Here’s the latest Whiteboard Wednesday. What we discuss:

- A “normal” person’s cash flow situation.
- The “dip” (not Seth Godin’s).
- A YNABer’s cash flow situation operating with a Buffer
- How Rainy Day Funds move the YNABer even close to a state of cash flow bliss.

As requested, I went with a YNAB t-shirt. If you’d like to purchase one so you can be the center of virtually any social scene, you can do that here.

Our success story this month focuses on building your YNAB Buffer. Mary A., from Washington State, started using YNAB Pro about three years ago and loved it as it was so easy to use.

I asked Mary how long it took her to save her Buffer. She said, “We just got it this summer so 2-3 years. I really didn’t even try to save for it until about three months before we got it together. It took me this long because we were in the process of paying off debt and wanted to finish that first. I also didn’t see the true benefit of having a buffer although I could see it would be nice to not be living paycheck to paycheck. We were already paying all our bills the first week of the month or as soon as they came in so I didn’t see a buffer would make that much difference in our financial lives.”

Mary went on to explain that life is very different now that she has her Buffer. She said, “For us it is more psychological. We had no problem paying the bills nor even paying them right away. But after we had the buffer, wow, I felt so much more secure, and more in control. And instead of paying even small amounts of finance charges we are earning interest as we have an interest bearing checking account. It was like I didn’t realize we needed it, but now I know we had needed it all along. It’s just very comforting to look at our budget and see that Buffer there. I feel like we can handle most anything that comes along now and do it without incurring any debt.

Finally I asked Mary to offer some advice to those who may not have their Buffer or may not see the benefits. “I’d say start throwing whatever you can into your Buffer category each month. Even saving a small amount will add up and as you see that happening you will want to put more into it. Cut back on any expenses you can…it’s only temporary and soon you will have your Buffer which will be so worth it. Knowing you are not living paycheck to paycheck anymore is very freeing!”

The big lesson here is to put something toward your Buffer each month. While you may feel your steps are small, they will add up, and eventually you will remove yourself from the paycheck to paycheck cycle.

Our private betatesters are running the Adobe AIR 2.0 beta and are reporting that YNAB 3 is running faster. Excellent.

Adrian, our new full-time developer, is also going full-bore optimizing the code for speed. Hopefully we’ll have something for everyone to bite into in the next few weeks!

A bit late because I had major technical difficulties :) Please leave a comment down below if you have any feedback or ideas for future Whiteboard Wednesday topics! Also, please share this with friends that need to learn a bit about budgeting!

I’m a recovering CPA.

So I don’t legally “know” what I’m talking about, but I can still remember a bit from when I did. And since this is my least-favorite season of the entire year, it’s also going to become a Savings Tip topic (and the focus of a free course launch I’m working on, see below for details).

You’re Trained to be Focused on the Completely Wrong Thing

The impetus of this post actually happened this morning on the treadmill. There was a commercial for Intuit’s TurboTax…how it guides you through your taxes and then they showed this really fancy image with a guarantee seal. On Inuit’s website you’ll see this front and center:

What’s the focus of Intuit’s marketing for TurboTax? It’s about the Refund.

I don’t want to just single out Intuit. Not at all actually. Take a look at TaxACT.com’s front page:

Intuit’s fine print reads as follows:

If you get a larger refund or smaller tax due from another tax preparation method, we’ll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to a payment of $14.95 and a refund of your state purchase price paid.

Fair enough.

TaxACT’s fine print re: their guarantee sheds a bit more light on the problem:

If you get a larger refund or smaller tax due from another tax preparation method with the same data, we will refund the applicable product price you paid for your TaxACT Deluxe federal return.

Emphasis mine.

I won’t even go into H&R Block’s “Instant Refund Anticipation Loans.” Nasty — and a whole other story.

The focus is on that carrot dangling out in front of you. Your own money that you paid to the government in anticipation of your tax liability — your tax refund.

Even Trained Accountants Get it Wrong and Fall For the…Indoctrination :)

Back when I worked for a large accounting firm (don’t get the idea that I have tons of experience doing that — I lasted 10 LONG months), I remember sitting around the table in the cafeteria of our client. It was tax season and I was probably complaining about this very thing. One of my colleagues — a CPA said something along the lines of:

Oh, I didn’t pay any taxes this year. I got a refund.

I about lost my lunch.

If that same concept can happen to someone who passed the Reg section of the CPA exam, it certainly happens to your average Joe the…Piano Tuner.

What was the problem with my colleague’s statement? Even if they had just slipped up and really meant to say that they didn’t need to pay any additional taxes for the year…it was still alarming.

Just to be 100% clear.

1) You earn money.
2) You pay income taxes that are either withheld from your paycheck automatically (so you’re not as aware of the expense, removing you psychologically from it and encouraging just the problem we’re discussing here — a HUGE lack of awareness) or you’re required to file quarterly estimates.
3) By April 15 of each year, you calculate what you actually owe and either pay more (because your estimates weren’t enough) or you’re paid a refund (because you paid too much).

Unless you literally did not have a tax liability that year, you paid taxes. You may not have a tax liability if:

1) You’re dead or,
2) You earned only a small amount of income.
3) You have tons and tons of kids :)

I’m grossly simplifying with the above three points.

So know this: you very likely pay taxes every single year.

And I’m not even talking about the FICA (Social Security & Medicare) taxes that you can’t avoid (re: minimize) much at all if you’re a wage worker. Even if you did fall into #2 or #3 above, you still paid almost 8% of your wage in FICA. (By the way, your employer paid another almost 8% to FICA as well — the money which they just might pay to you if they weren’t paying it to the government, so you can choose to see that as a tax you pay as well).

You pay taxes. Every year of your life. And when you die, you pay again. Don’t let me ever hear you say, “Oh, I didn’t pay taxes this year — I got a refund.” Wrong. Wrong. Wrong.

This is Not About Tax Policy. It’s About Your Life’s Single Biggest Expense

This is not about political leanings, or tax policy. It’s about what will likely be (or already has become, and will only continue to be) the single largest expense of your entire life.

I’m guilty as charged. These Savings Tips that I’ve written have ranged from saving time and money with dinner groups to 29 Ways to Save a Fortune on Your Energy Bill.

If I were doing these tips according to bottom-line affecting expenditures, I’d probably be writing about tax savings two out of every five times. For almost everyone.

Going Back to the Refund Focus. Which Way Are You Facing?

At the beginning here I established that we’re trained to be refund-focused. With tax compliance software we’re trained to drop in data (what we’ve done) and have the computer spit out what we owe or are owed. We’re complying. We’re facing backward.

Over a year ago I wrote about preferring head-on to rear-end collisions (the metaphor breaks down quickly in real life, but you get my point) when it comes to making spending decisions. You want to be proactively looking forward and acting — not looking backward and reacting.

Taxes are the exact. same. way.

Remember TaxACT’s guarantee from above? How they mentioned the same data? They’re basically saying that their software will return the same result as another software because both softwares do an excellent job of looking back, crunching the numbers, considering the rules and spitting out the liability. Hang on to that thought.

If Things Were Simpler, It’d Be Easier. But They’re Not, so Let’s Move On

We can lament and moan (I do my share of it) about how economically costly tax compliance is. How it’s a huge drain (as a whole) on the economy with no value-add. How a client I worked on employed 35 people full-time to make sure their M-1 (that’s a C-Corporation’s return, that has maybe…12 boxes to fill out) was correct…

But we won’t.

Things aren’t simple. Life is complex. In honor of the season premier of Lost tonight, I’m going to say it’s a lot like that black cloud that haunts the island. It’s always there. Nobody knows what it is or how it works. And it kills you.

At the end of Lost this season, perhaps we’ll know how it works. At the end of this tax season, we still won’t know how the tax code works.

So, let’s just get comfortable with the idea that the tax code will always be complex.

Even for those situations where the tax scenario really is simple, we have divergent voices. The New York Times wrote a very interesting article days ago, “Why Can’t the I.R.S. Help Fill in the Blanks?” that cast some of the large tax preparation software backers in a negative light.

The gist: California uses ReadyReturn, where they send eligible Californians a pre-filled return. The data can then be validated by the person, but it “gets the ball rolling”. It costs the state $.34 to process a ReadyReturn, while a paper return filed in the traditional way costs $2.59 (not including the taxpayer’s savings in both time and possibly money).

The tax preparation software lobby pushes against this for obvious reasons. Intuit’s response is here.

Whichever side of that debate you’re on, it’s clear that there are interests hard at work on both sides, furthering their own agenda. What I want you to take away from this Savings Tip is that you need to have your own agenda.

What To Do About Your Single Largest Expense

The agenda is simple. Minimize it. Minimize your tax liability. Educate yourself.

My real awakening to this situation happened last year during preparation of our 2008 personal return. Before I get into that, let me tell you about my brother-in-law, Casey.

Casey is a tax preparation…guru? Yeah, guru’s the right word. He might be partially insane as well — he loves this stuff. Absolutely loves it. I’ve seen him become giddy over some strategy. It’s a sight to behold.

He’s also a straight-arrow. He deals in blacks and whites. Prior to using Casey, I used another CPA to prepare my taxes and heaven only knows how much money I overpaid (he was lousy, and I should have fired him immediately. Plenty of warning signs told me as much). This was all apparent once Casey got a hold of my tax documents for the 2008 return.

It’s the kind of thing where taking an expense here instead of there saved me over $10,000. I’ve been trained in taxes. The Reg section of the CPA exam was my shining moment (a 94 baby! Nothing to show for it now). I had class after class in school. I know enough to know that I need help.

$10,000 (and change)!

We used the money to help us pay down the mortgage.

But that money would have been gone. Forever. There’s literally nothing that you’re given in return for the extra you pay on your taxes. You are flushing money down the toilet. Stop doing that.

Casey’s in the know about this stuff though. He soaks it up. He prepares return after return and sees different situations. He dives into the tax code — discusses strategies and knows the forms inside and out. He’s a phenomenal resource.

I don’t think he’d want me to disclose what it cost me to have him prepare our 2008 taxes, but I will say it was a bargain (and I didn’t get any family discount :). An absolute, no-brainer bargain.

But here’s where the real value comes. Casey now can sit down with me and help me look forward and begin planning. For the 2008 return, he hadn’t seen anything going on prior to having my documents in hand. He was forced to comply and we still did phenomenal.

So the real value comes in being able to plan and structure things in such a way that your tax bill is minimized. Having that ability is, as Michael Scott (The Office) would say, “Incalclacable.”

I led into this talking about tax preparation software. I think, on net, it’s a positive thing. But don’t be deceived. No consumer-facing software is forward-looking. No tax prep software would have told me that I just needed to take my health expense here instead of there. It would have just accepted my answer and moved on. Did you hear that flushing sound? :)

The savings we found had to do with how we were handling health insurance premiums in relation to adjusted gross income (AGI) that was on a threshold of causing phaseouts for roth contributions, child tax credits, and I believe some itemized deductions. Sound like a foreign language to you? Embrace it.

After quite a bit of prodding, cajoling (begging?), I convinced Casey to help me put together something that would help that Piano Tuner I mentioned above get a handle on their tax situation. What we’ve cooked up isn’t quite ready yet, but will be soon. If you’re interested in taking part in a free course all about tax minimization, drop your first name and email in the box below:

Remember, you need to have your own tax policy: Educate yourself. Pay as little as possible and use the savings to reach your financial goals.

And please, please, please people: Do not turn this into some raging political discussion. I’m not talking about tax policy. I’m talking about taking the tax hand you’ve been dealt and proactively making the most of it.

A pretty funny forum thread popped up recently and I wanted to highlight it :) If you can think of another, add it to the thread!

You know you’re a YNABer when…

the first thing you do when you get a receipt is say to yourself “ok which category will those go in or better yet, is this a split transaction!”

I can’t wait til the next pay day just so I can go put February’s budget categories in! (And because I get giddy, like you, over entering receipts!)

you antagonize over buying girl scout cookies because you can’t figure out if you should categorize it as groceries or charity.

you get a kick out of coming in under budget on groceries because that means you can throw that money into the car replacement category, even though you expect your current car to last another 8 years.

you find yourself looking longingly at the chocolate bar in the store that costs only 50c and thinking ‘mmmm, chocolate….’, but then realising you don’t have 50c left in your ’snacks/eating out’ category, and you’d have to take it from another category, and you really don’t want to do that because then you might not have enough left in that category, and besides, you really don’t need the extra calories anyway. So….the chocolate bar stays on your shelf, your money stays in your wallet, and you still fit into your favourite pair of jeans!!

your 8 year old comes home from school and tells you they are doing a “Save, Spend & Give” project at school. She raised her hand and told the teacher “we do that and my Daddy does his budget, You Need a Budget, on the computer”!!!

your decision whether or not to purchase light bulbs at the grocery store isn’t JUST a matter of weighing convenience and price…the fact that it will create a Split also factors into it.

the UPS guy is concerned because I have cut waaaay back on getting deliveries from Amazon!

you forget when payday is.

someone mentions the word money and you can’t help yourself and have to mention YNAB and tell them all about it whether they really want to hear or not.

you use the word buffer in daily conversation.

your thoughts switch to ‘Yikes, the balances in my accounts are only ‘$[insert a figure in the hundreds or thousands]‘ instead of ‘Yikes, the balances in my accounts aren’t enough to buy me dinner’.

you go to the bank to make some changes to your portfolio and you end up upselling YNAB to the Financial Planner behind the desk

you don’t notice your account balance is rising because you’re focused on budgeting instead of dwelling in transactions.

you look at a large deposit and smile thinking; ‘I’m glad that those money already have a job.’

You know you are the spouse of a YNABer when you don’t understand why you don’t have enough money to buy a $1.90 cup of coffee when your account balance says you have $ hundreds/thousands!

you immediately recognize a $1.90 purchase is a McDonalds ice tea because you have entered the transaction over and over again!

you no longer have a constant horrible feeling in your stomach.

you don’t feel frustrated when you receive non-monthly bills.

you don’t feel bad about purchasing something that you really want.

you don’t buy something just because it’s on sale.

you constantly have to tell your spouse that we can buy this, but will need to subtract it from another planned expense.

you are a straight guy but still strangely love a guy named Jesse that you have met on the Internet

you no longer stress about how you’re going to pay the next bill. (The money is waiting in the bank.)

You can’t wait until the last week of the month to do next month’s budget.

you take out $40.00 for gas, spend $37.65 and your first thoughts are “hmm…how do categorize the remaining $2.35!

instead of cleaning the house during your baby’s nap, you obsessively read the YNAB forums!

you tell complete strangers about YNAB while standing in the ATM line at the bank.

the end of the month brings excitement as you know you will be working on a new budget!

Hello good YNABers!

I’m pleased to announce the first installment of Whiteboard Wednesday. Today we talk about On/Off Budget Accounts. Forgive the beanie. My hair is atrociously long (by my standard), but I can’t cut it until I reach a goal that I set in October.

Enjoy..

Leave a comment below telling me what you’d like to see in future Whiteboard Wednesday episodes :)

For the next little while I’m going to be highlighting some key differences (read: improvements) between YNAB 3 and the now retired YNAB Pro. Today, we’re talking about the improvements we made to the workflow of imported transactions.

This first video shows the old method.

This second video shows the new method. The difference is simple, but saves keystrokes, and that’s what we’re all about.

Part 1

0:00 – Why/How I started YNAB.
0:50 – Numbercrunching, realizing we would run out of money before I finished school.
1:30 – Julie says selling YNAB “won’t work” :)
2:00 – Stumbled onto the methodology.
2:40 – Monologue, tongue-in-cheek confession of a Budgeter.
7:35 – Definition of a Budget
7:56 – Diving into the Rules. Started with Rule Two.
9:00 – I want to buy a new putter. The process.

Part 2

0:10 – Guilt attached to every single spending event (and why there shouldn’t be).
1:10 – Budgeting is a goal-setting session every single month.
1:50 – The importance of His and Her money.
3:30 – Rule Three: Saving for a Rainy Day.
4:00 – Christmas as a classic Rainy Day — “Every month is a little bit of Christmas”.
5:15 – The Cash Flow Dip, and how Rule Three eliminates it.
6:30 – Rule Three’s importance for people with highly variable income.
7:00 – Elimination of “crises” in your household.
8:00 – Decision quality with Rule Three (hint: it’s better).

Part 3

1:20 – handling overbudgeting (Rule Four)
1:48 – Rolling with the punches (in Boxing)
3:00 – Why you don’t care about your checking account balance
3:40 – An easy trap for people with shared finances (and no budget)
3:58 – Max, my newborn, cries out.
5:15 – First of month, implementing Rule Four
5:45 – Borrowing from yourself instead of Visa or Chase.

Part 4

0:00 – There is no normal month with your finances.
1:20 – Will likely change the order of the Rules (eventually).
1:35 – Talking about the Buffer.
2:10 – All about timing, the sprint, belt cinch, firesale, etc.
3:20 – A demonstration of Rule One with envelopes.
3:50 – The horrible inefficiency of bill timing to paychecks.
5:40 – Batching bills = efficiency = probably 3 hours per month and no stress.
6:00 – Variable income EXCUSE debunked.

Part 5

0:30 – With variable incomes, forecasting is always, always, always wrong.
1:40 – Reaching Rule One (the transition).
2:05 – Why I was afraid to originally introduce Rule One when selling YNAB (and why I was totally wrong to be afraid).

Q & A Begins
3:15 – Break expenses down weekly? Or just do it as a month? What’s the optimal period for a budgeting session?
3:42 – Increased frequency of budgeting is tough, worth it if you’re struggling though.
4:28 – Frequency of entering receipts for our household (now that we have the HABIT!)
5:28 – Multiple bank accounts? Does YNAB care where the money is? The colored dresser scenario.

Part 6

0:48 – Why cash is sometimes really helpful for stick-to-it-iveness.
1:30 – Do you track cash in a different way? Nope.
2:10 – No demo of the software…but we import.
2:48 – One spouse that’s motivated…and one that isn’t.
4:00 – Handling split transactions.
4:30 – Don’t force yourself to do the tedium, if the tedium will make you quit.
4:48 – Some tactics to use at the grocery store’s conveyor belt.
5:35 – A nice testimonial for Rule One from a very wise man :) – “Your life will change.”
6:25 – How we cheated to get our buffer. Sort of.
7:00 – My own testimonial of the methodology as it works in relationships.

Part 7

0:00 – Establishing responsibilities among spouses with the budget.
1:00 – A funny story about my dry humor getting me in trouble.
2:05 – A “hot” thing to do with your fun money.
2:20 – Money laundering — it’s BAD. Don’t do it. Confess if you are doing it and get things right.
3:30 – Worse than hiding excess cash…
4:10 – YNAB was not in my life plan, a conclusion.

When people set out to “do their budget” they go about it with an approach that is just completely counterproductive. It’s rigid. Formal. Stifling. Ineffective.

One of my favorite board games is the old classic Risk. Great family fun guaranteed every time.

If you want to win in the game of risk, you need to possess one attribute in spades: adaptability.

Yes, you have a plan. And once you see how the other players are placing their armies, you move to your second, third, fourth… eighth plan. If you’re sitting there from the get-go saying North America is yours regardless the cost, regardless the surrounding circumstances, regardless what happens to you from externalities…you’re hosed.

We do this in traffic to. We’ll have a plan B. “Hey, take Mill, but if it’s looking bad we can always head south on 16th and then back over on Washington.”

We do this all the time. It’s a built-in survival instinct perhaps.

But when it comes to money, we have this other emotional side of the equation that is just absolutely insane. Financial academics that study investors continually prove again and again that investors aren’t rational, and that we make completely insane (read: stupid) decisions when it comes to money, how we deal with loss (and gain), risk, etc.

Out of the box, we’re also equally poor at budgeting.

You’ll sit down and begin to build either one of two budgets:

1) The Castle of Fairy Godmother Perfection, with you perched on top. If everything goes right this month, absolutely everything, then you’ll stay on budget. It will be the first normal month in your entire history of adult existence. It’ll also be the first normal month in the history of mankind.

2) The Alcatraz of Unrealistic Miser-y, with you locked inside. This is the budget where you’ll lose 10 pounds because you’ve budgeted $120 to feed your family of four with the main plan being to fill up on complimentary coffee creamer while at work.

In both of these unrealistic scenarios, you’re going to fail. The main reason being that you’re not coming at your budget with multiple plans — just one all-out-this-better-work-or-I’m-never-trying-again-plan.

Listen. You’re the Commander in Chief. Your money salutes you. Tell it to do what you want, but be flexible. Recognize that there are no normal months, that you do have to eat, and that you will go over-budget in a few categories pretty much every single month.

Do I lock my sites on the strategically-superior location of Iceland (in Risk) and just go after it with tunnel vision until I either finally get it (at what cost?) or fail? (At what Cost?)

One of YNAB’s great strengths as a piece of software is the extreme ease with which you can shuffle money around. It was meant to be shuffled. Flexible. Adaptable. That’s what will keep you in the game for the long-haul!