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

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

And they will.

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

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

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

Consider these two separate scenarios:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Hard Work
2. Persistence
3. Optimism

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

Hard Work

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Persistence

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

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

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

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

But you persist because persistence is key to change.

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

Alas, that won’t happen. Ever.

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

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

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

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

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

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

Optimism

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

You too can be optimistic about your financial future!

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

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

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

When you’re managing your money, you’re playing an active role in what it does, how it works for you — hopefully aligning it with where your values are. The key to staying on top of the whole thing boils down to one basic principle:

Revisit. And Revisit Often.

At the beginning of last year, I broke down my New Year’s Resolutions into four categories:

1. Physical
2. Spiritual
3. Business
4. Financial

I had two goals per section and wrote them down on a 3×5 card, which went in my wallet (an aside: if your wallet is so huge, because you save the business card from the guy that hands out 300 business cards a day, and your wallet is also your receipt filing system and a source for fire kindling in an emergency, then you may need to stick your goals somewhere else).

At the end of each quarter, I revisited these goals. I had to adjust a few of them because I changed employment situations in a major way, but it was interesting to come to them after just 90 days and see how things had changed. Had I lost focus? Was I on track? These little moments of reflection did amazing things for me this year — it seems I had more clarity in what I wanted to accomplish and how I would get there.

Some might say that a quarterly revisit isn’t frequent enough, but my goals were of a nature that didn’t require anything more frequent than that anyway. I found it to be just right.

One goal, that we later cancelled, was to purchase a home (we cancelled it because we moved to a new state and need to get to know the area, and I also believe the market will soften yet). That’s a large goal. Would I need to revisit it weekly? Hardly.

A goal that I also had was with a specific exercise regimen. I learned quickly that I become bored of specifics, but do enjoy the daily workout — it just needs to be changed a bit more frequently than I had orignally anticipated. Revisiting it monthly may have been slightly better, but quarterly worked just fine.

If you were to set a goal about dieting, you’d want to revisit it frequently because food plays such a common, frequent role in our lives.

The key is to match the frequency of your revisiting and recalibration with the frequency of the goal itself. It will help you stay on track.

If March is all about Madness, then late December/early January is all about New Year’s Resolutions. A very popular resolution is to manage your money better. As with food, money flows in and out of our lives daily. Frequency is absolutely key here. If you decide to make YNAB part of your New Year’s Resolution Solution, then embrace the idea of looking at it often. This will keep you on track and focused on your longer-term goals. Money management is a means to an end, so keep those ends in sight — they’re your motivation!

The other day a group of friends and I were discussing investing and my friend mentioned that he had purchased some stock in Apple Inc. (Ticker: AAPL) back in 2003 for $20 per share. He had invested $4,000 for 198 shares (Disclaimer: I also own stock in AAPL, but alas, I did not get in for $20 per share).

The investment performance has been something like this:

One of the others in the group had an interesting response: “I would have invested in Apple too, but we weren’t lucky enough to have four grand lying around to bet on stocks.”

(As an aside, I discussed with this friend why he chose to invest in a single stock, when most financial advisers advise to diversify. His response was that this was “play” money that he could afford to lose, and that the vast majority of his investing was done in index funds.)

A while back an acquaintance asked if I knew about one of my good friends recently purchasing a very, very nice car (I don’t know how much they run, but somewhere north of $90,000). The acquaintance’s next comment was something to the effect of, “He’s lucky to be able to afford that car — still in his twenties!”

Yes, he’s lucky.

And yeah, my friend who invested in AAPL four years ago is lucky.

They’re both lucky enough to be smart enough to live within their means.

With my investor friend, he had discretionary money lying around that he could afford to lose. Why was it lying around? Because he hadn’t spent it. Why hadn’t he spent it? Because he lives within his means. He doesn’t spend every dime that comes in. So when an opportunity came along that he thought he should take, he could afford to take it.

There are two points of affordability really: the physical and the psychological. Physically, if you have $4000, and an item costs $4000, then you can afford to buy that item. Psychologically though, it’s a whole different ball game — especially with investing. The question you also must ask yourself is if you can afford to completely lose that $4000 and have little to nothing to show for it.

My friend ran the risk of losing virtually all of his investment. But he could afford not only the $4,000 but also the risk attached to the investment. He was comfortable with both sides of the coin. Had he been living on the financial edge, he would not have had the means necessary both physically or psychologically, to be able to make the investment. As a matter of fact, his mind would have been so wrapped up in trying to stay current with his payments I doubt he would have had room upstairs to even think about possible investments.

The second scenario is with a good friend of mine who, while in college, begin helping his friend build a business. While building this business he has stayed in school, married, and started a family. While building the business he (and his wife, who of course shared in all of the building, or demands thereof I should say) wore old clothes, got by with one extremely old car that most of you would be embarrassed to sit in, didn’t go out to eat, didn’t go to the movies, didn’t spend anything extra on anything.

So yeah, he was lucky to have the opportunity, but how good would that opportunity have been if he had been living above his means, loaded down with debilitating credit card debt, used to living the high life (or worse yet, completely dependent on his parents while in college)? I submit that the opportunity would have been passed by, not on its merit alone, but on his ability to take advantage of it.

And your ability to take advantage of opportunities that come your way is directly related to your flex-ability with your finances. The rich get richer not because they’re in some secret club or know some secret formula — it’s because they live within their means (easily). This allows to them afford opportunities when they present themselves.

Go find yourself some luck and manage your budget so you can live within your means.

I’ve been fortunate enough to have the YNAB methodology in full force in my life since April of 2003. We’ve never lived paycheck to paycheck, always lived within our means, planned for larger purchases, and stuck with our budget over time. As a result of the methodology, our money situation has always been just fine, and, more importantly, we’ve been on the same page with our financial goals.

We never had a mountain of debt to conquer, retirement plan contributions to “catch up” to, or a kid that’s suddenly in need of tuition (and books, and fees, and food, and gas money, etc.).

But I’d venture a guess that most people who highly recommend YNAB as budgeting software have had at least one of the aforementioned challenges — probably several at a time.

So what makes someone highly recommend budgeting software? Why do people recommend the You Need A Budget software?

Not a day goes by where I’m not asked the question in an email (or two, or three, or four) about the possibility of YNAB having this or that feature: Does it forecast? (sort of) Will it automatically download transactions to my bank, or will I have to download the file myself? (no and yes) Will it amortize my mortgage for me? (no) Can I use it for my business? (yes) Does it support online bill pay, where I can just write the bill from within the program? (no). Of course, this is all at the time of writing.

I’ll be square with you, and possibly scare a few off, but YNAB is budgeting software. It’s built to help you budget. It helps you manage your cash flow. It only comes highly recommended as budgeting software, not as an all-in-one-all-the-bells-and-whistles-and-upgrade-fees software package like Quicken or MS Money. YNAB cannot be all things to all people, and will never make the attempt. YNAB is budgeting software.

With a piece of software doing just one thing it’s a wonder why it nails things on the review circuit the way it does. Thankfully, I think the reviewers have recognized YNAB for what it is, and what it is not. But I’ve noticed one thing with software, and budgeting software is no exception: When it does one thing really well, that gets noticed.

And YNAB does budgeting very, very well.

But to go a bit further, the real reason, when you get down to it, why YNAB comes highly recommended is not because of the software. Anyone can build an application that clicks and shines, etc. That’s not where the power of YNAB lies (not even with its übersimple interface that I love and adore). The power of YNAB goes back to the beginning of this article. The power of YNAB is its methodology. And one thing I’ve discovered in my accidental journey of YNAB, is the fact that software will be recommended highly when it changes someone’s life for the better. And that is exactly what this budgeting software does.

Yeah, I’ll be talking about Rule One again. Only because it’s so important. Yes, you can use the budgeting software without following Rule One, but my hope is that you follow it as soon as possible.

The other day I was interviewed by the founder of LivingLikeNoOneElse.com (also a fan of acronyms, you can find them at llnoe.com as well). One of the questions asked from the listeners was whether the YNAB software helped you time your paychecks to match with expenses.

Important Budgeting Question #1: How do I time expenses with paychecks?

This really is an important question, actually. Rule One answers this question.

But when you first begin using YNAB, you likely won’t be following Rule One, you’ll:

1. earn some money
2. record it as an Inflow
3. budget it
4. spend it
5. (and hopefully save some of it)

And you do this every single time you bring in any money at all (paycheck, side income, cash you found in the cushions, etc.).

The budget it step is where the timing takes place. Your thought process would probably go something like this:

Alright, here’s my check for $1100. I get one every Friday. What expenses are coming up? Oh! We’re almost out of milk, and eggs, I’ll have to go to the store [budget it]. Did I pay the electricity yet? Oh, here’s the bill in my ‘To Do’ folder. I guess I didn’t [budget it]. The rent is due in two weeks, which means that this paycheck, and the next are the only ones to help with the $1,300. I’ll set aside $650 for it from this check [budget it], and the other half with next Friday’s check…

Rule One comes into play in answering this question because the above scenario is not the ideal way to manage your money. It’s too much micromanaging and ends up taking you much more time than necessary (though I should mention that there are advantages in doing this exercise when first starting out: you learn the software, become acutely aware of your (over?)spending, and build strong habits).

Okay, now let’s assume you have your Buffer in place, and, according to Rule One, you’re actually living on last month’s income. You would have recorded your income as earned, and would sit down at the beginning of each month and budget it. The whole thing. All at once.

Alright, there I have it. $4,400 (four paychecks) of income, ready to take on the month, all sitting in my account just waiting to do its job. Let’s see, the $1,300 of rent is due tomorrow [budget it]. Electricity will probably be about $85 again [budget it]. We’ll need $400 for groceries [budget it]…

And so on. Suddenly, a weekly exercise has become a simpler monthly exercise. The time savings are substantial, and the risk of not being able to sit down one time per month to sort through everything is much higher when you have to find the time four times instead of once.

When you’re living under Rule One, you don’t time your paychecks. Were all your bills to be due on the 1st, you could pay them without even glancing at your checking account. That’s the beauty of the Rule. It shouldn’t be written off so quickly. It’s huge.

Important Budgeting Question #2: How do I cope with a variable income?

I’ve beat on this before, but I’ll do it again. Variable incomes can be challenging when budgeting — if you’re living paycheck to paycheck. But when you’re following Rule One, the challenge is mitigated to, at most, a slight annoyance.

Imagine now, living on last month’s income, that you sit down for your Budget Meeting and look at your (hopefully) big Available number. This is the number that tells you what you have to work with for the month. That’s it. There’s nothing “gray”, “dicey” or “iffy” about it. That’s your number this month. You just need to decide what to do with it [budget it].

Another answer to the Variable Income problem is to prioritize your spending. You basically say, “I don’t know what I’m going to make this month, so when I do bring in money, I’m going to take care of these things (rent, lights, food) first.”

That’s a great strategy. It’s powerful when you see that you ran out of money before you get to the “Clothing : Gucci” category. Perhaps a light bulb just flickered: more money to retirement, less money to crocodiles.

And while Rule One doesn’t take away from this principle of prioritization at all, Rule Two embraces it. A zero-based budget is exactly the same principle. You budget until you run out of money. Obviously it would behoove you to (and reality will slap you if you don’t) take care of “first things first”, as Dr. Covey would say.

Make life easier and start living by Rule One!

Important Budgeting Question #3: How do I handle financial crises and still budget?

When you’re not living right on the financial edge, you’re smarter. While being smart may mean you already don’t operate right on that edge, not operating right on the edge also allows you to be smarter.

The one factor that contributes to more stupid financial mistakes than any other is TIME. Better yet, LACK OF TIME. In sports, timing is everything. In business, timing is everything. In personal financial crises, timing is everything. Operating under the shade-giving awning of Rule One allows you to sit back, completely evaluate a situation, and arrive at a logical, non-rushed, wise, in-line-with-your-goals decision. Only a buffer can do that.

You will have a legion at your command when a financial crisis decides to make its attack:

• According to Rule One, you’re living on last month’s income this month. So in May when something unexpected slams you up against a wall, you’ll have a portion of May’s earnings to buffer you from danger. (Those May earnings are there only because you’re living on April’s!).
• And with Rule Three in effect, you’re setting aside money on a monthly basis for non-monthly expenses (car insurance, property taxes, Christmas, etc.), so again, when you suddenly find yourself on defense, you’ll have money to make your play.
• Finally, Rules One and Three obviously are there for specific purposes (next month, and Rainy Days respectively), so you have Rule Four to guide you in paying yourself back for the disaster. If you can’t ‘Roll with the Punches’ and recover with just a small adjustment, Rule Two’s Zero-Based Budget will tell you very quickly that you need to take alternative action to rectify the situation (drastically cut your expenses, make a short-term increase to your inflow, or perhaps call for an infusion from your emergency fund).

The important thing to note is that you don’t go into debt with the crisis hits, you make a wise choice because you now have some time on your side, and you stay on your feet with the budget, instead of throwing in the towel.

These are important questions to ask yourself when setting up your budget, and now you know. You have the answer to the age-old “timing” question with your paychecks, the variable income that’s always seemed un-budgetable, and the financial disasters that (will) strike, which used to snap your budget in two.

Those are all behind you now. So despite what you make think, budgeting works. And you need one.

You’ll often hear people protest budgeting by saying something like, “If I budget, it will just tell me there’s not enough money” or “I don’t want to see all of those red numbers.” My mother-in-law (don’t worry, she doesn’t read this) claims that if she were to budget, her finances would be a mess, so she chooses to manage her money “on faith.”

I’m not about to dispute the principle of faith, but would like to point out that sometimes we should also…count the cost ((Luke 14:28)).

Yes, it is possible that your budget may tell you that you don’t have enough money — even for some niceties (but not luxuries) — maybe even for some necessities. Bear that in mind as you begin. You just may find out that you are completely and totally broke.

A zero-based budget does tend to highlight the scarcity of your resources. On the flip side, the Budget can also show you how flush with wiggle room you truly are. Though if you’re in that department, you’re probably not one of the budgeting unbelievers!

Rule Two of the You Need A Budget system states that every dollar is given a job. In other words, you’re expected to operate zero-based. If you have $3000 to work with, and you allocate $1000 to a house payment (a wee bit high at 33%) and then are forced to allocate another $450 for your two car payments, and $200 for credit card obligations, and maybe $300 for food (in Utah we manage about $270 for two adults, a three year old and a one year old), $100 for car insurance, etc…It starts to look pretty grim. I didn’t yet allocate the cell phone bill, cable, electricity, internet, eating out, car repairs…

But the point is that you’d begin allocating each of those $3000 to a job. By the time you had allocated throgh food, you’d see that you had $980 with which to work. So you’d chug along, moving down your categories, allocating your dollars. You’d be operating zero-based.

Usually in our Budget Meeting, my wife and I will ask the question again and again, “How much do we need for [category]?” Some of the categories are straight from the last month (rent doesn’t change, some utilities don’t change, the retirement contribution doesn’t change), but many of them need to be tweaked each month. So we move down with special attention on those variable categories and answer the question of how much we need in each category. Without fail, we look back at how much we have Available after doing this allocation and we see we’re in the Red. We’ve overallocated.

It’s the Zero-Based Budget’s way of pulling back on the reins and guiding us back toward reality.

In our case (thankfully) things aren’t usually in the I’m-unbelievably-stressed-because-of-our-money-situation (thanks to following these principles for years), but it’s a reality check nonetheless: “Hey! Guys! You know those dreamy allocations you just made? See how you put way too much in Entertainment? Well, pull some out and be realistic. You can’t afford that!”

There’s a silver lining though.

While we had been following the zero-based budgeting principle (Rule Two) for about a year, we hadn’t yet had the very-stressful reality check yet. We both had been working part-time, our rent was a few hundred dollars, we avoided eating out, we didn’t own a TV — we were living on the cheap. As a result of that on-the-cheap living, things were going well for us and we were able to set aside some money.

Then it all changed when our first son began his nine-month journey into our lives. We had decided beforehand (before we even married) that Julie would be 100% Stay-At-Home Mom. It was a non-negotiable decision the two of us had come to. But that meant that we’d be giving up Julie’s income as well. I crunched numbers for several weeks, forecasting how much we would be able to save up until the baby came, how much the baby would cost, how much a new place would cost (our one-bedroom basement apartment wouldn’t do, plus, I think it had a mold problem), how many hours I would be able to work while going to school, how much longer school would take (two years), etc.

Well, the more I crunched the numbers, the more discouraged I became. My zero-based budgeting idea was staring me back at the face saying, “You won’t be able to do this.” I contemplated working 40 hours per week while going to school but knew my grades would suffer. I thought about taking out a student loan to tide us over — even if just small one — but I couldn’t let myself do that. I wanted to make it through school without anything tied to our financial ankles.

I worked, reworked, massaged, and coaxed the numbers and no matter how I did it, the zero-based budget continued to tell me that we would not have enough. Welcome to Reality. Again. And again. And Again.

One night I came home from school with an idea. I would sell our budgeting spreadsheet online to help us earn some income. I asked Julie what she thought and she said there’d be no way someone would buy our spreadsheet. I went ahead anyway and worked tirelessly on learning how to write webpages, market an online product, and create a user-friendly spreadsheet that could be sold to people wanting to use the same principles we had been using with so much success.

I launched it in September of 2004 — two months after our first Son was born. While it hasn’t been the “hands off” solution I had thought it would be, nor is it some IPO waiting to happen, it did tide us over for those two years of school. And on top of that blessing, starting this business has helped me meet so many other people. I’ve been able to write in my untrained way to hopefully motivate others to manage their money. In starting this little venture, I’ve found that I have a passion for sound money management. I enjoy helping people get a hold of their finances.

None of this would have happened had the zero-based budget not told us way back in 2003 that we wouldn’t have enough. My first big reality check turned into my first big blessing. I am certain that it can happen for everyone. Don’t be afraid of reality. Embrace the problem and find the solution.

Yeah, sometimes it’s not all hot chocolate, matching sweaters, and laughter around the toasty fire when Julie and I are sitting down ready to do our budget meeting. The last one, actually, had a new addition: Julie’s List of Things She Wants / Needs.

She’s becoming quite adept at how this whole budget system works. As a matter of fact, she’s scary-good at it.

Julie knows that living on a budget means living according to what you planned to spend. Living on a budget doesn’t mean you live on ramen noodles and ketchup packets (though it may point you in that direction). To live on a budget means to live in reality.

Yes. Your finances really are that [insert adjective here: good? horrible? shaky? fantastic?].

The key to the budget is to plan. And that’s where Julie’s list came into play about a week ago. She had it there in front of her - removed from its normal subtle spot, which is magnetized to the refrigerator door - ready to plan. You see, she’s so good at this! Her list is so conservative, and she rightly deserves every single item. She just had the problem in meetings past where she would forget that she needed something (like a new pair of running shoes, or a sippy cup for the one-year old).

So of course, when she was out and about later on, she would remember what she needed. But she hadn’t talked about it during the meeting. So sometimes it’s a phone call, or sometimes it’s just a chance for her to exercise some fortitude and pass on the purchase.

We operate on a tight budget - working toward saving for our first house. So we have every reason to pinch a penny.

But alas, now with that list. Living on a budget means living according to a plan, and her plan, is to make sure she has that list so it can become part of the overall plan. And then I can’t say, “Well did we budget for it?” Because we did. Or we should have. Or at least there was a heated discussion about it.

And that’s a long, round-about way for me to get to the point of this whole brain dump. Our discussion during the last meeting was a bit more heated than normal. I saw the list and pulled up the bridge, dropped the gate, threw away the key, and had some of my People add extra water to the moat.

Our budget meeting was anything but peaceful. It took a little bit longer than normal and we came to a consesus in the end. Basically it forced us to reevalute our priorities just a tinge.

So where does the peace come from living on a budget? It comes from aligning your money with your goals.

Peace happens when Money aligns with Goals

And that’s why I didn’t notice any feelings of withdrawal when I spent less money during my experiment as a teenager. I simply stopped spending money on things I didn’t truly care about, and I didn’t miss not having what I didn’t care about in the first place.

There are a few things I care about. I care about shelter for the family. I care about adequate transportation, health care coverage, food, clothing, etc. But you know what? I also care about getting Porter his first bike for his third birthday coming up here pretty soon (it’s a Superman bike, and is so cool). I also care about Julie’s knees not hurting after she runs, which means we need to get her some new running shoes. I care about going on dates with my wife every Friday night — which means we pay a babysitter, or find someone to swap with at least — so we can go out and give her a break.

When I spend money on any of these things, I don’t feel bad at all. But when I spend money on things that I don’t truly value, that aren’t in line with my goals, I get zero satisfaction from them. As a matter of fact, I would say that the net result is dissatisfaction. What a horrible thing: to spend money on something that makes you feel worse.

Living on a budget in the right way means that you take your budget seriously. You assign your dollars their jobs based on what you truly want them doing.

When we sit down and set our budget, we don’t carve the numbers in stone. You can’t reasonably anticipate every happening during the next four weeks. It’s just not going to happen (though its uncanny how regular things are over a longer time period). So when we go over budget, that doesn’t necessarily mean we’re straying from our goals, it may just mean we didn’t see something coming.

The important part about the budgeting process is the conscious decision to have your money do what you actually want it to do. Not what your coworkers want it to do. Not what the bank loan officer wants it to do. Not what anyone wants it to do except you.

And when you find that you truly are living on a budget, then you find that you are living in peace. Because finally…

Finally…

Finally…

You, and your money, are in alignment. And I’ll bet there’s money enough for that.

The basic equation to lose weight is to eat fewer calories than you burn in a day. So if you’re daily burn rate is 2,000 calories, you probably want to eat around 1,700 calories per day to cause weight loss.

That is about as fundamental, obvious, and straightforward as you can get.

Yet how many billions of dollars are spent on dieting books, pills, classes, methods, magazines, strategies, etc.? How many times have people tried to eat less and failed? I don’t have any data to back this up, but I’m guessing the failure rate is very, very high.

It’s a fundamentally easy task that people fail at again and again and again.

The other day I was reading an article about nutrition (my other hobby). The author stated bluntly, “If you want to lose weight, you need to monitor your caloric intake. This necessitates writing down everything you eat. Nothing goes unaccounted for.”

Naturally, I thought of this hobby: budgeting.

When I first began my mission to get the world on a budget, I knew it would be an uphill battle. My main fear was the fact that I would, in this technologically-advanced society, be telling people to manually record everything they spend and everything they make. It just didn’t seem like people would swallow that very well.

But to be honest, that’s the principle that is absolutely crucial to the budget. Now, I’m not saying that if YNAB could import from your bank, that I wouldn’t support it. I’m only saying that the principle of going through your spending, looking over your income, assigning transactions to categories — being conscious of the inflows and outflows of your money — goes a long way in helping you out with your finances. As I’ve said before, the budget is your foundation to financial health.

So the very thing that turns people away from effectively managing their budget (recording and being aware of what they spend) is the very thing that will help them the most. And I say “most” without reservation.

Being convinced that recording your inflows and outflows is paramount, it is then necessary to actually do it. This is, as they say, where the rubber meets the road.

The key with dieting is to maintain consistency in monitoring your caloric intake. The key to managing your money effectively is to maintain consistency in monitoring your outflow. That probably bears repeating: The key to managing your money effectively is to maintain consistency in monitoring your outflow.

I won’t lie and say it’s a really easy thing to suddenly develop a new habit of recording purchases. It’s actually a bit rough for some at the beginning. It’s hard to do develop new (good) habits! However, I can promise you that the habit will come. Writing down what you spend will get easier. And you’ll start to develop the nasty habit of never not noticing an outflow. It may haunt you until it’s recorded. Good.

The one nugget of advice I would like to give regarding your ability to monitor your outflows is to not forget the little things. When you’re dieting and working hard to record your calories, it’s easy to eat a cookie, cracker, chip, etc. and not worry about recording the calories. After all, it’s just one little…

And that act begins to erode at the very thing you’re trying so hard to develop. When you concede, even just a little bit, and let one thing slide, it’s just going to make it harder to force yourself to do it right the next time. The slippery slope of rationalization is indeed slippery.

It’s the little things that count when you’re establishing your habit of writing down everything you spend. Don’t start out by stopping so soon! Develop the habit to write down everything! I promise you a rapid decline in your spending.