The YNAB Way, “The Shift”, and my YNAB journey

July 4, 2013 at 10:15 am Leave a comment

Note:  I’m expecting that this will be one of my last posts about YNAB for a while.  It’s not that I don’t love the financial effects of the software, but I’ve spent quite a bit of time writing about it the last few months and I thought I should get back to I.T. related topics.

The people who sell YNAB came up with 4 great rules for budgeting.  The rules are short and simple:

  1. Give Every Dollar a Job (video)
  2. Save for a Rainy Day (video)
  3. Roll with the punches (video)
  4. Live on last month’s income (video)

Don’t just read the titles of the rules, go and read each of the above pages, or watch the video links.  As my favorite TV detective Monk might say, “You’ll thank me later”.

After you’ve read/watched the above links, you might say that it seems simple, perhaps too simple to really work.  It does work, and it is pretty simple, if you actually follow the rules.  It can take quite a while to get to rule 4, especially if you are currently living paycheck to paycheck.

I’m not going to try to explain the rules .  The guys at YNAB do a great job of that already.  Their process really works, and I’m so very thankful to have found it.

My problem

I’ve mentioned it a time or two on my blog already, but I”ll go into a little more depth.

I’ve never really budgeted until recently.  I mean, sometimes I had a general plan, but it usually revolved around debt.  Like, transferring from one card to another lower rate card, or consolidating a few cards together.  I’ve never been very good at saving any substantial amount of money over a long term.

When I saw a sale on something that I needed (or wanted), I didn’t have funds set aside to draw from to make that purchase, I just bought it on credit, figuring that I could pay it off at the end of the month.  I mean, at the sale price, it would be like losing money NOT to buy it, right?  🙂

So, anyhow, my paycheck comes at the end of the month, and my main credit card was usually due around the 1st of the month.  The bill would arrive around the 6th or so..  In the beginning, it wasn’t a problem.  I’d buy everything I needed on the credit card, the bill would arrive a week into the next month, and I’d have money sitting there in my account to pay it off.  Within a week or two of the bill arriving, I’d schedule the payment, and the money for those items would sit in my account collecting interest until the 1st.  Sounds good, right?  Of course, during the month, I was running up additional charges.  But since I paid it in full, there were no interest charges.  And they paid me “cash back” at the end of the year for using their card.  What a deal!

The deceptive part of this is the fact that whenever I saw my bank balance during the month, it looked great.  I think this may have lulled me into feeling as though I had more money than I really had.  From a YNAB perspective, most of the money in my account “already had a job”, but it wasn’t obvious to me just looking at the account.

For the better part of a year (maybe a few years even), this sort of worked.  I wasn’t budgeting, but I was getting most everything I needed.  I wasn’t accumulating any savings for any major purchases and I wasn’t saving money for things like Homeowners Insurance, or the property taxes for the house.  I’d just bite the bullet when the insurance bill arrived… And the property taxes were easy…  I’d pay them out of what I got back from my Federal taxes…  Of course, this means I couldn’t do much meaningful with my tax return most years, but it sort of worked.

The Shift

For those months with a major outlay (like if we bought a sofa or paid the homeowners insurance), things would be a little tight financially, but it was all good…

Or was it?  What took me a while to realize was that things were shifting.  I had become accustomed to buying whatever I needed/wanted (within reason).

When the credit card bill arrived at the beginning of the month, I began to not have enough money left to cover the entire thing when the end of the month arrived.    For example, say the May bill arrived on May 7th, due June 1st.  It might have been for $3200.  By the time my other bills were all paid, at the end of the month I might only have $2000 left from the paycheck I received at the end of April.  So, I’d pay the balance off using the remaining $2000 from April along with $1200 from my May check.

Just to clarify this a bit…  I was taking money that I got at the end of May and using it to pay for stuff I accumulated in April and the first week of May.  When I started, I was able to pay the entire balance out of my previous months pay, so this is “The Shift” that happened to me…  When I had to pay with my most recent check to cover things I had bought (in most cases) over a month ago.  If I thought that the credit card companies planned this, I would call this an insidious trick, sneaking up on me like that.  But no, I got myself into this mess by not budgeting.

When I first noticed this “shift”, I think I was in denial mode.  Like: “It’s just a one-time thing, right?  Next month will be better.”

Perhaps things did “work out” that way some months, but I think this eventually became “the new normal”.  One month, I was down to under $1400 in my checking before my next check arrived, only to have to pay out about $3600 to my credit card company.  To make matters worse, I had another credit card with about $1200 on it.  I paid about $200 a month on that card to pay it down, but we used that card to buy gas..  And guess what?  It wasn’t uncommon for us to spend around $200 on gas in a month, so that balance wasn’t really getting much lower either.  Various other loans had to be paid as well.

When dealing with my finances, my mood would turn south.  Perhaps for this reason, I found myself putting off dealing with it.  Some months, I had major bills that I barely got paid in time (you DON’T want to be late paying a credit card, especially if you are already running a balance on it).

How I got started with YNAB

Luckily, I saw it listed as “on sale” on a Lifehacker article, though if I knew how well it works, I would have gladly paid full price for it years ago.  Who knows how things might be different in my life if I started this sooner.

When you start budgeting, you need to arrange things to give yourself the best chance to be successful.  Otherwise, you end up quitting after a few months if things don’t seem to be going well.  For my best chance at success with a budget, I thought that I needed to make a clean break with my old cycle.  If I tried to finish my old cycle and budget, I’d end up spending over 1/2 of my monthly income trying to pay off the balance of that one card, which would leave me with very little money to use for the actual budget. I felt like this would be setting myself up for failure.  If I were to be successful with YNAB, I’d need to be able to budget my entire monthly income.  Otherwise, it would have been very restrictive and discouraging.

How I started ridding myself of Debt

When I started with YNAB, I put all my debts in except my mortgage.  I highly recommend this approach.  You can see the total, right there, that you owe everyone.  I think seeing it in one place puts the amount of debt you have into perspective, and you can use that to motivate yourself to pay it down.

The total of all of my debt was about $19500.  This included two Prosper loans (one for a home improvement, one for a previous debt consolidation), the family minivan, three credit cards, and a little bit left for private school for the kids.  I took the money left from the previous month along with a little more and paid it against one of my cards, leaving me with about $16500 in debt.  I got a 0% transfer offer from Chase (with no transfer fee!) and consolidated all of the credit cards to the Chase card, along with another $1800 fee for my children’s school for next year. (So, that pushed my debt back up to around 18300).

I set out to pay this down as aggressively as I could.  By the end of May I was down to about 15500.  The end of June saw a debt balance around $13700.  I expect this debt balance to be $11800 by the end of July.

By mid-July, I’ll only have the Chase card and the Prosper debt consolidation loan left, my two biggest debts.  Starting in August, I’m probably only going to be able to reduce this debt by about $1100 per month due to private school starting up for my kids.  So, by next July at the latest, I expect to be completely free of consumer debt.

Still using credit cards

Despite the fact that I want to be rid of consumer debt, I’m still using my credit cards.  Isn’t that dangerous, you might ask?  If I weren’t budgeting, I would agree.  In the past, whenever I’ve consolidated my debt, I’ve continued to spend as I always did before, only now making a small monthly payment to pay down the debt consolidation loan.

But, things are very different now.  Whenever I purchase something, whether it’s with a check or a credit card, I categorize my purchase.  Since I’m spending money that’s been budgeted, I know the money will be sitting in my bank account when the credit card bill arrives!  This let’s me use my credit cards with confidence.  I know that I can afford to buy whatever is within the budget.

The beauty of this is that now I can get the rewards of shopping with credit cards without the fear of getting caught in the credit card trap.

A new “Shift”

Lastly, I wanted to discuss another “Shift”, but this one is in me.  I now think about money in a vastly different way than I did just a few months ago.  I’m not stressed when it comes time to pay the bills.  While some people think budgeting would be stressful, it’s not.  I feel much more in control of things and it’s freeing.

Perhaps the most obvious way in which this change exhibits itself is with my frequent posting about YNAB, and frequent talking about it to my co-workers.  I’m such a vocal proponent of YNAB because of the control it gave me over things that I’ve previously felt were somewhat out of my control, and I want to spread that around.

Do I really need YNAB to use the YNAB process?

The YNAB process works, whether you use their software or not.  I’m certain using their software makes it easier though.  I believe it’s really what is known as a zero-sum budget, so you could research that yourself if you want to try it on your own, but I highly recommend just getting YNAB.  They have a free 34 day trial.  I suggest to start using it right before your next paycheck.  It will let you see your finances with crystal clarity, and help you to make better decisions about spending.

Oh, and I’m not affiliated with them in any way beyond being a very satisfied customer.

Updated 07/14/2013 – YNAB recently sent me a link whereby I can refer people to buy YNAB.  In this case, those customers will get a $6 discount on whatever YNAB is selling for, and they send me a little something as well.  All YNAB-related posts made  prior to this one (including this one) were made prior to me getting this refer-a-friend link.  I did not even know about this refer-a-friend program.  If you are interested in YNAB, use this link to save $6 off the current price.  Until July 22nd, it’s on sale for 39.99, so hurry up!

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YNAB Update – June wrap-up YNAB discount – 10% off the regular price!

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