YNAB You Need A Budget

[supersono99]

DH and I found ourselves in a world of hurt financially last month. that made me jump up and figure out a plan to fix things. I found Dave Ramsey's plan and it makes sense. So for July, for the first time ever, I created a budget and DH and I agreed. In our first two paychecks since starting the DR program we have saved 1200 in savings from 0 and paid off two credit cards totalling almost 700. He was hard to convince to start but now that we have paid off two things so quickly and saved money he is super stoked about the whole thing.
Now, in the llnoe.com forums I heard about YNAB for it's budgeting software. Now, after hanging around here for a few days and reading as much as I could, I am liking rule #1 too. Obviously it has felt so darn great to pay of debt when we have just been accumulating it as of late.
So here is where I need help. I can see that it would be nice to spend a few months to fully fund the buffer for rule one, stopping the debt snowball temporarily to make that possible, then get back into the snowball fight. I have a feeling DH will be very very hard to convince of this now that he is so happy to see debt disappear. Money is hard for us to talk about although DR has been making it better.
Any suggestions on how to best convince him to buffer up?

[Maggie Magpie]

Dave Ramsey's plan DOES make sense. You are new to his plan, but you are in the "infatuation" stage. Dave Ramsey's plan is good....I have some employees and clients on his program, but some of them have fallen off the DR wagon, especially as soon as the first "elephant falls on their house" (my words for an unexpected expense or an emergency). YNAB takes Dave Ramsey's envelope system to the next level and intuitively keeps you motivated to hang in the plan. That first $1000 Dave Ramsey wants you to save towards an "emergency fund" is actually the crux of where his plan can potentially fail for some people. It is still "unassigned" and can get spent as quickly as it's saved because nobody can "define" an emergency when they are first starting out. For seasoned savers, an emergency is something like "job loss". But for those in a lot of debt who have never really budgeted or saved, an emergency can be as simple as their auto insurance showing up because they forgot about the semi-annual expenditure....which, for a 2 auto household can eat up a lot of that $1000.

Re his Debt Snowball.....he actually wants people to pay off the "little stuff" first, giving them, like your DH, the motivation to keep going. I agree with this to a point. Let's say you have 3 or 4 credit cards with $300 or $700 on them and 2 auto loans, one with $12,000 on it and one with $15,000 on it.....and your mortgage which is about $150,0000. I agree with DR that you should work on paying off the annoying little stuff first to keep you motivated and to see some action. However, once those little ones are paid off....the climb up the debt mountain gets suddenly steeper and slower with a lot less noticeable results. As soon as an elephant lands on the house and the $1000 is almost gone, people will tend to fall off the DR wagon. If I could get a dime for everyone time a client told me, "...but something always happens almost every month at our house!". What they don't realize is that they are not unique. Something ALWAYS happens at everyone's house to knock them off their budget....

So here's how, in my opinion, I would amend Dave Ramsey's plan:

1. Replace the words Emergency Fund with "Buffer" in DR's step 1, and keep building the buffer.....make this a priority over the debt for a couple more months.
2. Pay off all your pesky little debts as fast as you can using a debt snowball.
3. Go back and continue to build your buffer. The faster you can build a buffer, the faster you can go back to paying off your debt and building an emergency fund per DR's Baby Steps.
4. Define "emergency fund" and decide how much you'd like to save towards it.
5. Continue with Dave Ramsey's other Baby Steps.....and don't give up.

Once you've paid off all the pesky little debts and you've built your buffer and started some semblance of an emergency category using YNAB, use a Debt Snowball software properly. It will save you thousands of dollars in interest if you do. YNAB helps you get comfortable with the rhythm of spending money, saving money and paying off any debt so that the slower reduction of the bigger debts won't bother you so much if you KNOW it's saving you thousands.
Basically this means paying off the higher interest debts first, then working on the lower interest ones (Dave Ramsey says pay off small first, then go to the next bigger). Take a look at this debt snowball caclulator:
http://www.whatsthecost.com/snowball.aspx?country=us It will illustrate exactly what amount of interest you'll save by doing it correctly. It will also show you how much you'll save by doing it the Dave Ramsey way (small balances first, all the way up to large balances). It will also show you how increasing or decreasing the "minimum monthly payment" per debt will keep the debt pay-off date the SAME, but will greatly affect the AMOUNT you end up paying in interest.....this blew my mind.

As a new Dave Ramsey user, you'll learn that the first 3 Baby Steps take the longest before moving along. If you want to stay on track, integrate YNAB and adjust the semantics around "emergency" vs. "buffer"......and KNOW that "emergencies" will evolve and change as you get better at saving and budgeting. So be patient.

Dave Ramsey is an awesome marketer of himself and his philosophies. He is really helping Americans wake up, however, his tools and rules don't have to be an "all or nothing" deal......integrating YNAB will put steroids in your plan and once you've hit "bufferland", there is ABSOLUTELY no looking back, whether you use Dave Ramsey's rules or not.

[malisab]

1. Replace the words Emergency Fund with "Buffer" in DR's step 1, and keep building the buffer.....make this a priority over the debt for a couple more months.

When I first responded on the Proposed Change for YNAB 3 thread, I had written:
"But that's only IF you take a buffer to mean just the ability to budget for the whole month at one shot. If you mean a sort of built in one of month expenses in advance rolling 'emergency fund' (that's for you supersono99), then doing away with primary/secondary/buffer... I don't see how you really have Rule 1 anymore."

But then I wasn't familiar enough with DR's steps and I thought I probably had the order mixed up. I figured that they had the e-fund already if they were working on the debt snowball, so I deleted the parenthetical note.

Maggie, thanks. Your post helps me with some of the recent realizations I've made re: throw EVERYTHING at debt vs. fund rule 3 categories reasonably. I've come to realize it's like trying to diet on 800 calories a day...sure you lose weight but you can't do it for very long and you'll probably binge to overcompensate and end up worse off than if you ate a reasonable 1500 calories a day and exercised. I think that building good habits overall (watch what you spend, reduce expenses where you can, have some savings, prepare for lumpy expenses/elephants, throw what you can at debt reduction, etc.) will be key for me.

And the division you made between little annoying debts vs. larger, longer to bust through debts helps too. Thanks.

[jesse]

integrating YNAB will put steroids in your plan

What a sweet quote.

Hi Malisab,
I do feel impressed to give you a caveat to maggie's great advice. If your husband will only go all or nothing w/ DR and you can't get any traction with him and YNAB then by all means, focus his positive energies as long as you can. It wouldn't be worth killing your (his) momentum. Also, great work on everything so far! No wonder he's so motivated atm!

[malisab]

integrating YNAB will put steroids in your plan

What a sweet quote.

Hi Malisab,
I do feel impressed to give you a caveat to maggie's great advice. If your husband will only go all or nothing w/ DR and you can't get any traction with him and YNAB then by all means, focus his positive energies as long as you can. It wouldn't be worth killing your (his) momentum. Also, great work on everything so far! No wonder he's so motivated atm!

For supersono99. I was just 'me too'ing, both in giving her a little advice and taking some of Maggie's.

[Maggie Magpie]

Jesse: It took me years to build my emergency fund to a free and clear 4 months of emergency funds (funds unhampered by dipping back in due to "elephants").....I'd throw the dollars over there hap-hazardly (after paying for everything and anything unplanned first). But YNAB helped me save 1 more month in 4 months of using it. Steroids is the only metaphor I can possibly think of to describe that kind of "pow" to our budget!! After we've completed 6 months worth of emergency funds, I'll assign the dollars to more retirement etc.

.....there is true "magic" in the buffer......Rule 1 and Rule 2 are life-changing.

And as I said, once you've conquered Rules 1 and 2, the rest of Dave Ramsey's baby steps are a piece of cake.....almost irrelevant.

[supersono99]

wow, I am a little confused. bear with me I am learning all of this budget stuff!
The buffer and the emergency fund are the same, right? Or do you have the full one month buffer in checking and if the "elephant" comes use some of that buffer as an EF or do you have a full one month buffer that you don't touch and if "elephant" comes you have a savings account with the EF?
Basically is the 1200 we have saved up currently to be transferred to checking to be a partial buffer? or leave it in savings and start rule one as if we have zero towards the buffer?

[Maggie Magpie]

The buffer and the emergency fund are entirely different.

The buffer represents "last month's income" from which you pay "this months" bills. In other words, it is an amount of money equal to your current monthly "known" needs. It serves as......a buffer.......in meeting your current everyday expenses.

The emergency fund serves those events that cannot be planned. Eg. losing your job, or the engine falls out of your car and your insurance doesn't cover wear and tear.

As I mentioned earlier, this is where I see the weakness in Dave Ramsey's Baby Steps. By not dealing with the "every day current needs" and having people save $1,000 towards an emergency, they are, in essence, skipping "dinner" and going from "pre-dinner aperetifs" to "dessert". When they are required to meet the needs of the day, they become weak due to lack of nourishment (dinner).

The definition of "emergency" varies between the inexperienced saver and the savvy saver. Using my previous example, if an unplanned auto insurance bill shows up, it will eat up any emergency fund for a new person struggling to get out of debt and start saving. But YNAB helps "buffer" new savers against this type of "emergency".

If you can explain that last sentence to your husband, maybe he'll understand how YNAB can be incorporated whilst following Dave Ramsey's baby steps .

[supersono99]

okay, I think it is clicking for me. And the buffer isn't what we bring home in one month, it is what HAS to be paid out in one month, minimum? Is that right? I can't wait until tomorrow to get to that snowball calculator link you gave me. I don't have time tonight and the file cabinet with the bills/interest rates is in the sleeping baby's room but will be interesting.

[jesse]

okay, I think it is clicking for me. And the buffer isn't what we bring home in one month, it is what HAS to be paid out in one month, minimum? Is that right?

Technically, yes. Though most people that are operating with a Buffer have their entire month's earnings as their buffer.

[Patzer]

Edited to add: The sequencing of the Four Rules has changed since this post was originally written. Rule 1, which was the heart of the OP's question, is now Rule 4, Stop Living Paycheck to Paycheck. (Or do we call it "Live on Last Month's Income"? I don't remember.) What I refer to as Rule 3 below is now Rule 2, Save for a Rainy Day. The concepts I originally described are the same; only the Rule Numbers have changed.

Original post follows:

If we step back to the very, very basics of personal financial management, what is the most basic, fundamental skill needed? The one skill, without which all other skills and strategies fail?

There's probably more than one answer to this question, but the basic skill I'd like to highlight is letting money sit unspent because it will be needed in the future. This skill is so basic and fundamental that most mass market articles on personal finance assume without discussion that every reader has this skill.

In the real world many people (including some I'm related to by blood or marriage, sigh) lack this skill. They get in trouble because they spend all their money on what looks good to them at the moment, then don't have any money to pay the rent or the car repair bill or the bank overdraft fee. (sigh)

Now, it's very difficult to tell people who lack the skill of "letting money sit" that they need to develop this skill. There is zero cultural support for even considering it a skill. So systems that address the very fundamentals and recovery from truly bad financial positions approach developing this skill in the context of the system being promoted.

Dave Ramsey has a $1000 baby emergency fund. It covers emergencies like car repairs, dental bills, and other stuff that beginners tend to leave out of their budgets. It lets people survive a small visit from Murphy without using a credit card, which would be a big no-no in the DR system. But that's not the most important thing about the DR $1000 baby e-fund. The most important thing about it is, it's a chunk of money that is supposed to sit there unspent. When an emergency pops up and all or part of that fund is used, replenishing the fund is a priority. IOW, less is spent on controllable spending in order to build back that baby e-fund.

That's teaching the skill of letting money sit.

With YNAB, there are lots of places you're supposed to let money sit. The big ones are the Rule 3 funds, so that the car repair or dental bill isn't an emergency. But the very first one that is taught is building the buffer so you can live on last month's income. It doesn't look much like the DR baby e-fund, but it also serves the function of teaching the skill of letting money sit. The idea is that your pay just sits there waiting for the first of next month, at which time it gets budgeted.

For people who have moved beyond the struggle of letting money sit and do this easily, the YNAB buffer is more flexible than the DR baby e-fund. It scales to the individual's income. If you think about it, someone who is having trouble making ends meet on $150,000 per year probably needs a bigger pile of money sitting around waiting for expenses to pop up than someone who is barely making ends meet on $24,000 per year does. It also flexes up and down in repsonse to changes in income, and it isn't designed to just sit there forever like the DR BEF. It sits there till the first of the month, then goes about its business of doing the various budget jobs that are needed.

That't not only teaching the skill of letting money sit; it's teaching the skill of taking time to think before spending. Taking time to think isn't quite as basic a skill as letting money sit, but it's still pretty basic. People who don't have this skill will have great difficulty making their actual expenditures fit their budget.

Once the budgeter is somewhat comfortable with letting money sit and taking time to think about how to spend it, living in compliance with Rule 3 becomes possible (or easier, anyway). And that's where a lot of the stuff that used to be emergencies becomes routine budgeted spending. That's where the decision whether to eat pizza tonight gets made in the context of, "Do I really want this pizza worse than I want to be $20 closer to out of debt, or $20 closer to having a replacement car?" The point isn't that the answer should always be "no;" the point is that a reasoned decision is made and the pizza isn't purchased unless the $20 doesn't endanger any goal more important than eating pizza tonight.

Coming back to the skill of letting money sit, sometimes people who are trying to get out of debt have trouble letting money sit without throwing it at a debt snowball. While throwing money at reducing debt may be more productive than buying pizza when you have a stack of credit card debt, there are limits. Money will still be needed for rent/mortgage, clothing, groceries, and numerous other things that are budgeted. Even when the emotions are screaming, "I need to throw as much as possible at debt reduction," some money needs to just sit there waiting for budgeted expenses to happen. Part of that's the buffer, and part of that's Rule 3 funds for expenses that don't happen every month. YNAB can help you quantify how much money you need to let sit, which lets you know in turn how much money you can throw at debt reduction. If you're trying to both use YNAB and follow DR, I'd recommend you create a category called Baby E-Fund and build the amount remaining up to $1000. In DR speak, that's a BEF. In YNAB terms, that's a Rule 3 fund designated for unforeseen expenses. In either case, it's there to bail you out for budgeting mistakes without sinking your budget entirely.

I know, none of this addresses the original question of how to convince hubby that Rule 1 is more important than DR. That's something you will have to work out as a couple. If you, as a couple, decide to use YNAB without Rule 1 while generally following DR, that's not the end of the world. You might not get everything you could out of YNAB, but you'll be in a much better position than you were before you were trying to budget and track spending. And both you and hubby will be learning and practicing the vital skill of letting money sit.

Patzer

[erin]

Patzer, I really like your last post.

Well said.

[gatherer]

to use Rule one with DR. it's simple, convince yoru husband that having a Baby Emergency Fund equal to 1 month's pay would ease your concerns of the money issue you are in. then when you have a Baby emergency fund of one month's pay you are also working in Rule 1 territory.

I love Dave Ramsey's Advice but I found rule 1 to be more important to my security gland.

[Maggie Magpie]

Patzer, wow! That was brilliant. There is SO MUCH in that post, and I'm not talking about the length.

[bookman413]

One reason I find that Rule 1, having a months' buffer, is useful, is that it makes it so that you really don't need to go to the bank 4 times a month. You might just go once since you have a buffer and, for example, *none* of your paychecks that you've received over the last 3 weeks really *need* to be deposited.

Not only does it simplify your life, it takes two or three "money errands" out of the month. This is useful because, I find that any time I do a money errand it can turn into a shopping trip.

By reducing the need for these errands/trips, it reduces the travel outside the home to the business centers where shopping temptation exists.