Sell everything you forgot you had. People sometimes make enough from their garage sale to save some major money toward their #1 fund. Typically you make between $500 and $800.
5. Ebay. Like a garage sale, but with a wider audience. If you don’t know how to ebay, ask the person next to you. They’ll most likely know how and will be able to help you.
6. Car pool. Gas prices are high right now. Sure it might be a bit inconvenient, but imagine if you could cut your gas bill in half!?
7. Brown bag it. Don’t eat out – at all. Remember, a short-term solution for long-lasting blessings. Sacrifice. (You’ll probably trim down a bit too – I know I tend to trim up if I eat out a lot).
8. Cash in vacation. Sacrifice a few vacation days for your peace of mind. Many employers will allow you to ‘cash out’ of vacation. It’s a great way to get some cash.
9. Save all windfalls. You do get windfalls. They happen. Stash ‘em.
10. Stop contributing to your retirement. Here’s where I usually get a bit of backlash from people. You are talking to a guy that knows the value of an invested dollar. Trust me. But remember, these money saving ideas are not long-lasting, permanent changes you make to your finances. They are short-term ‘bursts’ of financial feistiness that will get you to your #1 fund that much faster. Once your fund is in place, you can immediately begin contributing toward retirement. Email me if you have a question about this.
11. Cut your phone bill. Consider cutting your phone down to the very basics. Do you have a cellphone where you could get out of the contract inexpensively? Remember, short-term solution for long-lasting peace.
12. Dont’ buy bottled water. Seriously.
13. Don’t go to the mall. Seriously.
14. Cancel cable, satellite, etc. Seriously.

These money saving ideas will get you toward your #1 fund faster than you can truly appreciate until you have actually lived this.

BE INTENSE

ATTACK

FIGHT BACK

TAKE ACTION!

Creating a Home Budget Step by Step

Posted on August 29, 2005 by jesse

The other day I received an email from a guy that was looking for some help with his budget. What he really wanted was to run his family like a business.

While I think it’s a great idea to have the mindset that your family does operate with a bottom-line (that can’t or shouldn’t be masked by credit cards and borrowing beyond your means), you also need to remember that creating a home budget needs to be simple – and stay simple.

This guy wanted to know if the personal budget that I sell would allow him to do accruals. Heavens no! An accrual is basically where you might pay for an expense (such as car insurance) every six months, let’s say it’s $300. But you know that the expense really applies to the next six months. So you would spread that $300 over the six months – recognizing the expense on a month-by-month basis.

Sound confusing? It’s really not too bad. Businesses do it all the time because it gives a more realistic picture to their net income. (Imagine if a company had a big expense relating to the prior year that happened just after the new fiscal year started. It would understate that prior year’s expenses.

As a family, if your home is being foreclosed on, does the lender care that your net income looks good if you don’t have any cash to make the mortgage payment? Of course not. Families need to operate on a cash basis. Cash is, really, all that mattersi in the end (financially speaking of course).

Your First Step in Creating a Home Budget
Write down everything you spend for one month. This will give you a realistic idea of how much you will need to be budgeting into different categories. It’s crucial that you write down every penny you spend too. I’ve talked a lot about the power of writing things down when you first begin the process of creating a home budget.

Some people get after me on this and say they want to begin budgeting right now. Well, you are. Recording your expenses is at least half of your budget. The other half is planning what those expenses will be.

Actual Creating Begins Here
Once you’ve written down your expenses for one month, you’ll have a pretty good idea of where you spend money. So, write down every single fixed expense you have (these don’t have to be monthly). A fixed expense would be rent, car insurance, subscriptions, property taxes, internet, phone etc. Break those all down so they are monthly fixed expenses. So if you paid your car insurance premium every six months, you’d divide the premium by six to get your monthly car insurance expense (this is kind of like the accruals we talked about above, you’re just doing this to stock up cash, not recognizing the expense over the period in which it was used…).

Now that you have your fixed expenses, brainstorm all of your variable expenses. These might be electricity, gasoline, groceries, toiletries, gifts, entertainment, restaurant, etc.

Add both your monthly fixed and variable expenses together. That’s where your money is going. You’ve used what you’ve written down to help you be realistic about what these expenses really are.

Allocating the Budget
Now, if you have a spouse, sit down with them. If you don’t, sit down with yourself. Turn off the TV, radio, etc. This is time to focus. Decide on paper how much you want to spend this month in each spending category. Some categories will be easy (Rent), others will be tough (groceries). Take a look at what you wrote down and be realistic.

When you first create a home budget you’re kind of stepping into the darkness a little bit. That’s okay. Just don’t expect to be able to predict every expense the first, second, third, or even fourth month. If you’re abiding by Rule #4 of YNAB then you just roll with the punches when it comes to accidentally overspending. Resolve to do a little bit better each month.

Sticking with Your Home Budget
Stick with your budget. Don’t give up. Don’t throw in the towel. The budget is the most powerful tool you have to manage your money and make it do what you want it to do, instead of the other way around. Continue recording every purchase you make. Your spending will drop from that alone. Work together as a team if you’re married. Encourage each other to stay on the budget. Do not be domineering or coersive when creating your home budget together. Be honest and openly communicate your needs and wants. Be accomodating and sympathize with your spouse. Do not give up! I promise you after three months of active budgeting (1-2 hours per month) you will (seem to) have more money. Each dollar will work harder and longer. And you will finally gain some financial ground.

YNAB

You haven't budgeted like this.

Yearly Archives: 2005