Tag Archives: emergency fund

What do YNAB and College Football Have in Common? More than You Think.

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I know a few games have already happened, but for me, college football begins today (4:00 PM MST to be exact). All of this football talk has me thinking of one thing of course: budgeting.

I just finished reading JD’s post over at the forums. He’s 1 1/2 years into using YNAB and he’s done some amazing things. He checked in to report that they’ve fully-funded their emergency fund (so if, heaven forbid, JD were to lose his job, he’d have six months to find a job he wanted, instead of just taking whatever he could get and closing the door to a better opportunity). JD was also amazed that they’re able to concurrently contribute 15% gross to retirement, fund college 529 plans, and pay down the principle on their mortgage fast enough to pay the sucker off 7+ years early.

While YNAB’s focus is purely on the budgeting (you decide what to do with all the extra cash you’ll find lying around), JD used YNAB in hand with Dave Ramsey’s Baby Steps. In short, JD found YNAB, then found Dave. I’m hoping eventually Dave finds YNAB of course.

The success of YNAB users has very, very little to do with the software. I know, the software’s fun, and with the most recent update, it’s become even more enjoyable, even invoking a few “SQEEE”s out of people. (I’m told the sound of a SQEE is similar to the sound a teenage girl makes when she sees her boy idol come out on stage).

But again, the software being what it is, the key to success is with the methodology. What it is about the methodology that breeds success such as JD’s? Why don’t we see people using Quicken, or MS Money touting the same amazing results? What is the big difference?

Let’s be brutally honest here, both Quicken and MS Money do mountains more when you compare them to YNAB on a feature by feature basis. Again, it can’t be the software. From a methodology standpoint, Quicken and MS Money both do very well in helping you track your spending, analyze spending habits, even set some budgets (heck, Quicken has a whole financial planner built in there!). Why aren’t people paying down mountains of debt and saving a ton of money when using these programs?

Or, phrased differently, what is it about YNAB that allows people to just go after this stuff and get the job done?

It’s the first Saturday of college football, and I want to share with you the similarities I see between good football (from the coaching perspective) and good budgeting.

(And, before I get into this, I should say as an aside that when we talk about good “budgeting” what we’re really talking about is good reaching-your-financial-goals-and-getting-the-job-done budgeting. Call it whatever you want — I LIKE the word BUDGET.)

Imagine a football coach who focuses solely on the progress of the ball. If he is on offense and it moves forward, he’s happy. If it moves backward, he’s mad and throws his clipboard. The team all huddles around the coach and he gives them their instruction:

“Move the ball forward.”

When they’re on defense, the instruction changes ever so slightly:

“Move the ball backward” or “Try and Grab the ball!”

The players would do their best with the instruction given and very little progress toward their vague goal would be made. The coach would be frustrated. The players would be frustrated. And the fans would boo. You would LOSE.

But that’s not how it works at all is it? That’s not how a successful team is run. Quite the opposite actually. (Disclaimer: I’m a football fan — college football specifically — not a coach.)

How many coaches are there on a typical football team? At a high level, there are a TON! You have the head coach, quarterback coach, offensive coordinator, defensive coordinator, special teams coach, kicking coach, linemen coach for defense, linebacker coach, safety coach, secondary coach, etc. Each of these coaches are giving very specific instructions to the players under their supervision. Each player knows his job and also knows all of the other players know their jobs. You have a lot of moving parts, moving in concert.

Block here, be strong on this side, fake a pass, hand it off, receivers become blockers further down field, etc. There’s a lot going on during each and every play. Every single player on the field has a specific and important purpose. If each purpose isn’t important, then there’s an inefficiency and the team won’t operate at its highest potential.

All of these moving parts, specific instructions, special exercises, training regimens, techniques, goals, statistics, KPIs… all there just to

“Move the ball forward,”

or

“move the ball backward.”

In other words, to WIN.

Your success with YNAB stems from the fact that you are acting like all of those different coaches. You’re getting down into the detail of the execution with your money and at that granular level (how granular? Food:Boneless/Skinless Chicken may be a bit overboard) is where you truly make things happen. You may not think it’s important that you’re sitting there thinking about a $50 bill that’s only due once per year ($4.17 per month set aside will get you there) or recording the fact that you just spent $.85 on tolls. You may think that type of detail isn’t necessary.

But that is where you win. When you become the coach that works with a quarterback for days on their foot position, or the coach that implements a flexibility regimen for the punter, or the team physical trainer that makes sure the team’s rotator cuffs are healthy, etc.

Will foot position win a game? Will rotator cuffs win a game? Absolutely not. But in concert, with all of those details worked out and focused toward a common goal…that will win the game. And that’s how YNAB helps you win the money game. You get focused on the execution of the details and the big picture all comes together:

“We have gone from aimlessly living paycheck to paycheck up to our necks in debt to properly managing money and now planning for our family’s future. If I had a five year goal when I first started out [one and a half years ago] this is where I would have hoped to be.” – JD

Emergency Fun

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I know that those two words don’t usually go together. You may have even thought that I just left the ‘d’ off of the last word. But I actually want to talk about emergency fun. Not that emergencies are ever fun. If you have prepared properly, though, there can be a real element of fun, especially after the emergency has past and you are looking back. There is even fun to be found when there is not an emergency if you are prepared for when there is.

I guess first I should clarify. I think that saving money is fun. If I have outsmarted the foreseeable downturns in life, or jumped across pitfalls that ensnare others, or even just get a great deal on something that I had to buy anyway I think that it is fun.

This Fun Begins With a Fund

Hopefully you already understand the absolutely crucial nature of an emergency fund. There aren’t many things that are more critical to success in personal finances and financial planning than a sufficient emergency fund. Perhaps if there is interest I will write an entry just on this. Suffice it to say that right now a good emergency fund is a number one priority in any financial plan.

So where is the fun in that? The fun begins after you have the fund. Once you have the money in place you can sit back and watch the fun begin in all the ways that you can save money.

A Few Morsels to Whet Your Appetite

Here are a few of the ways that you can save money by having an emergency fund. These, and numerous other ways can add up to a significant amount and can more than offset the lower interest rate that you earn by keeping this money liquid.

Home and Auto Insurance
Give your insurance company a call and ask what the difference in your premiums would be if you increase the deductible to the maximum amount that they allow. Add up the savings. Usually the difference in premium makes up for the increased deductible in a short amount of time. And you have more than enough sitting in your emergency fund to pay the deductible should you need to. Also, if you are paying monthly find out how much less it would cost to pay once per year. The difference can be as much as 20%! Pay the premium from your emergency fund the first year and then pay yourself back monthly, plus enough to pay next year’s premium.

Health Insurance
Here is a similar principle. However, the savings in premiums for a higher deductible plan can be much more substantial than with home and auto. Be sure to check out my article on Heath Savings Accounts to see how much money you could really save.

Your Job
Now here is an interesting one. If you have a healthy emergency fund (3-6 months, or more) you have much more flexibility in your employment. If you are not happy with the job, the circumstances that you are placed in, or the pay, you are free to ask for something better. The worst that could happen is that you need to find a new job and you conceivably have 3-6 months to do that without a problem. Or what if you get fired? You can smile and not wonder how you will feed your family. Or, what if you have been working on a side business and you are ready to take it to the next level. You have the ability to do so much more than you otherwise would without substantially increasing your risk.

A Major Repair
In this case you have the ability to find the best deal because you can pay with cash. Also, you don’t have to use a credit card. Just add up the savings in interest that you would have paid on a credit card, plus the better price you negotiated for paying in cash and you will really be having fun.

Your Turn

I have a lot of others. In fact I have held back some of my favorite ones. I want you to think of the fun that you can have and the savings that you can achieve by having a well funded emergency fund. And then I want you to send me your ideas. Even better, send me your real experiences. I will put my favorites in a future entry.

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.

 

Exercise Your Power Over the Bottom Line

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During the past two months we’ve had two significant and unexpected outflows of cash. These experiences have reaffirmed many things for me. First, a rainy day savings account is inestimably valuable and comforting. Second, initial bids from contractors and laborers are always high; don’t get suckered in. When it comes to negotiating with sales representatives — foster boldness, dash fears.

Our first unexpected outlay of cash occurred when a swarm of black, winged insects came pouring out of the wall by our back door. Termites. The first bid we got for treatment from Terminix came in at just under $1400. I’d been warned that extermination would be pricey, but that estimate knocked the wind out of me. By the time the Terminix man was walking out my front door, he had already lowered his estimate to about $1000, simply because I’d asked, “Now is that bid the lowest you’ll do this treatment for?” Satisfied with the $300 concession and horrified by the infestation of wood-eating-insects, I just wanted to sign the paperwork and get some poison pumped around our foundation ASAP.

However, at the insistence of my husband, I made three phone calls to different extermination outfits, and by the time I was done, we had our bid down to $849. With another couple of phone calls, pitting pest-control providers against each other, we had the bid down to $649 plus tax. We paid $703 (total) for the termite treatment. In other words, we kept six hundred dollars in our pockets just for making a few phone calls and holding a few salesmens’ feet to the fire. And we haven’t seen a single sugar ant, let alone a termite, since the service.

The second unexpected outlay of cash happened just last week when we took our car in for a ninety thousand mile inspection and discovered that we needed some extensive work done on our brakes. The first bid we got from the mechanic was almost two hundred dollars higher than what we ended up paying for the work we had done (by the same mechanic who gave us the initial bid.) The principle of dickering for deals is one I’m learning by repetition. And I’m saving our family hundreds of dollars in the process.

Here are a few take home points for negotiating with vendors:

Remember that initial bids are rarely (if ever) the bottom line. My husband and I both learned from personal sales experience that the initial quote you offer a customer is always high. The sad reality is that most people will willingly take that first quote sans questions. Don’t be one of those customers.

Don’t be afraid to make the situation slightly uncomfortable with a follow-up like: “This bid seems pretty high to me; is this the best you can do?”

Be upfront with the representative about the fact that you will be calling around to other service providers to compare cost. A lot of times an establishment will want your business badly enough to lower the bid right then, without any competing bids. Especially now with the economy in low gear, many vendors are willing to relax and play nice from the get-go.

Follow through with the threat to call around. Cost compare. And if it’s prudent, take your business elsewhere. Talk to friends and trusted associates about reputable establishments you can contact for alternate bids and start pitting providers against each other.

Almost everything is negotiable; dicker over the price of monthly cell phone rates, pest-control fees, utility rates (especially phone, internet and cable costs,) insurance premiums, car repair quotes, household repairs, etc.

And finally, keep the money you save stashed safely away in your emergency/rainy day fund; life has proven time and time again that you can always expect quite a bit of the unexpected. And whether it’s medical expenses or termite infestation, the resolution of the unexpecteds usually requires money.

A Four-Year Old, a Light Saber, and an Invaluable Lesson in Personal Finance

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Today is Porter’s 4th Birthday. For two years he’s asked me why I have to go to work. For two years I’ve told him the same thing:

To earn money, so we can buy food and have a place to live.

When he was really little he actually started to leave money out of the picture. I’d say I’m going to work and he’d respond, “to buy food?” And that, my friends, is how the world works. His first exposure to money and he just forgot about it. Food was the important part.

Last year for Christmas he was given a wallet with a five-dollar bill inside. I was amazed, but he actually kept that money in his wallet for the most part. A few times I found it among the toys in their toy box and I’d bring it to him and tell him how important it was that he keep track of his money (you can’t start ‘em too early). His aunt came and visited a few months ago and we headed off to Target because Porter had decided to assign those five dollars a job: buy a toy light saber.

Julie and I went off to do some other Target-errands while Porter and his aunt headed to the toy section. When it came time to checkout I was keenly aware of the entire process. This was his first transaction and I wanted it to hurt when he spent that five dollars. (The total was actually $7.50 and I made up the difference – a moment of weakness perhaps).

I made sure Porter handed the cashier the five dollars, and waited with baited breath to see his signs of hesitation, perhaps a furrowed brow and a longing look at his wilted piece of currency.

Nope. He handed it to her so fast and didn’t blink an eye. Money was a means to an end (end = light saber).

I used my new found knowledge a few weeks later when I came home from gathering food and was told that the basement apartment below us was now dealing with a broken window, compliments of Porter’s (awesome) ability to huck anything he can heft further than kids twice his age.

I didn’t so much care about the broken window, or even really about the money it would cost. I did want to teach Porter a lesson about what this loss would mean. I sat him down and told him that because it was going to cost money to replace the window, we wouldn’t be able to buy a Wii. His eyes got big and he got the lesson. The Mecham Pie is finite buddy, and you just ate a slice.

[We still haven't purchased a Wii even though I still really want one for, you know, Dad-Son bonding time and things like that. Porter still mentions the fact that we don't have a Wii because he broke the window. The lesson that just keeps on teaching!]

For Porter, the End was the Wii and we didn’t have the Means because he had broken a window.

As an adult with these little dependents running all around me, my Ends are different. Or at least they should be. And I suppose that is where the lesson lies.

This list is not exclusive, but as an adult, your Ends should include:

An Emergency Fund – Guys, give your wife a break and let her have a bit of breathing room! She’ll thank you for it.

Savings for Retirement – Don’t depend on anyone for your retirement except your own ingenuity, creativity, and sweat.

Minimal (or no) Debt Load – Pay off all of your debt as fast as you can and reclaim all of the time, sweat, thought, stress, and tears that create that precious income.

A kid gets bright-eyed with the prospect of spending $5 on a light saber. A guy gets bright-eyed with the prospect of spending $500 on a “modest” gas grill (the one that really caught my eye yesterday was over $900 though – yeah right!). Does the same guy get excited about throwing $500 toward unsecured debt? Or stashing $300 in his emergency fund?

At some point, the earlier the better, your Ends have to change. You’re no longer a kid. For Porter, Money equals things. For you, an adult, Money should equal Security and Peace.