A little over a year ago I learned a valuable lesson, both about myself and how I manage my finances, and I want to share that with you today, hopefully as a “how not to” story for folks to learn from.
I was paying my bills in late September and came to a sobering realization. As I went to pay my credit card bill (which I had always paid off in full every month), I realized that I wouldn’t be able to pay it off with what I had left in our checking account. Even with the “emergency fund” I couldn’t do it (which was, unfortunately, only an embarrassing $500 at that time).
What made this realization hurt was not because we were low on funds. That happens to people all the time, including me. What made it hurt was that I didn’t see it coming at all! What I discovered was that I had been mis-managing my finances for several months. I hadn’t been sticking to my budget amounts, hadn’t accounted for some over-spending we’d done in some of our primary categories, and I had made several purchases over the last year where I thought “I’ve got that covered“. But mostly I had just ignored our finances and allowed some credit card spending to take place where I thought “I’ll figure that out next month when the bill is due. We’ve got the money sitting around”. But we didn’t.
What I Learned About Myself
My initial reaction to this situation was not good. I was embarrassed at my negligence. I discussed it with my wife and explained where things were, and took responsibility for not managing our money well. Then I began to do some research. As I looked closer I started to learn some things about my own spending habits:
- Without clear boundaries I am prone to spending money more freely than I should. Earlier in the year I had bought a $300 canoe for myself and my family, as a “reward” for losing some weight. And then I bought some new paddles for it. And life vests. And tie-down straps for the car in order to transport it.
Those purchases weren’t bad in and of themselves, but I had “written them off” in my mind as justifiable because they were for a good cause (spending more time in the great outdoors with my family). And I didn’t reconcile them with how much money we actually had. When you couple that tendency with a little too much golf with friends, some family road trips to some weddings for my cousins, and some other “just gotta figure out how to pay for it” purchases, I allowed our spending to mushroom, mostly unchecked.
- Putting all my purchases on the credit card and then paying them off at the end of the month was asking for trouble. Now, I don’t frown on this process in general (you can earn some reward points this way), but for myself it became crystal clear that psychologically it was more expensive to use a credit card and risk overspending than it was to forego the rewards points and only spend money that we already had.
- It had become too easy for me to “cover up” overspending. I realized that I needed to go back to my trusty envelope system of budgeting. I had been allowing certain categories in the budget to go over month after month, trusting our “buffer” in the checking account to cover that overspending without having to pull from another category. This had to stop! I realized that if we spent too much in our restaurants category we needed to feel the impact of it in our vacation fund, or another discretionary category that would hurt us.
These were not easy things for me to learn. I had disappointed my wife with my lack of control over my finances. I had put us in a hole instead of allowing us to thrive. I had become a passive money manager, and instead of having the hard conversations with my wife about where we needed to cut back or eliminate spending over the course of time, I simply ignored those areas and hoped we’d do better next month.
On The Financial Side Of Things
As I was looking for solutions to manage my finances more closely, I stumbled across a review of You Need A Budget, which caught my attention for its hard-line approach to managing envelope budget categories.
One of the core philosophies behind the way that YNAB works is this: your current paycheck should be allocated for next month’s spending. And by the end of this month you should have funded your entire budget for next month. Sound simple? Well it is! And yet it’s not.
If you’re like me it’s easy to say “I’m going to build up a reserve of cash and live off of last month’s income”. But practically that’s not an simple thing to manage! That’s the beauty of the YNAB software. It changes your thinking about where zero is and keeps you accountable. If you haven’t fully funded next month’s budget, your available funds are in the red, and you’re shown a negative balance.
Here are a few advantages this software gave me:
- Like I stated above, it reset my “zero” line. If I hadn’t fully funded my next month’s budget I felt like I was in the hole.
- It created something like an emergency fund for us. Our monthly “budget” is made up of over $3700 in expenses. When you’ve already got that stored up before the month starts you’ve given yourself 30 days of emergency fund already.
- The envelope-style budget forced me to account for overspending immediately. Your options are [a] deduct overspending from next month’s overall budget, or [b] deduct overspending from this category next month. Either way you go you’ve got to deal with the money you’ve overspent. I usually just move some funds from another (discretionary) category over to the overspent one, which fixes things immediately.
How We Got Back On Track
We were very fortunate last fall. We had to make a few tough decisions about how we were going to get things back in order, including a delay on paying extra on our mortgage for about 3 months and severely limiting our Christmas gift giving. But we were also very blessed by receiving 3 big boosts in our income last fall (a quarterly bonus, a Christmas bonus, and an annual merit raise at work), and all of them went directly to “catching up” on our budget. By January of this year we had fully funded February’s budget and were able to continue paying extra on our mortgage again.
Over a year later I’m absolutely loving the way that YNAB helps me manage my finances. I know exactly where my money is and have to make decisions constantly in order to maintain my budget properly. There’s no way to ignore them.
But the major shift came when we decided to stop putting credit card reward points first and living on a cash basis instead. Essentially switching from living on next months income to living on last month’s income.
Note: If you’ve got an interest in giving YNAB a try I strongly recommend it. I’ve written a review a while back, and they’ve got a free trial available if you want to see how you like it. Maybe it’s the piece you need in order to keep yourself and your budget on track!
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