We recently met Terra, and instantly loved her in no small part because her email signature read: “Terra—Got 99 problems and my money is one of them!”
Terra has a variable income and therefore, a challenging and ever-changing cash flow situation, which she was “kind of, sort of managing,” until her divorce a few years ago, when—as things do when real-life happens—”it all kind of snowballed.” Now she is facing some hard financial realities and desperate to feel in control of, well, anything really.
Terra met with Todd, our Chief Customer Officer, for some one-on-one coaching. (Disclaimer: We don’t offer coaching but we thought it would be an interesting experiment to see if many people could benefit from the coaching of one individual. You’ll have to let us know if it worked!)
One hour with Todd, changed Terra’s perspective a couple times over and surfaced several revelations. Do Terra’s revelations have any application for you and your budget?
Revelation #1: Forecasting And Budgeting Are Not The Same
It turns out Terra was making a very common mistake. She thought she was “budgeting” when in reality, she was “forecasting.”
Budgeting is planning how you will use the money you have right now, before you spend a dime. Concrete numbers.
Forecasting is projecting guesses about money you *think* might come in and how you could spend it, which—especially if you have an inconsistent income—can get you in a lot of trouble. Hypothetical numbers.
It’s just too easy to be overly optimistic and round-up generously when we are predicting our futures. Of course, we’ll get that raise, land that big job, work overtime, get an inheritance or win the lottery. Terra, being the optimistic person she is, was guilty as charged; forecasting (and making spending decisions) based on very generous guesses of what she could possibly have in the future.
As a result, there was never enough, and she was constantly wondering what she could and could not afford. Stressful!
When you are budgeting, dealing only with the real numbers—the finite amount of money you have right now—you become keenly aware of the scarcity. You must decide what is most important to you and are equipped to make informed choices. It’s incredibly effective.
Are you guilty of forecasting? Could forecasting be the source of uncertainty or ill-informed decisions?
Revelation #2: Don’t Underestimate the Power Of Simplicity
One of Todd’s first observations was that Terra hadn’t fully committed to one system, and therefore, there was no one singular budget she could trust. Furthermore, she didn’t really trust herself, so there was a lot of shuffling money among different accounts, lots of transferring and this, that, and the other.
It was complicated, and confusing, and time intensive, and she still didn’t know what she could afford, so what was the point? The complexity made it all too easy to get behind or give up. (Terra had done both at one point or another.)
Budgeting—and your finances in general—are all about the long game. You have to commit—fully commit—to a system that works for you and then keep it as simple as possible. You don’t need lots of cards or accounts. Many successful, long-term YNABers just have one big, fat, happy checking account. Trust your budget, keep it simple, and you will be successful because you’ll stick with it. (And then be more successful!)
Have you made things more complicated than they need to be? Where could you simplify to make budgeting sustainable in the long run?
Revelation #3: Budgeting Requires Brutal Honesty
Forced to see her finances through Todd’s eyes, it became clear to Terra that she’d been living in denial: “I feel like after my divorce in 2012, I was just kind of hiding out in the dark, unwilling to face my finances.”
Unfortunately, there is a cost to checking out. In Terra’s case, she had to take out a personal loan, which became a major source of anxiety.
The good news is it served as a wake-up call. Terra suddenly had financial priorities—to pay off her debt—but even more than that, to budget in such a way that she would not find herself in that position ever again. It required facing the reality of her true expenses, and living well below her means to create margin and put less pressure on her cash flow, while she caught up.
Not being honest and realistic about her True Expenses, might free up some extra money every month, but ultimately, it put her at risk. Take taxes for example: “I have taxes back in my budget, and it’s FUNDED!!!! Such a big deal for me—this alone will give me a sense of security I haven’t had in a long time!”
Are you being realistic about how much you spend? Are you considering all your true expenses and saving appropriately every month? Are you ready to tackle your debt head on—if so, what are you going to do about it?
Revelation #4: Control Of Your Finances Can Feel Like Control Of Your Life
Terra had spent several years feeling out of control of her life and her finances were collateral damage. Ironically, her money was one of the few things she had the ability to control entirely. Once she accepted that truth, she realized that if she took the time and effort to control her finances, it would give her leverage to control other areas of her life.
And the more Terra and Todd analyzed her habits, fears, goals, and priorities, it became crystal clear: Terra’s number one priority was control. Of her finances, her life, her future—and her finances were foundational to giving her freedom and options in every other area.
Getting control was the outcome of applying all the other lessons and truly committing to her budget. By being hyper aware and intentional with every dollar: “I can finally answer the question, ‘Can I afford this?’ I feel more confident and secure in my financial life, post-divorce, than I ever thought possible.”
Are your finances keeping you from pursuing other things in your life? Do you feel stressed and anxious spending money because you don’t know what you can afford? What would your life look like or feel like if you were in total control of your money—might that be worth committing to a budget?
Revelation #5: Feeling Guilty Is Not Helpful Or Necessary
Terra is the first to admit she has made mistakes. She was embarrassed about how long it took her to get serious about her finances. But Todd—and YNAB’s philosophy—helped her let go of the guilt that was keeping her stuck.
The only benefit to looking backward is to ensure you don’t make the same mistakes again. But your energy is wasted feeling bad about the past; instead channel that energy forward—because the future is where you can effect change.
“I think the best part of all this, is afterward, I’ve finally been able to let myself off the hook from feeling financial guilt and shame. Now when things don’t pan out quite like I expected or I overspend in a category, I hear the little voice in my head say, ‘No worries, Terra. Just roll with the punches and keep budgeting!’ It is so much easier to live ‘in the know’ and have confidence that I am making informed decisions and moving forward.”
Well, how’d we do? Did you benefit at all from Terra’s coaching session?