About jesse

Jesse is the founder of YouNeedABudget.com. When he’s not speaking on, writing about, fine-tuning software for, or doing his own budgeting, he enjoys playing the piano, working in the garden, CrossFit, marksmanship, and honing his golf swing. Jesse graduated from Brigham Young University with a Masters of Accountancy degree. Immediately after he obtained his CPA license, he let it lapse so he could work on "You Need A Budget" full-time. Jesse lives in Utah, is married to Julie, and has five children. You can conect with Jesse on Google+ here.

YNAB Podcast Episode 72: Sowing Seeds of Money Happiness

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Hello YNABers. My name is Jesse Mecham and this is podcast number 72 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Today I’ve had the thought, a wish… I wish… You know when you play video games? I have to confess that I haven’t played video games for a long time, but back in the day when you were fighting an opponent they’d have a little bar that would go down as you would win the fight. You’d take away their power or their health, whatever it is, and the bar would maybe be green at first and then as you’re beating your opponent it would go yellow and get smaller and smaller, and then go red and then be empty. And the bar was always hovering over your opponent, so if you had a group of opponents you could see which of those monsters or whatever were healthy and which were hurting.

And we kind of have that today, but it gives us wrong information. And the thing that people use for those financial health meters is cars and houses. Cars more than houses because you’re driving around, you’re seeing people in their cars and you’re making value judgments. And you’re able to look at a person’s car and say, “Oh, that person makes money. That person’s healthy financially,” or, “That person just cut me off,” or, “Man, that person doesn’t make a lot of money.” Maybe they’re driving a really old car or whatever. But you make judgments like that.

You do the same thing when you see where someone lives. You make judgments. And you do the same thing when you see what people wear. You think you don’t, but you do. And a lot of times you’ll try not to judge people – and I think that’s a good ambition – where you’ll say, “Well, I don’t want to judge a book by its cover. I don’t want to make assumptions,” because you feel bad about it for whatever reason. But what’s tough is the fact that we make these judgments all the time on auto-pilot, probably a lot subconsciously. And we end up being misled because people can look healthy – the monster can look like it has a lot of strength and power and it doesn’t have any. And when we use externalities like a car that’s being driven, clothes being worn, house being lived in, when we use to gauge where we’re at, that’s where we get seeds of discontent sown in there. And those grow and pretty soon you’re feeling unsatisfied with your current situation.

These comparisons happen all the time. There are a few ways to combat them. One is education. Read ‘The Millionaire Next Door’ so you can learn what people that are genuinely financially well off do as far as consumption goes. The other thing you can do is examine your friends, your circle of friends, and ask yourself if you are trying to keep up with your friends. And some people have very honest friends – and the relationship dictates how honest you are with your finances – where everyone’s very open and they talk about it and what they’re struggling with, what they’re doing poorly with, what they’re really acing. And then you have other friends or acquaintances where you don’t talk about money – maybe it’s a little taboo. Either way you go about it with your friends, whether it’s very open or very closed, you have to recognize that their wants, their consumption cannot dictate yours.

I was just camping over the weekend and we went out to do this survival stuff. And you realize quickly that all you really care about is shelter, food, clothing to keep you away from the elements, and everything else just kind of falls away. I was reading the book ‘Hatchet’ to my kids, and in the book there’s a 13 year old boy, a plane crash, he’s the only survivor, he has to live off the land in some Canadian forest out in the middle of nowhere, and he’s successful. He ends up finding some food and just feeling like it’s Christmas times a thousand. He’s just feeling overwhelmed. And his needs were all just brought back down to bare basics. And then from that point his contentment was just totally rewired.

I wonder if sometimes we couldn’t do something where we can kind of rewire ourselves. Maybe we do a spending fast where we just go insanely, insanely tight for a month. Added benefit – you’d probably get to your buffer or darn close following Rule Four. But do something where you just say, “We will not spend any money for two weeks.” Automatic bills, maybe make an exception, make sure all that’s done on that. But just say, “We will spend nothing.” See what happens. Or do a purge of your house where you’re saying, “Okay, we’re going to get rid of all this superfluous stuff. Everything that just is kind of dragging us down.” And we’ve talked about this on the podcast before with Claire. But getting rid of all this stuff, purging, feeling like you’re dialing it back to where you’re very content.

I told Julie – this is hilarious because I want a camper, so I actually want something – but I want to camp instead of going on other vacations because I want to kind of get back to some basics with the kids and discover other ways of entertaining, other ways of having fun, other recreational activities that don’t involve spending as much. And we don’t spend a lot, and we always save for it and enjoy the benefits of Rule Two in doing that. But I just thought, “Man, could we not kind of discover some more minimalist approaches to family recreational activities?”

All this being said, I just want you to be aware of what is influencing you and your desires. I want you to be aware of where potential discontent comes from, and I want you to be proactive in removing those things that cause that discontent with your stuff. So whether it’s a purge or a spending fast, or just a really introspective evaluation, any of that can work in having you realize, “Okay, this doesn’t define who I am, but who am I? And what will make me content? What would make me truly happy?”

One more point of education that you could look to is to read the book by Joe Dominguez – and I can’t remember his co-author, I apologize – ‘Your Money or Your Life’. An excellent book. A little bit dated on the investment side – they may have come out with a new edition that I’m yet to pick up. An excellent book on helping you rewire and look for what would truly make you content. Even happy. And you’ll be surprised how little money has to do with that.

So, until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast 73: Your Life on a Treadmill

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Hello YNABers. My name is Jesse Mecham and this is podcast number 73 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

I was talking with Taylor, our lead developer, a week ago and we were discussing different interviews I’ve been doing with customers that just recently purchased YNAB. And I was talking to him about events – everyone’s experienced some kind of an event. And there was a TV show called The Event – I never checked it out. But events push us toward that idea of meeting a budget. Nobody wakes up on some random day, sees the bright sun streaming through the window and thinks, “We need a budget.” I didn’t. And like I said on my blog, I’m a budgeting freak of nature.

So, my wake-up call came entirely from a big event on my own horizon, which was my marriage to the greatest woman in the history of the world. When I was 14 my dad gave me Dave Ramsey’s book Financial Peace. I read it in a few days – life insurance, mutual funds, growth value, all that stuff that was in there; get out of debt, stay out of debt. I had no debt – I had no money. So it was all really simple to set up a budget. I actually started tracking my money because of that, and I think because of a personal finance merit badge – Personal Management, I think it’s called. Another story for another time. But I was always a little bit of a geek in that regard. I read The Millionaire Next Door before I finished high school, read The Richest Man in Babylon – one of my all time favorites. My favorite book of ALL time, personal finance related, is Your Money or Your Life.

Anyway, this all made pretty good sense, all these principles that I was learning, and I became fairly indoctrinated to the idea that debt was evil. So when I was in school and had three years left and this marriage coming up, it was pretty obvious that I was not going to take on any debt. So without that as an option I thought we needed a budget. So my big event, again, was getting married.

We did need a budget. So do you. I started with this analogy in the blog of a treadmill. Almost anyone can walk on a treadmill with no degree of incline. Like two miles an hour – anyone can do that for a long, long time. Most of us are doing this with our finances. You’re not really getting anywhere, everything’s going fine, you’re not sweating. I mean, you could do it for a long time. And then some big event happens – maybe your hours are cut at work so the speed of the treadmill kind of increases, or maybe you found out you’re going to have a baby. That’s a big event, a happy event, an expensive event.

Side note… Oops – just got a text. Don’t know if you guys heard that on the mike. Side note is the cloth diaper thing. If anyone has tried cloth diapering instead of WalMart or Costco diapers, email me. I’m curious to hear your experience. I’m intrigued by the idea. Apparently they’re not as bad as I totally imagine them to be because I don’t know what… I’m not imagining when I imagine it it would make them better than chucking them in the garbage except for less waste. But seriously, anyway, I’m really curious about that. Email me if you’ve had any experience with that.

So, you’re going to have a baby – big event – and now it’s like someone hands you 25 pounds to carry with you as you’re walking. That would get tiring. Maybe you’ve outgrown your apartment and you decide it’s time to purchase a house. The house payment is a little bit of a stretch, so the treadmill’s incline bumps up. Your oldest needs braces, the kids’ summer camp bills are due and the car just broke down again, Christmas is coming again – every year, same time. The vacation that you take with your family every year – every year – is in six weeks. No money set aside for that. So the treadmill is now going faster, steeper incline AND you’re having to carry that 25 pound bundle of joy, so you’re sweating, you slip, you grab onto that railing for support and then realize that walking won’t cut it, so you break into a slow jog, and you can’t hold that pace for too long. At that moment, when you’re sweating and stressed and tired, that is the moment where you realize that you need a budget.

And then, once you begin giving every dollar a job, being conscious about it, not just automatically doing it – which is what I feel like I was doing in 2012 – treating larger, less frequent expenses as monthly bills, following Rule Two, your breathing will regulate, your leg muscles will find new life, you’ll get that second wind that I’ve never received in a real race but I hear it’s phenomenal. Even if the treadmill stays that fast and you can’t shed the 25 pound baby – as if you’d want to, but that analogy has broken down, I think… Maybe the incline won’t abate or your budget needs to be worked over a couple of times. But in the end, the budget will help you handle that new scenario, that new situation. You’ll find your stride and you’ll have the time to make any long-term financial changes that may need to happen.

Maybe you bought too much house, maybe you bought too much car. Look at the fixed stuff. What can you axe from the fixed stuff? Everyone can make the variable things move a little bit, but the harder decisions are the ones that really give you a big bang with the buck, so to speak. Those are the fixed ones. Because when you can reduce a fixed expense that change is multiplied. You don’t have to keep working on it – keep working on keeping grocery bills down or not going out to eat. If you’ve got debt, you shouldn’t be going out to eat. It just shouldn’t be a priority. So, look at the fixed costs. See if you can make some long term financial changes that will give you a springboard off of which you can then reach your financial goals.

So, I’m curious. Check it out on the blog – you’ll see if you just go to ynab.com/blog and scroll down a little bit – Your Financial Life on a Treadmill. And leave a comment for me there telling me what event or events pushed you to the idea that you needed a budget. I’ll give you a hint. The event was not, “Well, I was tired of Quicken.” That was not the event. And it has nothing to do with the software. It has everything to do with your life and what’s happening in your life that caused you to say, “I need a budget. I’m going to check things out.”

So, I’d love to hear it, and we can chat over there on the blog. You can catch us on Twitter. I don’t say this very often, but we’re @ynab or you can catch me personally @jessemecham. I don’t Tweet tons because I removed it from my phone, but every once in a while. And you can catch us on Facebook, where I am more active – facebook.com/iynab. And by more active, not personally. I removed that from my phone as well. I just mean on our Facebook page. We post stuff there, so catch us there, like us, friend us, fan us.

I think that’s pretty much it. So, think about your financial treadmill. Anything you can do to adjust it? Give it a bit more manageable speed? And what events cause it in the first place?

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 74: Your Kids Need a Budget

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Hello YNABers. My name is Jesse Mecham and this is podcast number 74 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Today I want to talk about money and kids. I am not… well, when you’re a parent for the first time you don’t know what you’re doing. Your only experience is what your parents did with you. Hopefully it was great. Mine was. Anyway, you don’t know what you’re doing, and I certainly don’t know what I’m doing. But I will still share with you what we do when it comes to our kids and money.

First I want to talk to you about what we’ve tried in the past and what we’re doing now and how, and maybe a little why that’s working. So, one, I think it’s important that kids earn money so they have to manage it and get in the habit of that – having money pass through their fingers, maybe a little bit stay in their fingers. So with the kids, we at first tried cash where they would earn money doing various… it was pretty random stuff, and we would say, “We’ll pay you a quarter or 50 cents to do this.” But we try and teach them to tithe, and so if you give one of the kids a quarter and then you’re trying to teach them to tithe, that means if they would want to give two and a half cents… and that got kind of dicey. So if you’re giving them 50 cents that’s easier because it divides evenly. You can do five cents out of the 50. We’re trying to teach them to save half of their money for school and when their money will be important to them later on, and then spend the other half.

So, with the tithing at 10% and then the giving and saving, they end up 45% for their own and 45% for the saving. I don’t know how long we’ll keep doing that. I think when the kids get older I don’t think I would mandate some kind of a savings rate or anything like that. I just want to teach them that saving money feels really good, then hopefully they can pick something reasonable for themselves. But for right now, I am the dictator and they are all young enough that I can pull that off without any issue whatsoever. So, when the rebellion comes I will amend this podcast.

This was pretty unwieldy for us having cash, and it bugged me to no end when I would give them cash and then I would find the cash had been – by cash I mean change – had been left around the house, “Whose quarter is this?” “That’s my quarter,” “No, that’s my quarter.” It was a disaster. Or it just kind of made me think, “We’re screwing things up,” because they would get this money that they’d worked for and then they would lose it. Maybe it wasn’t intentionally leaving it around, but they would just unintentionally lose the thing and they’d be sad about it. We got them wallets – that didn’t work very well.

One of the kids was stealing money from the other kids, so that was a teaching moment for the whole house or something. Then we got banks so that the stealing couldn’t happen. But the banks were… When they wanted to get their money out to spend it, it didn’t work very well – the accessibility of their money was poor. And we’d go out and be around maybe Target or something – the kids love Target and the toy section – and they would see a toy but they couldn’t buy it because they didn’t have their money with them. And if they brought their money everywhere they went, they would lose it. So that was a problem.

We still had a little bit of theft of just things in general, and so for Christmas two Christmases ago we got the older boys what they call safety kits. I’m not sure why they call them that, but they’re just fireproof safes and they have keys, and I keep a copy of the key and they keep a copy of the key. They have both lost their keys, so now we’ve just relied on my keys that have not yet been lost to gain access to the safes. Anyway, three boys sharing a room – I think it’s a little too tempting for the three year old to not play with their stuff. So they cram everything they can in those safety kits.

This wasn’t working for us. About… I don’t know when it was, maybe a year and a half/two years ago, I heard about a service where you could kind of be your own kids’ banker and they could earn interest and things. The name is escaping me… FamZoo. I don’t even know if they’re still around. They probably are – they’re probably doing really well. Anyway, it was all about managing kids’ money and you’re the banker, and you can pay them interest and things. Pretty interesting set-up, and I checked it out for a while. The only thing that kept me away from it was I didn’t want to manage two different money systems.

So I thought, “Okay, what would I do if I already use YNAB? I don’t want each of the kids to have their own version of YNAB – that would be just total overkill.” So what I did is I set up a master category called Kids. And then for each of our five kids, I set up three categories. So they’re all under one master and I ordered them by age, and I ordered them… named them Porter-Tithing, Porter-Savings, Porter-Fun, because those are his priorities – tithing, savings, fun. And then Harrison, same thing: Harrison-Tithing, Harrison-Savings, Harrison-Fun. So out of the five kids, three categories each, you’ve got 15 categories all under one master category that remains closed most of the time, and you get this long list.

Now, when the kids are paid, we just budget money into those categories. If they’re paid 50 cents, I can easily drop five cents into tithing, 45 cents… Oh, let’s see. Five cents into tithing, and then 13 and 12 into… My math is off. Okay, let’s hold the phones for a second. 50 cents. Five cents goes into tithing, leaves me 45 cents left over. So then you have a difference of 23 cents here, 22 cents here. The conservative side of me always rounds up toward the savings. And the kids understand this – they get it, they see that their savings category balance is growing. Every once in a while their tithing balance will grow enough that we could actually make the donation, otherwise you’re just giving pennies and the people that have to do all the finances for the church probably would prefer to have it consolidated. Anyway… It’s also kind of to help our sanity too because we can batch process that situation where we’re doing a lot of showing them how to literally do everything.

Then their Fun category is the important one to the kids. The nice thing is everything’s virtual, so you’re just assigning money to those categories. And the best part is that when they’re at Target and Julie’s with them and they’re looking at toys, I’ve never liked not telling them they could buy something. I want it to be their money that they have control over. I don’t want it to be their money except they have to have dad’s approval to actually use the money. That doesn’t sound like their money, it sounds like mine; and I want them to actually have their own.

I’ve had Porter plenty of times – because he’s the oldest, he’s had the most opportunity – waste his money. And it was killing me inside because I knew it was waste. But he was so excited about it, the money’s burning a hole in his pocket, he just thinks in his mind, “I want to buy something today, I want to buy something when we go to the store.” And no matter what, he will buy something. He’ll just settle. And it’s been a learning lesson for me to back off, let him make the mistake and just be okay with it. And he’ll learn over time.

So, as we’re in Target or whatever and they said, “Hey, I want this,” all that Julie has to do – she’s normally there with them – all she has to do is just whip out her phone, check the category balance, show it to the kids and say, “Well, see Harrison, on the fun you’ve got $7.19. Remember you just spent $5 on X, so you’d need a little more to be able to buy this $10 thing.” Harrison’s totally okay with it. It’s the easiest way I’ve ever found to say no to things because we simply have them check the budget. We say, “Okay, well let’s check your budget, because you totally can buy this if there’s money there.” They look, there’s enough, they’re totally jazzed about it, and then you’ll maybe give them a cautionary sentence or two like, “Hey, remember if you buy this here, you mentioned a couple of weeks ago you were saving for X. Are you still planning on saving for that or is this new thing what you really want?” “Oh, this is the new thing! This is what I really want!” “Okay, cool.” So they buy it and it’s all good. We record the transaction to their category, it flows out.

Money never changes hands in the sense that I’m never handing them cash, change, they’re never having to split quarters and do all that to be able to manage it. They know to check the budget. They’re being taught it at a really early age, “You check the budget to see if you can spend.” They see they have money there in savings and they see they have money there in tithing, but they know that money is earmarked for other jobs. And the one they care about is that fun money, and they want to see it grow. It’s worked well for us for this last while that we’ve been using this.

Tonight we’re going to have a little family meeting and I’m going to reiterate the whole chore thing – Spring’s coming, yard work will need to be done, the kids are getting older and will be able to help me. Plus, if you’ve been keeping up with my 2012 budget rehash, I want to fire my lawn care company and I will hire the youngest lawn care company ever, which is Porter and Harrison with my help. So, it has me pretty excited having them earning money. I think it’s important that kids do. I think some jobs they should… This is me personally, but I think some jobs they should do just because they live in the house, and other jobs I think that they should be paid for. So that’s kind of what we’re working on.

Until next time, follow YNAB’s four rules and teach your kids about it, and they will win financially. You have not budgeted like this.

YNAB Podcast Episode 75: How I Tripled My Money in the Stock Market

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Hello YNABers. My name is Jesse Mecham and this is podcast number 75 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Today, though, I want to talk about making money: how I tripled my money in the stock market. It was 2005 and I was in a class at university, where… It was called Entrepreneurial Perspectives, it was my favorite class, and people would come in and speak. Those basically that had made it big – they would come in and just share how they made it big, and we would all just lap it up. And one guy came, he had been in the Air Force and started his own mutual fund because he loved investing. And all these pilots he worked with would say, “Hey, I heard you are into investing. Would you invest some of my money?” And so he got it all set up and literally started his own mutual fund. And he does really well – or he did back seven years ago. Really well. His returns were phenomenal, and most of the money was his but he managed other people’s as well, and it seemed like he really enjoyed what he was doing.

During the presentation he was showing us his current holdings – his portfolio. He shows it up on the PowerPoint slide and says, “Hey, do you guys have any questions?” and one of the students raised their hands and said, “What’s that SMD stock?” And he says, “Oh yes, of course you’ll point out that one that’s the big loser on my portfolio,” and he had purchased a pretty big chunk of this company, SMD was the ticker, and it had gone down by… it’s hard for me to remember the exact details, but I believe it had gone down from when he had purchased it by about 50%. And he told us that the company made karaoke machines, and he had done a lot of research into them and chatting with their board and all this stuff, and still felt like even at the price he bought it – which was now double what it was at – he said, “I still think it’s a really good buy.”

Well, we moved on in the class and I’m not sure what else was discussed. But I remember walking out of that room in the north west corner of the Business Building. I remember walking out of that room and saying, “You know, if he thinks that that stock – and he’s done all this research – if he still thinks that stock is a good buy at twice what it is, then I think I should buy some.” So I went to the computer lab, I logged into my Scottrade account where I had very little in there, but I invested $300 in this company Singing Machines. And then I set an order… I can’t remember what it’s called now. Anyway, I set a trigger so if it ever hit – I can’t remember what it was per share – but if it ever went triple what it was that I bought it at… I mean, it was something tiny per share, like $1 or something per share. If it ever did triple that, then I would want to sell it and it would just sell automatically. Well, I did that and then I forgot about it.

Months and months later, I get an email from Scottrade saying, “Your trade is executed,” and that’s that. And so of course, I go in and look, and lo and behold the Singing Machine stock had tripled over some period of months. It had just hit this big peak. I just checked on it now. I think it’s not even on the same exchange – they just tanked again.

So, the moral of the story is that I was very savvy and listened to this investor, got in on the ground floor of this fantastic oppor-… The moral of the story is that I got lucky. Because when you look and see now what the stock has done and how volatile it is, I just got lucky. So I don’t encourage investing in individual stocks unless you’ve got a hankering for living on the edge and you do it just with gravy money, play money, money you can absolutely, totally afford to lose that is not your retirement – because you cannot afford to lose your retirement. Your retirement fund is an acknowledgment that you’ll have expenses in the future when your earning power declines.

Anyway, I wanted to share that story with you guys, just partly spurred because of the investment course that I’ve been writing and working on, and something I hope to launch fairly soon.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 76: Taxes and Timing

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Hello YNABers. My name is Jesse Mecham and this is podcast number 76 for You Need A Budget, where we teach you four… four rules to help you stop living pay check to pay check, get out of debt and save more money.

I’m not going to edit that out. I’m just going to leave that in. Most of you guys know that I make mistakes, so it’s staying in.

Today I’m going to be talking about taxes. Talking about mistakes, you make a mistake with your taxes, the worst thing is you won’t even know it happened – as you guys know from my podcast where I talked to my advisor, Casey, who you can also have advise you at casey@youandiplan.com. I have no financial interest in Casey’s success. I hope I don’t make him so busy that he can’t focus on me and my tax needs. I’m just kidding – sorry.

So, if I were a millionaire, if I had a lot of money, I would enjoy options when it comes to taxes. And I wanted to talk about this today. It’s an interesting topic. It’s a little bit advanced, but you can just consider how powerful it might be to be able to time when you actually incur taxable events. A taxable event is like when you have a baby, because you get child credit and you get another exemption on your tax returns; so if you could time a pregnancy it would be more tax advantageous to have the baby born just before the end of the year – like I was. I was born right before the end of the year because I wanted to save my parents some money. Of course, I was 60 days premature and that meant that they maxed out their deductible for my birth year and the following year, so my dad told me it didn’t actually help them at all. So think that through with those deductibles and things.

But when you time things, it can be big. Imagine that you’re a 65 year old multi-millionaire and you just maybe do some consulting gigs on the side, and your consulting contract income is low in one year because you haven’t felt like working as much. So you purposely pull out some of your tax-deferred money because you’re in a lower tax bracket. So you’ve got, let’s say, a 401K where once you pull money out you’re taxed on it. If you know that your income will be low for a year because you’ve taken less jobs or whatever, that would be the year where you would pull out some of that tax-deferred income because you’d be taxed in a lower bracket. If, on the other hand, you have a big payday one year with your consulting gig, landing some big contract, they were paying you all kinds of money, you wouldn’t take ANY distribution, as long as you weren’t forced to. The IRS does start to force you to do these things, I think, after 70 years old, maybe, to a degree. I’d check with your tax advisor. But you can see what would happen.

If you had $30,000 of consulting income one year where the year before you had $100,000, then in the year where you had $30,000 you may want to take out $40-50,000 from your 401K. You wouldn’t want to take $40-50,000 out of your 401K when you’d earned $100,000 because then you’d bump your taxable income up to $140-150,000 and you’d be paying that high rate for those people in those upper brackets for income taxes.

Imagine that you have a big donation that you’re set to make to your alma mater or something. You’re set to make this big donation, you’re limited to, I think, donating only up to 50% of your income in a year, but that would be the same year when you may happen to also pull a lot from your tax-deferred account or sell some things and recognize some capital gains, because those would be offset by your very large donation.

Maybe you make an investment and it has some losses in some way. That would be the time where you could say, “Well, I’m going to go ahead and exercise… not exercise. I’m going to go ahead and sell some investments that had gains with them so that I can offset the losses and have it basically be zero,” where you have no tax ramification for it. The timing – that’s where a tax advisor comes into play. TurboTax would never tell you this because it’s not smart enough, nor will it ever be. All famous last words. Who knows what it will be like in 20 years. But right now, TurboTax is not sufficient to be able to tell you, “Hey, Jesse, you’re going to pay tithing next year and you’re going to be paying tithing again this year, but next year you’re going to be earning a lot more money. So why not pay a lot… Wait a month. Instead of paying as much tithing in the current year, defer some of that tithing to next year.” Or even better – so you’re not withholding, you’re giving – you could flip that around and say, “Hey, if this year’s going to be a big year, and you’ve got the cash to be able to float this, you could prepay your tithing for this year, offsetting a lot of that big year income.” And then the next year, when you are expecting your income to go back down to normal levels, you wouldn’t need that tithing nearly as badly – you wouldn’t need the deduction, I should say, of the tithing, or any other charitable giving, nearly as much.

That type of timing can be very advantageous. It gets very interesting when you look at the standard deduction and you actually time your itemized deductions and double them up. You prepay a lot of expenses for the following year so that you have virtually no itemized deductions for that year. Then you can take the standard deduction. So you basically get the standard deduction in Year 2 and you get a big, fat itemized deduction in Year 1, instead of just having two medium itemized deduction years in both years.

I wonder if this would have been better with video. At any rate, that flexibility is what gives you power, and a good advisor is what gives you that knowledge to be able to do those types of things. We are talking about thousands and thousands and thousands and tens of thousands of dollars in tax savings by just doing things at a different time. Not spending any more or any less, just watching out on the timing of things.

So, until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB does not provide professional financial, tax, or investing advice. Always seek the advice of a licensed professional.

YNAB Podcast Episode 77: Why Roths are better than regular IRAs

podcastmicHello YNABers. My name is Jesse Mecham and this is podcast number 77 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money. Always wanting to save more money.

Today I want to end the debate that is incessant when it comes to traditional or Roth IRA. Some people say IRA [pronounced as a word] – I can’t do that for some reason. I’m the guy that says N-A-S-A for the NASA situation. NASA, N-A-S-A, IRA, I-R-A. I’m going with I-R-A. And if you don’t like that, we’re going to be talking about it a lot so you may want to change channel.

But, people debate constantly the difference between Roth and traditional IRA. They look and say, “Well, if you invest in a Roth IRA you pay tax on that money that you invest now, and then it grows tax-free, and then when you withdraw the money it’s all tax-free,” – the investment you put in initially, because you already paid tax on it at the beginning, and the growth that that investment experienced while riding around in that Roth investment vehicle.

On the flipside, the traditional IRA is a tax-deferred vehicle in which your investments ride around. So you would say, “Well, I’m going to invest that money,” and you deduct that money from your tax on your 1040 for that year, saving yourself some taxes that you would otherwise definitely pay. Then that money also grows tax-free until you withdraw it, at which point you pay money on the entire withdrawal – what you deposited or invested originally that was deferred from taxes, and then the growth that you had experienced that was also deferred.

Everyone would say, “Well, naturally the Roth is better because the taxes… the growth isn’t taxed.” But that’s not mathematically accurate. If I were to use really, really simple math – I’m going to get my calculator out for this one – let’s say that you were only going to contribute $1,000 to your… $1,000 you could contribute to your Roth. So you put in $1,000, you’re taxed at 25% though. So that $1,000, you really only could put in $750. Right? So you invest the $750 and it grows to whatever. The traditional IRA that you had the $1,000, you don’t have to pay taxes on that $1,000, so you end up contributing the entire $1,000 – $250 more than the Roth. They both grow at the same exact rate, same everything. At the end of the day, they will have – provided that your tax rate is the same as when you were going in – they will have the same amount.

Now, this opens up the question, and I’m going to loop back around to why the behavioral side of this is totally ignored, but this loops back to the whole idea of if your tax rate will be lower when you’re in retirement, then you should definitely be putting into a Roth. That makes sense. If your tax rate will be higher in retirement than it is now for your contribution, then you should be putting into a traditional IRA. That makes sense. It’s too bad that you have no idea what your tax rate will be.

I looked this up in the investing course that I was working on – the tax rate is all over the board. When it first started you would have made, I think, $425,000 in 1913 or so, maybe 1916, and you would have been taxed at 1% then. In 1944 that same person making $430,000 of inflation-adjusted dollars, they would have been taxed at 77%. Now I think it’s somewhere like 35%, the highest rate. We don’t know what the tax rate will be and you can’t pretend to know. We don’t know what Congress will do tomorrow, let alone what they’ll do 25 years from now when you retire. So the whole debate of will your tax rate be… I’ll admit that the tax rate will affect the financial ramifications of your decision, but you have no control over the tax rate, you have no insight into what it will be, so you should ignore it because doing anything else but ignoring it is kidding yourself. So, that removes the retirement tax rate from the discussion completely.

Now, let’s go back to that $1,000. You would not sit there and say, “Well, I have $1,000 but I’m not going to deduct it so I can only invest $750 because I’m doing this Roth.” You would just say, “Well, look, I’ve got $1,000,” and then you would invest it in your Roth. You would not, on the flipside, with your traditional IRA say, “Well, I’ve got this $1,000 here” – you’ve got the $1,000, there’s $1,000 in the bank account budgeted for, ready for retirement – but the $1,000, you would not say, “Well, that’s $1,000 but I’m not actually going to save tax money when I invest that $1,000, so my actual contribution should be $1,333.33 because if I invest $1,333.33 I will save myself $333.33 in taxes.” Right? That’s what you would do because you get that deduction. No one does that. Nobody does that. That calculation, if you want to know, was $1,000 divided by one minus your marginal tax rate – so in this case our marginal tax rate is 25%, so it’s $1,000 divided by 0.75. That gets us to our pre-tax situation amount that we could invest in the IRA. Nobody does that. You can see why – it’s confusing. My brain is oozing out under my keyboard a little bit here!

So, at the end of the day, because nobody does that we can’t consider honestly the fact that you would invest more in your traditional IRA because it’s tax deductable. You wouldn’t do that. You would just look to see what you have to invest and you would invest it.

So, why is the Roth better than the traditional IRA? It’s better because the limits are different. It will say in all the literature that you read that an IRA, Roth or traditional, I think are limited to $5,000 or something – I’m not going to spend the time to look it up, it will just change tomorrow or whatever. But the limits are $5,000. So you actually can contribute more to your Roth. It says that the limit is the same – it says that the limit for both is $5,000. And it’s true. You can only contribute $5,000 into a Roth or a traditional IRA. But to get that $5,000 for your Roth you had to earn… because you had to pay taxes on it already, you had to earn $6,667.67 – assuming 25% tax. So you are actually allowed to contribute more to your Roth because that will grow tax free and you’re capped at $5,000. You can’t go to the Government and say, “Hey, listen. You said $5,000 is all I can invest, but if I invest $6,667 that’s the money I saved, that $1,667 above $5,000 that I save, I want to be able to invest that too so that the Roth and the traditional are equal.” No, they’re not, because the Roth is tax free and you pay the tax upfront and the limits don’t reflect that fact. It’s better because tax rates in your retirement are off the table to invest in your Roth IRA.

Maybe I should have Casey [my tax and investing adviser] on here at some point. Maybe he could discuss that a little bit eloquently. But that’s my take on it and that’s why I like Roth. If you have a 401K with a Roth option, you should be doing that one. It’s just the same thing – 401K or Roth 401K limits, they’re both whatever they are, they’re both the same number, which means you technically can invest more in the Roth. And you should. Take advantage of that tax free growth, retire filthy rich, sipping some kind of a drink on a beach – I’m not much of a drinker, so I didn’t know what liquid.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 78: The Black Box of Spending

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Prefer audio? Click the play button:

Hello YNABers. My name is Jesse Mecham and this is podcast number 79 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Sometimes money operates in a little bit of a black box of its own. It’s that dreaded Miscellaneous category. I wrote a blog post doing a deep dive into my 2012 finances and saw that we a had pretty hefty – in my opinion – amount of Miscellaneous category spending. So, I cannot care about it – which is one option, and it’s a viable option. Not caring is actually a great option. If you’re reaching all of your goals, you’re investing for retirement the way you want… By the way, we just launched our investment course – it’s free, it’s a 10 day email course, you can catch it at ynab.com/courses/investing if you haven’t already caught it from my newsletter blast that I sent out last week. Anyway, if you’re reaching your retirement goals, investing goals, if you’re reaching your other goals that mean something to you, then having spending in any other category doesn’t need to bother you. But, if it does and you want to dial things in a little tighter, the one way to do it is to basically peel the onion.

I remember when I was first learning about advertising with Google – Google AdWords – Google would talk about getting more granular and more granular as you looked at what keywords you would be targeting. And in that way, you could measure the ad performance reliably and see if it was profitable or not profitable on a very granular level. If you lump everything into a big category called Budget Software and then advertised for everything under one, big Budget Software banner, you can imagine some of the things would not be profitable and some of them would be, but I wouldn’t know because it’s all one big, nasty mess. So, you peel away a little bit of the onion and you see what sticks.

And that’s the same thing you can do with your Miscellaneous category. If you care to track it, if you want to see it go down – which is what I want in 2013 – the question is basically to do a little bit of an audit, look back on your category and say, “What was the spending? Is there a pattern here that’s developing? And could I have that with its own separate category?” As soon as you break things out into separate categories, then the power of the monthly budget meeting kicks in and you can have that discussion with yourself, with your spouse, whenever it comes up. When you’re out and you record it on your phone and you’re seeing the balance for that specific category and you’re recording a transaction for that specific category, you’re getting all that psychological impact, that overhead that you have to pay, in order to have that transaction be approved for you. And that is where you start to get downward pressure on your purchasing. The downward pressure happens when you spread things out.

And as you open up that Miscellaneous category and lay it all out flat, then you can start doing a little bit more pinpointing and saying, “Okay, that’s got to go. No, that should definitely stay. This has got to go. This we could cut down. This is fine.” And you can be more granular, seeing what works for you, what doesn’t, what you really value, what you don’t value, and find a little more contentment.

In that big blob of miscellaneous spending, there’s probably some value conflict there. There are probably things that you care about but just don’t have a category for. And then there are things that you don’t really care about. My guess is most of the miscellaneous type stuff is things that you don’t care about because you haven’t called it out already on its own. A few of the things will creep in there and you realize,” Oh wait. I just didn’t have the category for it.” That’s just part of tuning and tweaking. But when you have that kind of catch-all category, usually it’s a good sign of spending that’s wandering a little bit away from the value line, and you can kind of bring it back in check.

So, until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 79: Patience

podcastmicEditor’s Note: In our march back through the YNAB podcast episodes, we’re skipping episode 80 because we published it last year. Enjoy the transcript of episode 79.

Hello YNABers. My name is Jesse Mecham and this is podcast number 79 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

It’s now planting season – at least it is here in Utah – and I have planted some things. The trick is being patient. And since I put in the cold stuff a few weeks ago – radishes, spinach, some Italian seed mix that will throw up 11 different types of lettuce – I find myself going out daily and checking on the seeds, seeing if they’ve sprouted. And it is a test in patience. I was telling Julie after three days, “I’m worried about the spinach. I’m not seeing anything from it,” and then, “I’m worried about the lettuce,” then I saw some lettuce. Oh, I put in beets too, and I haven’t seen any of the beets. And I found myself wanting to do things to try and hurry it along. But there’s not really anything you can do – you just have to be patient. If you think that adding more water is going to help, if they’re sufficiently watered already that won’t and you wouldn’t want to drown them. If you’ve got a lot of cold weather, a lot of cloud, that will slow it down a little bit. And so I find myself being patient.

I planted 14 raspberry plants. They were bare root, and bare root plants are really strange because you stick them in the ground and it’s just like putting sticks in the ground. I worry that my kids are going to yank them out and start using them as Harry Potter wands or something like that, so I had to warn them. But you sit there and you’re just looking at these sticks in the ground. They look completely dead. The instructions even told me to snip off about six inches of the stick, so not only have I just stuck a stick in the ground, but I also snipped half of it off and I’m supposed to be patient. The raspberries will take a full year to… and they might produce a few berries but nothing of note until next year, so I have to be patient.

Two years ago I planted two pear trees, five peach trees and four apple trees. And I did get a little bit of fruit last year – like one peach and two apples. I didn’t have the heart to pull them off the tree and have the tree devote its energies to establishing itself, which is what I should have done. I just couldn’t bring myself to do it. So I ate the apples and the peach. But the trees won’t produce fruit for another two years or so – nothing of note, at least. So I have to be patient. So I fertilize, I look at the trees a lot, I make sure they’re budding. But there’s not much I can do. You have to wait for things to do their thing.

There was a study done a while ago… I don’t remember what the source of the study was, but I heard it from a reputable source. And it had to do with little kids that were put in front of a marshmallow – a big, pasty marshmallow – and they were told, “There’s the marshmallow, you can have it now. But if you wait a while, we’ll give you two marshmallows.” And they would videotape the kids and track what the kid decided. Some of the kids, they just went to town on that marshmallow immediately; and other kids waited and waited and then cracked under the temptation of that big, white, fluffy marshmallow, and they popped it in their mouth. Some of the kids actually could hold out, and if they did then they got two marshmallows and they were rewarded.

They tracked these kids for a while, and they found a correlation between the kids’ ability to hang on, to kind of hold off and not have immediate gratification; they tracked that willpower back and saw a correlation with their success – with their grades in school and with how they performed based on standard measures of success that we have for kids, mainly grades and test scores and things like that. So the kids’ ability to be patient and wait for the greater reward is what allowed them… well, not what allowed them, but was at least correlated with greater success later on in life. And we know that with the harvest as well. If you harvest too early – if you eat the seed corn, so to speak – then you don’t get the ultimate reward.

And of course, you guys often see the parallels with budgeting, with avoiding debt – avoiding the instant gratification temptation and being able to say, “You know what? I don’t need that now. I might want it now, but I don’t need it now. I can hold off. I can wait. And I can determine if that’s what I really want and if it’s something I should work toward.” The same happens with retirement, saving up for vacations, saving for Christmas – all those things. Well, Christmas you kind of have to wait for no matter what, but… Being able to put off instant gratification for a greater reward down the road is a mark for a patient and likely, later on in life, a wealthy person.

I’ve been thinking a lot about the investing course that we launched, and I’m having great feedback from people on it. The ability to set money aside and acknowledge the fact that you will have expenses in the future, for which you will need money, and those expenses are far, far, far in the future – it’s like the ultimate rainy day category. The ability to set some money aside and say, “I don’t want to use that now. I’m going to exercise some discipline and use that later” – that is the mark of a patient and wealthy person.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 81: Handling Accounts Receivable in YNAB

podcastmic

Editor’s Note: Jesse recorded this podcast episode a while back, but the transcript coincides nicely with a blog post he wrote recently.

Hello YNABers. My name is Jesse Mecham and this is podcast number 81 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Today I want to go totally off the rails and talk about YNAB for business. I wrote a post back on the blog a year ago, maybe more, talking about how we moved YNAB the business to YNAB the software and how awesome it’s been. It’s helped us grow faster because it’s allowed me to be more aggressive with reinvesting where I was always, by nature, quite conservative – too conservative. And in that post I mentioned a few constraints, a few things you should be aware of that YNAB couldn’t or wouldn’t handle, at least not very gracefully: inventory, accounts receivable, accounts payable, banks that have very strange requirements on what they want your P&L to look like.

In the meantime, YNAB 4 launched and we now have an awesome P&L that any bank would take, for sure. We now also have a balance sheet that any bank would take, so that one doesn’t really apply. The accounts receivable would be needed for service businesses, doctors’ offices, chiropractors, therapists, dentists, orthodontists; any time where you’re providing a service and you have to deal with your money – designers, contractors. So it’s a fairly large group of people. Your businesses should still be rather simple, but YNAB can handle the accounts receivable pretty smoothly, actually. And it would probably make more sense to you than doing it in traditional accounting software where you have to worry about the double entry side of things.

So, here’s how I would do it if YNAB had accounts receivable. I would set up an accounts receivable account. It would be off-budget because accounts receivable means you did not receive any cash – it’s an account that is in waiting. You’re waiting for the cash. If you’d gotten the cash it wouldn’t be there. So, it’s in an off-budget account – budget only works with cash or credit cards, things like that, where cash actually changes hands. So, off-budget accounts receivable account. And let’s say I have John who pays me for my bookkeeping services and he owes me money for it – I provided them in advance. So, I record an inflow to my accounts receivable of $500 and the payee is John, and that’s it. It doesn’t affect the budget at all because there’s no cash, but my accounts receivable account just increased by $500. Then I have Mark who owes me money and Chance that owes me money, and they all… I send them an invoice and record the receivable inflow – not category, obviously, because it’s an off-budget account – and we’re good to go.

Then, what happens when I actually get the cash? Well, the cash comes from my… it lands in my checking account. So let’s say that John pays me. I would record that inflow in my checking accounts, just like normal, but I need to make sure that I record the outflow from the off-budget account because that accounts receivable will go down by the same amount as the cash that I received. So, what I would do is I would record the inflow from the… let’s say the inflow of cash – I should have written this out – in my checking account, and then I would do a transfer of the payee, I would say transfer off-budget or whatever – accounts receivable, whatever the name is – so that there would be an off-setting outflow in that accounts receivable account. So it goes down and then we’re done.

The only way currently in my implementation that I did quite quickly that you could be able to track who owed you what in an easy way would be to record in a memo field the client name, for instance. Then you could do a search on the memo in your accounts receivable account, and we naturally show you the search total. So you have inflow, inflow, inflow, someone that’s gotten a receivable that you’ve got on your books, and then it’s increased and increased, and then they pay you, and then they have another one and they pay you again – those would all be totaled. The inflows and outflows are summed together when you’re searching. So I would just search for “John” in the memo field and it would show me every transaction with John in the memo. And then it would give me the search total and tell me what John still owed me, and I could call John and be like, “Dude, what the heck? You owe me my money.”

So, that’s how you track accounts receivable. It’s actually not very different at all from what you would do in QuickBooks or Peachtree or other standard accounting software that follows general accounting principles. As a matter of fact, any auditor would be fine with that. You just record the inflow in your accounts receivable off-budget account, and then you record the transfer out of that and into your checking account. And that cash that you receive you actually budget.

And that’s where YNAB for your business would really start to shine, because then you could see that you’re being too crazy with your money and pull back, or maybe that you’re being too conservative and plow forward. Either way, YNAB would give you the business insight that you needed to grow at the pace that you could sustain, to market effectively, and to deploy your resources in a way that would make you, in the end, more profitable and help you build your company even bigger, better and all that.

So, that’s how I would handle accounts receivable in YNAB, and it would work really, really well. If you have any questions, especially if you’re a business owner where you’d actually want to implement this, just shoot me an email – jesse@youneedabudget.com – and we can talk about it.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

YNAB Podcast Episode 82: The Age of Money

podcastmicHello YNABers. My name is Jesse Mecham and this is podcast number 82 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

A lot of people – if they’ve just heard of YNAB or if they’re like the 80% of everyone – spend money that is not very old. For instance, you’re paid on Friday and you spend on Saturday what you earned on Friday, and then Monday you’re broke again. So the age of your money in that situation is very young.

Some people get in a situation that’s even worse where they’re spending money on a card that they haven’t yet earned. I was talking about this with Mark, YNAB’s blogger, about this and he called it in-[utero] money, money that hasn’t even been born yet, and you’re already spending it.

So we were thinking about that – the age of money. I wanted you to think about it as well. What would it mean if you were spending money that was 30 days old? That would mean that you had a buffer in place. We teach you to live on last month’s income. Essentially, we want you to be spending money that’s at least 30 days old. Think about Christmas and falling into level two with your rainy day funds, if in January you set aside $100 and February you set aside $100 and so on and so forth, in December you would have $1,200 with which you could then shower your children with gifts. And on average, the money that you were spending on Christmas would be six months old because you’d been saving for it for a year. And that would be a nice place to be.

Think about something even further out, like paying cash for a car. We bought a new car back in December and we were spending money, on average, that was two and a half years old because we’d been saving for that car for about five years. My kids’ college – if I help them out with college – will be hopefully giving them money to use that will be on average about nine years old, assuming we started saving when they were one and started using the money when they were 18. That using money that’s nine years old would feel really good versus using money for your kids’ college that is from last pay check – or worse, that is money that you haven’t even earned yet, it’s borrowed and you’ll be paying back later.

What if you set aside $200 each month for retirement, and then when you were 65 and you were doing this from the time you were 30… let’s say 25 until you were 65, and then you started pulling out money. That would mean that in your retirement you were spending money that was, on average, 20 years old, and that would feel pretty good.

For the time being, I just want you to ask yourself how old the last dollar is that you just spent. If it’s a day old, that’s not very good. When I was 10 and would earn my allowance, I would be given the money, I would get on my bike, I would ride down to the Bull Pen, which was a baseball card trading shop, and I would spend the money that I’d just earned on Topps baseball cards. And that money was about… I mean, the bike ride took me about 12 or 15 minutes, so that was about how old the money was. Are you spending money that’s so young or, as Mark said, hasn’t even been born yet? Or are you spending money that’s maybe 15 days old, 20 days old, 30 days old, 40 days old? As you get up into the 30+ day range, I think your stress drops. I think you’re able to sleep a little better, I think you’re able to stop timing your bills to your pay checks. I think you’re basically living on YNAB’s buffer, following Rule Four.

I’m just framing it a different way for today, which is to talk about how old your money is. And that dollar that you just spent at Starbucks – or at 7-11 if you’re not into the Starbucks scene – how old was that dollar? I think it’s a good measure of overall financial health.

So, think on that, and until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

Editor’s note: We’re working our way back through the podcast archives, posting transcripts each Saturday and Sunday.