“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!

It seems the move has given me plenty of fodder as far as writing goes. I have more ideas flying through my head than I ever did when everything was going nice and easy for us! The move has kind of rattled me in a good way and made me experience just a bit more of life.

This morning, while talking with my wife, I caught myself saying something that is a pretty common budgeting/money management mistake. It was in response to my wife’s question about when we were going to purchase a couch. (Yesterday a magazine salesman came to our place trying to make a sale. I had to laugh at myself later when I realized how absolutely sparse our place looks at the moment. And he wanted me to subscribe to new magazines? I can barely make it through Kiplinger’s each month…) Anyway, back to the couch. She asked me when I thought we would be able to purchase the couch.

My response was meant to slow things down, pace ourselves, and evaluate, but it doesn’t really hold water:

Let’s just wait until things get settled, until we have a normal month.

At first pass that may seem reasonable. My wife thought it was (so perhaps I needn’t worry past that? But in thinking about it more this morning you can see how my response to my wife was basically saying:

We’ll never buy a couch.

Now of course I wasn’t intending that. I do want a couch. Soon actually. (Though when you don’t own a TV, the need for a couch is substantially lessened, a bit of a side note). But in waiting for a “normal month” I’m basically waiting for eternity. In life, there are no normal months. Some months may be worse than others, but none of them are ever normal.

You could be pluggin’ along great in September when your kid falls out of bed and breaks their nose on the bed post, necessitating an ER visit.

Your car could be totaled by something you ran over in the road.

You could experience flooding.

The sales commission you were expecting could be held up.

You could lose your job (though a well-funded emergency fund could curb this quite a bit).

Anyway, the list is infinitely long. And believe it or not, at least in my experience and the experiences of many people I’ve worked and spoken with, you’re statistically likely to have an unexpected event (be it large or small) every month. Period.

The whole “perfect month” idea is for sitcoms (well, the traditional old-time sitcoms, today’s sitcoms seem to be dysfunctional from the start).

Instead of always looking for something that’s never going to appear, what you can do is focus on how to deal with a normal month. And for the rest of this entry, a normal month is defined as follows:

normal month - a month where the unexpected (large or small) will happen.

Your greatest weapon against the normal month is to budget. You knew I would say that. I don’t mean you just budget by throwing down your goals for the year (how the heck can you forecast a year into the future?!) and I don’t mean just writing down what you spend (though there is plenty of merit to that). When you budget you’ll want to implement the following:

1. Live by Rule One espoused all over this site. Build up a buffer and live one month behind your income. What you make in January, you spend in February. That right there gives you knowledge about the month for which you’re budgeting that you would not have had before. And that knowledge helps you make better-informed decisions.
2. Operate on a monthly basis. Don’t attempt to forecast a year into the future. There are corporations that spend millions and millions of dollars per year trying to accurately predict manufacturing, staffing, and cash flow needs to optimally run their business. There are people employed full-time to do this. They use extremely complex models and they’re still wrong. However, attempting to forecast 30 days into the future is very manageable. I highly recommend it.

   When you’re having your budgeting meeting with your significant other, talk about the upcoming month. Try to anticipate what it is you may be facing. Be a bit of a pessimist. Be conservative. Run through various scenarios. I’m not talking about trying to do sensitivity or multi-variate analysis on your life here. I’m just saying that talking about what’s coming will be much more helpful than just blindly going into things. That exercise alone will help you mitigate the effects of a normal month.

3. Follow Rule Three. This is not an easy rule. It’s much easier said than done. But when you look to the future and just set aside money for the known fixed expenses (home owner’s insurance, property taxes, renter’s insurance, car insurance, Christmas, gym memberships, car replacement, magazine subscriptions, college tuition, etc.) the effects of a normal month will again be substantially mitigated.

   It is very tempting to dip into these Rainy Day Funds to live for today at the expense of tomorrow. Avoid that temptation!

The normal month is the month where something, many things, an unbelievable amount of unexpected things culminate and knock you financially off balance. When operating a budget without the three guidelines mentioned above, you just have a tougher time regaining that balance. Follow the guidelines and you’ll notice your normal month is not quite as tough as it used to be.

Perhaps we’ll buy a couch sooner than I thought.

Having just moved recently, we’ve travelled up the social ladder from very, very, very low, to very low. And the view is a bit better. With the CPA exam firmly under my belt (we found out on Saturday I passed all the sections) and my first “real job” starting on Tuesday, we’ve given ourselves license to move up said ladder.

Why?

I’m not really sure. It just kind of seems like the thing to do.

For instance, our new apartment is 50% larger than our last apartment. It’s still quite small (less than 1,000 square feet) but it’s large to us! We also are now a two-car family (though that wasn’t entirely on purpose). Heck, we even have cellphones now. And a Costco membership.

What else? Instead of jimmy-rigging a kind-of-broken shower curtain, we just bought another one. We bought two matching picture frames for 8×10s of the boys (that had been waiting to be hung for several months). We have 8×10 frames — but not matching.

We’re paying an extra $10 per month for covered parking. Dallas does have the ability to heat a car quite nicely.

Why the sudden surge in spending? I’m thinking of a few reasons:

1. Our income is going to increase from internship/part-time-job-while-in-school levels to starting salary as a bean-counting staffer. (And no, I won’t be paid overtime).
2. We’re living in an area with people that are making more money than what we’re used to (we previously lived in family student housing — not your richest population for sure).

Number two is an interesting subject, whether it be keeping up with the Jones’ or just subconsciously adopting some of the lifestyle habits of those around you, it’s a very real force. Number one is what I want to hit on though.

Now granted, not all of our expenses fall under the umbrella of “well, our income is rising, so let’s buy this.” Some of them (especially onces I didn’t bother mentioning) are part of the “settling in” costs of moving. But I’ll admit, some of this is for no other reason except that our income is higher. We’re finally out of graduate school. We pinched and pinched and scrimped and scrimped (and budgeted, of course) to make sure we had what we needed and didn’t borrow any money from banks, family, or the government.

So you can imagine the type of excitement (jubilation?) I feel, my wife feels, to imagine that we’re finally maybe going to be able to start investing for retirement, buying a few Wants, going on a vacation or something, maybe having our oldest boy sign up for T-ball (okay, he’s only two, but still, I’m thinking about it).

It’s almost like there’s this pent up desire to let go a little bit. In I-just-ate-too-much-at-a-restaurant terms, to loosen the belt.

This morning we discussed this to a degree. Tonight is our own budget meeting (it’s the 30th of August, a fine time to budget for September!) and it will be crucial. I don’t think we’ll knock it out in our patented 12 minutes (while I advocate holding the budget meeting regularly, I don’t think you should spend all evening doing it, except maybe the first time). This meeting will be crucial because we have a lot of new obligations: higher rent, more utilities, higher car insurance, those cellphones, etc. We’re also having to pay for high-speed internet for the first time (the nice thing about living on campus? Free extremely fast internet). Our health insurance premiums are quite a bit more.

So it seems that this increased room we’ll have in our “belt” may be taken away from us before we even get started. A few of those things are our own doing, but a lot of them are just kind of coming to the party uninvited (but you’re obliged to let them in).

As I walked out the door this morning to get some work done, I told my wife the following:

“We just need to slow down, pace ourselves, and evaluate.”

By slowing down, I mean that when you see this increase in income, don’t automatically assume it’s all going to you. Don’t assume much of anything. And certainly don’t spend your raise, your first salaried paycheck, your anticipated bonus, before you actually get it in hand.

Pace yourself when acquiring new things — especially new month-to-month obligations. This $50 cellphone bill…can we afford it every month? Even in the months where things may be a bit tight?

And finally, evalute. Evaluate your budget. Evaluate your purchases. Ask yourself why you’re purchasing whatever it may be. Evaluate your long-term goals (if you don’t have any, get some) and make sure your actions on a daily, weekly, monthly basis are in line with those goals. When budgeting your Available money, make sure you start with the top-priority items and move down from there. Make sure you’re giving some away, giving some to yourself (retirement) and providing the necessities of life for yourself and family.

Proceed with caution when you receive the raise, the bonus, or the windfall. It seems that the longer you’ve anticipated these things, the stronger your desire may be to match your expenses to your income without too much evaluating. Proceed with caution! Enjoy your good fortune to a degree, but keep your head about you. And stick with the jimmy-rigged shower curtain for a month just to reenforce to yourself the fact that you can.

A few years ago I wrote about some of the practical aspects of living within your means. The gist of the article: if you want to successfully live within your means over the long term, you need to have some sort of system in place to record, track, monitor, and evaluate your spending. With whichever system you choose, consistency in the execution is paramount to your success.

Being a budgeting aficionado, it’s no wonder I think a system is necessary to live within your means. But today my focus is not going to be on the how, but on the why. I hope to open your eyes to a benefit of living within your means that is sometimes overshadowed by the ‘How’ of the principle. It’s a huge benefit. Perhaps infinitely huge.

Forgive the shallow talk of getting rich for the next few minutes, but that is basically going to be the benefit I’ll be talking about. We’re just going to get at it from a different angle.

No — I’m not going to talk about how living within your means enables you to invest the difference in well-selected mutual funds and how, over time, the compounding of those investments will make you a millionaire (perhaps a few times over). We’re going to talk about risk. Risk is a rich man’s best friend, and the enemy of anyone living paycheck to paycheck

Why the Rich Stay Rich (and Get Richer)
I’m sure you’ve heard it often enough. The rich are privy to secret investments, inside networks of private businesses needing equity infusions, IPOs for only the accredited, sweet real estate deals, lucrative side partnerships, yada yada, etc. and blah blah.

Some people are bitter about the opportunities that apparently present themselves to the rich, other people only envious. I don’t want to take any position here except the position that opportunities to earn more money do indeed present themselves.

Consider the well-to-do person that is presented with an opportunity to invest $10,000 in a very small, private startup company. The person could very well lose their $10,000. They could also turn that $10,000 into $200,000 in a matter of five years. The person takes the plunge, writes the check, and invests the $10,000. Do they lose sleep at night because they have $10,000 of equity in some shaky startup? Not hardly. Why? Because they can afford the risk.

Consider the person that is not living within their means. $10,000 to invest is a dream to them and nothing more. If they did have the $10,000 they certainly could not afford to risk it on something as shaky as a startup company.

However, if this second person cinched up the belt, got a budget, and gave him or herself a bit of breathing room, would a $1,000 investment in something seem so unbearable? Probably not. Could they afford a $1,000 loss if worse came to worse? Probably so.

I Can’t Afford That
A few years ago in my corporate finance class we talked about risk. Actually, we talked about it pretty much every day. The rule is that the return you require on your money invested should be equal to the risk you’re taking when you invest. While there are a few people that are risk-seekers, others risk-avoiders, the core principle is the same. Where there is low risk, there is low reward. Where there is high risk, there is high reward.

The rich can afford to take on higher-risk projects, which gives them the opportunity for higher reward. Those living above their means, with no (or even negative) disposable income, cannot afford high-risk investments. As a result, they’re immediately disqualified from high returns (we’re talking about the norm here, not the exceptions to this rule). And if you can never “afford” to invest, you’ll never be rich.

The trick is to get to that disposable income I’ve mentioned a few times. And begin investing.

While I’m not a Rich Dad, Poor Dad diehard, I did appreciate Kiyosaki’s push to begin thinking a little bit differently about money. This is one of those ways.

I’m not saying you’re going to suddenly become privy to new investment opportunities just because you now have some disposable income. What I am saying is that without disposable income, you cannot take advantage of any opportunities that may roll your way. And that would be a shame.

It’s the Famous Debt Snowball…in Reverse
Perhaps it will take a few years before something comes up in which you feel you could invest your disposable income. Perhaps you’ll keep things simple and invest purely in index funds until another erm, more flavorful, opportunity comes along. But you can rest assured that the opportunity will come.

And maybe I’ve been indoctrinated by optimistics (the class was called “Entrepreneurial Perspective” and every week a different “normal” speaker would come and tell the class how they made it big. The opportunities ranged from hair salons, to time organizers, to multi-family apartment buildings), but is there really any healthier way to be?

What will happen once you seize the opportunity to invest in a local hair salon? You’ll probably need tax advice. You’ll hire an accountant. A few years later your accountant gives you a call because he has a client that’s looking to market an invention and needs some equity partners. You’ve grown to trust your accountant, so you take a look at the opportunity. One of the other investors in this invention does a lot of residential real estate development and is wondering if you want to invest in a new duplex he’s looking to build…

Of course I’m making this up, but the principle I’m trying to illustrate is this reverse snowball effect. Opportunities beget even more opportunities and after several years of waiting, saving, evaluating, and networking, you’ll have more than you can even possibly look at.

The rich stay rich because they consistently find opportunities to invest their (large amounts of) disposable income. And I am saying that you can become rich by creating disposable income and searching for opportunities in which to invest it.

That is the benefit of living within your means. If you don’t do it, your opportunities are severely limited.

Today the United States celebrates its day of independence. My thoughts naturally turn toward the great people that fought for this country’s freedom. We have so, so much to be thankful for.

I’ve often wondered what it would be like to have lived back during the time of the American Revolution. You can be certain that not everyone living in the colonies wanted to be free from British rule. I’m sure some were perfectly content living under the reign of the King. Others couldn’t bear it, couldn’t live with it, and eventually even gave their lives for it.

Two hundred plus years ago there were divisions among the American people regarding their declaration of independence. Was it the right move? Had they done the right thing? Those men that signed the Declaration were putting not just their livelihoods on the line, but their very lives. They believed that what they were doing was worth it.

The revolutionaries obviously faced fierce opposition from the British. But what about the opposition they faced on their very own turf? What about those people who were not just lukewarm toward the revolution, but were downright opposed to it? I personally think those were likely the most trying of situations for the revolutionaries - to have opposition from the inside.

Still, because they wanted it so badly, they fought for it - and eventually they got it. Independence. The work didn’t finish. The worrying didn’t finish. The Articles of Confederation didn’t make it. The Constituional Convention almost didn’t take place. Ratification was a stretch. But they made it.

I was sitting in the library of the University today doing some studying. My mind wandered away from the procedures required of a CPA when issuing a compilation report (it’s quite easy to let the mind wander from such things) and I just sat there thinking about all of the great people of this world that have done so many unbelievable things while staring opposition straight in the face. They had an enviable fire burning inside them that ignited them to act.

They took A C T I O N and accomplished amazing things.

Some were inspiring as they overcame what seemed to be insurmountable obstacles. Others had the ability to lead men to higher ground. In a way, great people show you how to gain independence over certain aspects of your life, whether it be spiritual, emotional, physical, and yes, even financial.

The greatest question to ask yourself (and ask it often) though:

From what will you gain your Independence this year? I find July 4th to be a great time to look back at the previous six months and assess where you have been, what you have accomplished, and where possible improvements need to be made. Standing in the middle of the year, you can then do an about-face and look toward what will come, what you will accomplish, what you will overcome, and where you will gain a little bit more freedom.

Freedom comes from continual empowerment. This empowerment is a product of consequence. Consequences are children of our actions. What actions will you take during the next six months that will empower you more than ever before? From what will you gain your independence? Even when the right choice is made, there is still opposition. I suppose nobody will today stand and say that the revolutionaries made an ill-advised decision. Of course not. But was there still opposition to their decision? Absolutely.

As you begin making the right decision about certain aspects of your life, you too will face opposition. That does not mean you should stop. That does not mean the decision wasn’t right. If anything, it seems that good choices are followed by tough situations. Keep a steady hand and a hopeful heart that the areas of your life where you’re focusing will improve. You must take action to change.

You must take action.

Happy Independence Day.

Read the source article here

We’ll be in the market for our first home in the next year or so. For that reason, my mind has been on credit scores quite a bit lately. I don’t want to pay more than I have to for our mortgage (planning on a 15-year fixed, if you were wondering).

I found this article on MSN direct, and pretty informative and thought I’d pass on a summary of it to YNAB readers.

There are a few things one can easily do to optimize a credit score. However, as I’ve mentioned before, we shouldn’t obsess about it. Time may be better spent reading and learning more, networking, starting a side business, etc.

I found the breakdown of variables in the credit score extremely useful:

As mentioned in the article, it doesn’t matter how much income you make. (Though the amount of credit you’re given does, to an extent, depend on your income. A higher credit limit will lower your utilization and thus, raise your credit score).

It’s smart to monitor your credit score every four months from one of the three bureaus (Equifax, Experian, and Transunion). When you stagger checking your credit report and score, you get to see what it’s looking like over the course of a year, instead of just at one time. This will help protect you further from identity theft, mistakes, etc. You can see the scores that lenders most likely see by going to myfico.

And finally, from the article, a couple of (fairly obvious) things you can do to make sure your credit score is maximized:

• Pay all bills on time.
• Think twice before closing accounts.
• Minimize credit card applications.
• Keep balances low.

Keep in mind that you should probably not be using credit cards if you can’t answer yes to my six requirements before using a credit card.

Regarding personal finance: If there were one piece of advice, one word of wisdom, that trumps all other pieces and words, it would be this:

Personal finance is personal

It’s up to you!

Were you to go to the library and read all of the personal finance books available, you’d find quite a few conflicting opinions. Regarding home purchases: Never go into debt. It’s okay to go into debt for a home. Go into debt for a home for the tax deduction. Staying in debt for the tax deduction is stupid. Borrow as much as you can for as much home as you can possibly afford. Don’t buy a home where your payment is more than 25% of your take-home. Do a 15-year fixed mortgage. Do a 30-yr fixed mortgage. It’s okay to do an ARM, you’ll probably be moving. Never do an ARM.

Regarding credit cards: Never use credit cards. Use credit cards responsibly to build up your credit score. Don’t care about your credit score. Buy my credit score kit. Maximize cashback rewards with credit cards. Use other people’s money to make you wealthy. Get Junior a credit card. Never get Junior a credit card. Cut up your credit cards. Use a credit card only for emergencies.

The list goes on and on and on and on.

On the internet especially you’ll find conflicting wisdom. But whose wisdom is really the best?

Here’s some more advice to consider: Read read read! Read some more. Think, ponder, contemplate on what you’re reading. Read voraciously! Educate yourself concerning insurance, budgeting, home purchasing, investing, taxes, wills, estates, etc. You can do this by reading one guru’s book after another. Just pull those little bits of wisdom from all of the books you’ve read and compile them into your principles of personal finance. Remember, this is about you.

Think about it another way. How can any one guru prescribe a universal answer to questions that involve so many unique variables? One for instance: I was listening to Dave Ramsey probably six months ago and a guy called up saying he had a lease and Dave immediately went into the negatives of leasing - how he was getting fleased, etc.

Well, it turns out Dave had jumped the gun and was totally wrong. The guy said his dad worked for Chrysler and I think his total car costs came to something like $150 per month. It was the sweetest lease you’d ever heard of. I guess you could say it was unheard of. Much to Dave’s credit, he admitted to the guy that he had a very unique situation and that it was a great deal.

Imagine that. Dave said in that specific situation leasing was okay.

What about if you lived in California in 2002 and wanted to buy a home? Could you have afforded the guidelines given by many gurus of an X debt-to-income ratio? Probably not. But had you not stretched yourself a bit and purchased, you would’ve missed out on an absolutely huge (some would say irrational) run-up in home prices that would’ve probably removed you from the housing market for the next decade. In that regard, you made the right choice going against some of the gurus’ guidelines.

Nothing is black and white. That’s why it’s so important to be educated in these matters! You want to have enough knowledge that you can take all of the variables in your life that only you know about (these include emotional variables, variables unique to you because of your past experiences, externally unique variables such as a mother you need to take care of, a disabled child, etc.) and come to the right decision. No guru can speak directly to your situation unless they know all the facts and circumstances. And they don’t.

As mentioned above, your course of action is to glean all the wisdom you can from all of these (mostly) wise people. Armed with that wisdom, you make the choice for your personal finances.

I would recommend you begin compiling some sort of personal finance constitution. This should include overarching principles that guide your actions regarding money. I’ll share a few of mine to get you started.

I will:

1. Spend less than I earn.
2. Actively budget my money, which includes:
• Recording what I earn and what I spend.
• Allocating what I have earned to appropriate spending categories.
• Working on the budget monthly with my wife.
3. Invest my money.
4. Diversify my investments, which may include:
• Stock market mutual funds, index funds, or ETFs.
• Real estate.
• Private businesses.
5. Give regularly.
6. Never expect something for nothing.
7. Never borrow money to purchase a depreciating asset.
8. Never gamble.

That’s certainly not complete, and I may update it from time to time, but it’s a start. Some of th gurus would disagree with me, but they’re wrong. Because this is mine, which makes it right.

Read the whole article here

Please no.

Wayne is asking whether he and his wife should put their 7-year old son on their credit card account as an authorized user…

No…

Dr. Don (who has a slew of letters after his name) does get to the right answer, but does it in a very roundabout way.

The take-away from the answer is here:

The pervasive use of personal credit histories to make inferences on employment, renting and insurance decisions makes managing your credit score an important aspect of financial management, but it’s easy to get too wrapped up in managing your credit score

It’s tough that it can now determine so many things - so you want to make sure it’s solid - but what else could you maybe focus on? Are there things that just might pay higher dividends in the future (and are knowns verses the unknown aspect of ‘managing’ the answer to some equation to which you don’t have access)? These are in no particular order.

1. Budgeting (you had to expect that one, right?)
2. Furthering your education
3. Setting yourself apart at work as a hard-working, honest employee, business owner, etc.
4. Investing (your portfolio is properly allocated along the efficient frontier).
5. Paying off debt.
6. Funding “Junior’s” college.
7. Developing multiple streams of other income.
8. Finding places in the household finances to save money effortlessly.

That’s just a list off the top of my head. But let’s all admit it that it just doesn’t make sense to obsess over your credit score. Sure, get a free credit report every year to make sure everything’s okay, but don’t get too stressed about it. And certainly don’t worry about 7-year old Junior’s credit score.

Sheesh. How’s his t-ball team doing?

Mary Hunt has popularized a method of budgeting that I absolutely love: Freedom Accounts. Over here in the world of YNAB, we call those things “Rainy Day Funds” - either way you name it, Mary’s advice to set up freedom accounts is spot on.

A freedom account is basically a fund that you build up over time to help you pay for big expected (or unexpected) bills. I suppose the word “freedom” in there is pretty applicable. Most of the time if people don’t plan for these large purchases, they end up taking on credit card debt - which is the antithesis of freedom.

According to Ms. Hunt’s advice, you should set up freedom accounts for things like your car insurance premium, Christmas, birthdays, property taxes, health insurance premiums (especially if you do this privately and not through an employer), vacation, and - I’m not sure she says this - but I’d throw a vehicle in there as well. Yes, you can save and pay for a reliable vehicle with cash.

Bear with me as I throw a bit of the YNAB Personal Budget into the fray here, but it has this “freedom account” idea built right in. For instance, if your car insurance is due every six months, and the bill is $300, you’re going to need to budget $50 into your Car Insurance freedom account. In six months, if you’re true to Mary Hunt’s advice, you’ll see a $300 balance in that account and you’ll be able to write the check with no problem at all. YNAB tracks that accumulation for you with ease.

You can use freedom accounts for just about anything. Remember, I mentioned above that they can be both anticipated (car insurance premium) and unanticipated expenses (a new transmission).

Case in point: my wife and I haven’t needed car repairs for our Chevy Prizm for several months. Well, actually the air conditioner is broken, it’s leaking freon, but it’s been Winter here for the last several months so we haven’t needed to repair it. At any rate, even though we haven’t technically needed to spend anything on repairs for the last long while (knock on wood), we know that it’s going to happen. That’s just a fact of life. As a result of facing the music of reality, we’ve been quietly budgeting some money into the car repairs freedom account each month. It has a nice balance built up now and it should get us through a moderate repair without having to touch our emergency fund.

In applying Mary’s advice, you might be asking yourself what you should be doing with that money while it’s waiting, ready to do something for you. I use the rule of thumb that if the expense is going to happen within eight months, I’m going to leave it in the checking account. If it’s something annual (such as Christmas) you could benefit from getting a competitive interest rate at an online bank such as ING. Actually, the great thing about ING is that they let you open about a bazillion inter-linked accounts with no hassle at all. You can set up separate automatic transfers between them, from your checking, to your checking, etc. The sky’s really the limit there.

Going back to our car insurance example, if you wanted to make a bit (and it would just be a bit) of interest from the money you’re stashing away in your freedom account for car insurance, you could do the following:

• Setup an ING account with the minimum $1 required deposit (the setup is all online, it’s quite slick).
• Setup an automatic withdrawal from your checking, to your ING Car Insurance account, for $50. Make sure it happens monthly.
• Setup another automatic withdrawal from your ING Car Insurance account to your checking account for $300 just before the next bill due date

…and walk away. Now that’s automated baby! Currently, ING doesn’t let you schedule recurring items with less of a frequency than monthly. You would have to go in every six months and set the new date for the withdrawal. Also, you’d need to remember that there is a 2 to 3 business day lag for the money to actually land in your account (they seem to be faster when taking it out…hmm…) - don’t cut things too close with the due date of your bill and the arrival of your money.

This is one way to take Mary Hunt’s advice and put it into action. The freedom account takes the peaks and valleys of your money situation and smooths them into a nice, level, walk in the park. Brainstorm what possible things could represent freedom accounts for your personal finances. You can use YNAB to help you track it with a few minutes each month, and you can use ING to help you carry out your budget automatically.