So I think that creating a budget every month is critical to finding success with your finances. In fact, I spend so much time talking about my favorite budget tool, YNAB, that last week I decided that I would go a little more in depth and write about why I love their software so much.
This week, I’m going to stick with the YNAB theme but instead of talking about their software, I wanted to talk about the method that they’ve built their software on.
Now before I go any further, I want to convey how important these rules are for anyone. These rules are not just important for someone that’s using the YNAB software, but for anyone looking to stick with a budget.
I want to repeat something that I think is really important.
The tool you use to manage your money doesn’t matter. Your consistency in working in your budget and your willingness to get back up when you fall off the wagon matters way more.
The folks at YNAB are going to be very upfront with you. You don’t need their software to be successful.
But I will continue to be clear that I think YNAB is the best for as long as that’s my opinion.
So when Jesse Mecham founded YNAB, he decided to build his new budgeting method on four rules. And it really doesn’t matter if you’re also a fan of someone else’s method, the rules are usually a great compliment to their method.
Their method, or rules as they call them, is the important part. How you do it is up to you.
-Rule #1 Give Every Dollar a Job
This first rule is based on the concept of a zero based budget. A zero based budget is the act of assigning every single dollar that you have to a job. You don’t want to have anything left over.
That way, you’ll have a more realistic idea of how much you actually have left over to spend this month.
So if you’ve budgeted for all of your priorities and you have $500 left over. What do you want to do with that $500? Do you want to spend it? Do you want to put it towards a savings goal?
You need to decide what you want to do with that money. If you don’t, something will happen to it and you won’t know what.
That’s the power of giving every dollar a job. You’re being intentional with every single dollar so even if you are just wanting to spend it, when you make spending purchases, you can rest easy with the knowledge that you’ve budgeted for it and you can make that purchase guilt free.
-Rule #2 Embrace Your True Expenses
This rule is all about saving ahead for those true expenses. True Expenses is a term that I learned from the YNAB folks and it’s what they use to describe all of those irregular expenses that crop up throughout the year.
It constantly feels like you’re getting slammed with emergency expenses all of the time and that you can never get ahead. But when you realize most of those “emergency” expenses were actually pretty predictable, you can start to plan ahead.
For example: In January, you take the amount that you’d like to spend on next year’s Christmas and divide the cost evenly across the next 12 months. Then, when you’re saving for that true expense, Christmas rolls around the next year and you’ve got everything saved up.
Since Katie and I moved to Houston, something that I’ve been super shocked by is how much more often you have to get new brake pads put on your car. The constant city traffic is just killer for your brakes.
So, if you know that you’re probably going to be performing some sort of maintenance on your car, even if you’re not quite sure what it might be yet, rule 2 teaches you to go ahead and save for those sort of expenses.
After a while, it just isn’t the same surprise that it used to be. And it’s great when you’ve got some cash sitting in a category waiting to be spent on those inevitable expenses.
-Rule #3 Roll With the Punches
Rule 3 is all about being flexible. People think that you can’t budget because there’s no possible way that you can predict what your expenses are going to be for the month.
What’s the most popular budgeting advice out there? Create a budget and….stick to it.
So what has happened is that people had an unexpected expense come up, so they threw their hands in the air and declared that nobody budgets, because there’s no possible way to know what money you’ll need this month.
While it may be true that you can’t look into your crystal ball and see every possible thing coming your way, you can get pretty close.
Rolling with the punches means that you can make adjustments. In fact, you’re encouraged to. If something comes up and you need to change your mind on where your money is going this month, do it. Move some money over in case you need to adjust.
The important part is where you make the conscious decision of where you’re going to steal money from to cover this category. So if you’re stealing month after month from your vacation fund, you won’t be able to go.
Honestly, this is probably your most important rule. This rule is all about getting back up when you fall down.
This rule is all about giving yourself some grace when things do go as expected.
This rule is all about making progress, not being perfect.
It’s still all about being intentional about where your money is going. It’s just that you can change your mind if you need to.
-Rule #4 Age Your Money
I love this rule so much. But I’ve found that it can actually be confusing for people. So stay with me here, because this is genius.
Using rule 4, you want to reach a point where the money that you’re spending this month is actually coming from money you earned last month. Essentially, you’ve created a buffer with your money.
In fact, this rule didn’t used to be called Age your Money. It was actually called Live on Last Month’s Income. That’s still essentially what they’re trying to get you to do.
What most people do is barely make it to each payday, maybe even a little in the hole, and then spend that money as soon as they get to it. They’re living paycheck to paycheck. They’re crawling to each payday, barely making it, and then starting the whole process over again each time they get paid.
There’s a better way, and this is why age your money is so genius.
First of all, I think the reason that this is so confusing for people is that it’s just such a crazy foreign concept. We’re so used to spending each paycheck as we receive it that we just can’t imagine hanging on to our paycheck for any period of time and not spending it.
So I will have to ask you to suspend your reality for just a moment. I don’t want you to worry about why you can’t do it now. And believe me, I understand that feeling completely. It’s hard to imagine yourself getting far enough ahead that you could age your money. But I promise, it’s possible and you’ll love it when you get there.
So what actually is aging your money?
Let’s say that you aren’t living paycheck to paycheck. And you actually have quite a bit of cash right now. Let’s say that you have enough cash that for January, you don’t really need your paycheck to pay for all of your expenses this month. So when your check for January comes in you can actually move over to the next month and budget that money in February.
When the month rolls over for February, you’ve already got all of your expenses budgeted for the month. You’re ready to roll.
It takes away that feeling of living on the financial edge. You aren’t worried about the timing of your bills and how much money you have in the bank.
Anybody ever do that? You stress about when certain bills are due and making sure that the timing of bills line up nice and neat with when those bills are due.
If you have money for the entire month, right at the beginning of the month, you don’t have to worry about when any bills are due. Throw everything on auto pay and just let it pay whenever it needs to. You don’t have to worry about having enough money in your account to cover it because you have the entire month already budgeted.
And when your paycheck from February starts coming in? Just start sending it over to your budget for March and you’ll start the process all over again.
Keep Budgeting
It can be tough to stay on a budget. Trust me, we’ve definitely struggled as well.
When it comes down to it, the most important skill you can have when trying to reach any goal is your ability to get back up and try again.
So remember, it doesn’t matter what tool you use, only that you’re budgeting and working toward your goals.
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