With this slogan start hundreds of podcast episodes and Whiteboard Wednesday videos of YNAB. Todays blog post is absolutely unrelated to IT or security or my study. However, it is a very important topic for me and I would like to share some thoughts about it. This blog post is all about personal finances and money. If you are not interested in this topic, you could actually stop reading. On the other hand, I will write about my personal experiences and this could be of interest for some of you, especially if you think you’re bad with money.
Some years ago I lived like what is often called “paycheck to paycheck”. Of course I tried to manage my income and expenses and it worked quite well. I’ve been always able to pay my bills when they are due and I could effort the little things you buy when you are going shopping. However, in life every day is different. One day your car breaks down, the other day an infrequent expense that you had already forgotten comes due, like the annual car tax. What happens now? You grab as much money as needed and put it towards the bill. If you are lucky, you have enough money left and just pay the bill. You can also cut your expenses down for a short period of time and use the money leftover. In the worst case, you are going into debt to cover the spending. If it’s just one unexpected payment, this procedure might work for you.
As said before, every day is different and you cannot foresee the future. If life hits you hard, everything comes on one day. Your car breaks down, some insurance wants a quarterly or annual fee, you job sends you on an expensive business trip, … and maybe you cannot manage this situation that easy as before.
But how can you solve this issue and prepare better for the future?
For me, the answer is budgeting!
I need a Budget!
Some years ago, I found a little piece of software called YNAB. You Need A Budget. – Yes, I do! And oh my god, I really did! Before I go on I want to make clear that YNAB is a commercial software. I have no business with the company and I don’t get any money or discount for writing about it. It is just the software and the process that changed my way of thinking about money, income and expenses. In fact you could actually use pen and paper or a spreadsheet. The software is just a nice way to keep track of your account balances, expenses, payments, etc. and it gives you some comfort features like setting goals, reporting, etc.
The Method: Budget to Zero
How does it work?
There are four simple rules to follow, and this is independent from the software.
Rule 1: Give every dollar a job!
This is basically what’s often called budget to zero. You take all your available money and put it into different categories. Categories are things you need money for, e.g. groceries, insurance, fuel, rent, medicine, etc. You think about, how much money you will need, and assign that amount to the categories And, as the name says, you are doing this until there is zero money left.
Rule 2: Embrace your true expenses!
Here we are again. The car tax is due, 100 or 200 bucks. You maybe thought it will take some more months, but today the amount is withdrawn from your account. How to handle this better? These expenses are often regular in some way. They are not spontaneous. If I have to pay my annual car tax today, I know that I have to pay it again in 12 months. The solution is to plan ahead, divide the amount by 12 and budget 1/12 of it every month. This leads to a situation where the money is available when the bills are due.
Rule 3: Roll with the punches!
Assigning money is a guessing game. And you will fail, sometimes hard. However, that is no problem. It is not about perfection. It is all about control and awareness. The second rule just means that you reassign money if it is necessary.
Rule 4: Age your money!
That is kind of an abstract rule. It actually means that you should spend less than you earn. By doing this you will -at least slowly- grow your pile of money. If you think about the money in your bank account like grain in a silo, you can understand that the oldest money is at the bottom and new money is put on top of it. While spending, you will always spend the oldest money first, and that it how the age of money is calculated. In other words: You are building a buffer, for emergencies, or a special event, etc.
Why do I write about all this? Because I think it is important! No one teaches you such things. Maybe your parents, but they are not teaching this kind of knowledge in school. I wish that someone had shown me the method and the software earlier. As I wrote before, you don’t need a specific software. I use YNAB, but there are other Budget-to-zero software products out there. Some for free, some require a license, but you can also use a simple spreadsheet to track everything.
I can say that this approach has improved my handling of money massively. I feel much more safe and confident with my finances and it helps me to plan ahead. Often people say, budgeting is a way to say always ‘No’. From my point of view it is the opposite. My budget helps me to say ‘Yes’ and it helps me to prioritize my financial and life goals.
And now it’s your turn! Do you budget? Do you use YNAB or any other software? Do you have any questions regarding budgeting?