This is part 6 of 14 of my series on the 14 ways I am changing my financial life in 2014.
WHAT WASN'T WORKING
My budget and my budgeting software weren't working. Well, technically they worked, but they left something to be desired in terms of helping me build and maintain the right habits to optimize how I used my money.
NO CONSEQUENCES FOR OVER-SPENDING
I have used mint.com for for the last several years. It is great for looking at historical expenses, and I love that it will connect to all my accounts, download their balances and transactions, and even allow me to categorize the expenses and build monthly budgets for each category. However, it lacked in a few areas.
If I ever spent more than I budgeted, the software gave me no consequence for my indiscretion. It didn't require me to make it up in the next month or pay it back in any other way. When the next month came, the system just rolled all the balances to zero and I started over with a clean slate. I realize I should be responsible to hold myself accountable, but it would have been nice if the software forced me to pay it back.
LESS-FREQUENT THAN MONTHLY EXPENSES
Another frustration with most budgeting software is how to handle expenses that come up less frequently than monthly. For example. I pay for my life insurance annually. The annual premium doesn't fit into my monthly budget, but it would if I could accrue 1/12th of it every month until it was due a year later. The most common alternative is to set up a separate savings account for each of these types of expenses, but that can add up to more than 10 different accounts. That's cumbersome.
ONE-TIME NON-RECURRING EXPENSE
Have you ever come to the end of the month, blown through your spending budget, and made excuses for all of the things you needed to buy just that month, just once? The challenge is that many of us make the same excuses pretty frequently, sometimes even monthly. That is not one-time, and it says that you either need to increase your expense budget or get your spending under control. Either way, most budgeting software struggles to help you target and improve in this area.
NEW SOFTWARE NEEDED & FOUND
So my three pain points mentioned above had me convinced I needed a new solution. So I started looking for a new budgeting software and came across a company that I heard of before. In fact, I had met the company founder at a business event and remembered him telling me about his company. Most importantly, his software solved all the problems I mentioned and more. It is called You Need A Budget (use this link for a 10% discount on the software: You Need a Budget 10% discount).
ENVELOPE BUDGETING IN DIGITAL FORMAT
I started using this software in January and I am hooked. It allows for zero-sum budget, where every dollar that comes in is allocated for a specific purpose. The You Need A Budget site calls it giving every dollar a job, which is the first of four rules the site uses to explain the methodology behind the software design. It is a digital format of the envelope budget, the old-school way of using cash for all purchases.
Here's how the envelope budget works with cash. You place each dollar you receive into one of several envelopes. You then need to carry those envelopes with you everywhere. When you spend money on groceries, then you remove money from the grocery envelope. When the envelope is empty, you know you can't spend any more. The same applies for each of your envelopes representing how you have categorized your spending.
Carrying around envelopes with cash is just not practical anymore, especially for those like me who would much rather live a paper-free life. "There's got to be an app for that" is how I approach old, archaic ways of doing things. You Need a Budget makes it easy to create digital envelopes with money that is in your bank account. Using your computer or smartphone you can quickly see how how much is in each envelope whenever needed. I always check the budget before I spend to make sure I have enough in the envelope. If I have enough, then I swipe my debit card. This is the modern way of applying the envelope budget principles, and it solves many of my aforementioned problems.
CONSEQUENCES FOR OVERSPENDING
Unlike my old budgeting software, You Need A Budget makes me pay the price if I overspend on my monthly budget. It carries the deficit into the next month! And, if I under-spend, it carries the surplus into the next month. The makers of the budgeting software call this rolling with the punches.
SAVING FOR NON-MONTHLY EXPENSES
I love how You Need A Budget handles the expenses that are highly variable each month, like my annual life insurance premium. I pay zero dollars for life insurance for 11 months, then in the 12 month I pay the entire amount. Called saving for a rainy day, I just put the monthly amount needed into the life insurance digital envelope. If I don't use the amount during the month, the balance rolls simply over to the next month (treated like a surplus in a budget), and sits there until I need it. I repeat this process each month during the year, saving 1/12th of the annual premium each month. Then, when the premium is due, I spend all of the accrued balance without a major gyration in that month's budget. Here is a list of what I use this for: Christmas, life insurance, summer vacation, winter vacation, medical, home repairs, home furnishings, school clothes, auto repairs, gym membership, and athletic contest fees (triathlons). This allows me to have a planned budget for all of these expenses even though the actual need to pay for them varies significantly from month-to-month. All the while, the cash is sitting in my checking account earning a small amount of interest.
NO MORE PAYCHECK TO PAYCHECK
Although not a complaint I mentioned above, the software solves another pet-peeve I have with other budgeting software - focusing only on expenses, neglecting the management of income. Rather than living paycheck to paycheck and hoping to cover your expenses, the software is designed to help you live on last month's income.
As money comes into your account, you can assign it to be used for next month's expenses. It may take a little time to build up the reserves to do it, but it I highly recommend you implement this discipline into you life. This process is amazingly helpful for knowing how much money you have to work with at the beginning of the month (especially helpful for those with variable incomes). You start every month knowing exactly how much you have to spend, and you can easily give every one of those dollars a job. It makes "nailing" your zero-sum budget pretty easy.
So think this through. That means that during the month of March, each time you get paid or money comes into your account you are ear-marking it for use in April. You are stockpiling cash all month, then using it the next month. That sounds like one month's worth of an emergency fund to me.
You Need A Budget has been a great fit for the way I want to manage my money. It even gives me an easy option for tracking money for the kids and the tithing they owe. It is offered as downloadable software with a great iPhone and Android app. It is very easy to use and designed to help you see and understand what you need to do with your money. If you want to check it out, use this link for a 10% discount: You Need A Budget 10% Off.