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Do You Need A Budget? | YNAB
Episode 165
Episode Guide
Episode Summary:
Episode Timestamps
ChooseFI Podcast Show Notes
Episode Summary
Understanding the necessity of budgeting is critical for achieving financial independence and reducing financial stress. Brad and Jonathan engage Dominick Quartuccio, founder of You Need a Budget (YNAB), to unravel budgeting misconceptions and explore practical strategies for effective money management. Dominick emphasizes that everyone needs to define their non-negotiables, which informs their budgeting priorities. He shares personal anecdotes about overcoming financial hurdles and the significance of aligning spending with personal values.
Key Topics Discussed
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Understanding the Need for a Budget
- Importance of having a budget to mitigate financial stress.
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Budgeting Misconceptions
- Common misunderstandings about budgeting and its necessity.
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Dominick's Journey with YNAB
- How YNAB began and the personal experiences that shaped it.
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Defining Non-Negotiables
- Key Insight: Define your non-negotiables to guide your budgeting priorities.
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The Four Rules of YNAB
- Give every dollar a job: Help identify where your priorities lie.
- Embrace your true expenses: Plan for irregular but necessary costs.
- Roll with the punches: Adjust your budget as necessary.
- Build a buffer: Provide financial breathing room to avoid stress.
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Communicate Money in Relationships
- Actionable Takeaway: Communicate openly with your partner about financial goals.
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Adapting to Variable Incomes
- Special strategies for budgeting with an unpredictable income source.
Actionable Takeaways
- Identify and define your financial non-negotiables.
- Align your spending with what truly matters to you.
- Utilize the four rules of YNAB for better budgeting.
- Focus on covering essential expenses when budgeting with variable income.
Key Quotes
- "It's about putting yourself in a place where your money aligns with your values."
- "Scarcity is your best friend when budgeting."
- "An audacious goal can lead to unexpected opportunities."
Discussion Questions
- What financial non-negotiables do you prioritize?
- How do you ensure your spending aligns with your values?
- What challenges do you face with budgeting?
Speaker Highlights
- Brad Barrett: Co-host of ChooseFI, focusing on financial independence and budgeting.
- Jonathan Mendonsa: Co-host of ChooseFI, passionate about teaching financial principles.
- Dominick Quartuccio: Founder of YNAB, sharing insights on budgeting and financial management.
Additional Resources
- Website: YouNeedABudget.com for more information on budgeting strategies and tools.
Call to Action
If you found value in this episode, please subscribe to the ChooseFI Podcast on your favorite platform and share it with friends or family who could benefit from improved budgeting and financial independence.
[This episode contains valuable insights into effective money management and budgeting strategies from Dominick Quartuccio of YNAB.]
Mastering Budgeting for Financial Independence
Achieving financial independence is a goal that many strive for, but understanding how to budget effectively is often overlooked. In this article, we will discuss actionable budgeting strategies based on insights from Jesse Mecham, founder of You Need a Budget (YNAB), explored during a recent episode of the ChooseFI podcast. Let’s dive into how you can master budgeting and take control of your financial future.
Understanding the Need for a Budget
Define Your Non-Negotiables
One of the first steps in effective budgeting is to define your non-negotiables. Non-negotiables are essential commitments that guide your financial decisions. This could include saving for retirement, paying off debt, or setting aside money for your child’s education. By having clarity on what is non-negotiable for you, you can prioritize your spending more effectively. Ask yourself: What are the financial commitments I will not compromise on?
Align Money with Personal Values
To truly experience financial peace, it’s important to align your money with your values. Consider what you cherish most in your life—family, travel, education. Ensure that your budget reflects these priorities, allowing you to feel fulfilled rather than restricted by your financial obligations. This alignment creates a sense of purpose around your spending habits, making budgeting less about sacrifice and more about intentionality .
Essential Budgeting Rules
Jesse Mecham outlines four essential rules of budgeting with YNAB that can transform how you manage your finances.
Rule One: Give Every Dollar a Job
The first and most important rule is to give every dollar a job. This means that every dollar you earn should be allocated to a specific purpose, whether that’s saving, spending, or investing. This practice ensures that you are fully aware of your financial situation at all times and helps to avoid overspending. By doing this, you also encourage conscious decision-making regarding your expenditures.
Rule Two: Embrace True Expenses
Embrace your true expenses by planning for larger, less frequent bills (e.g., property taxes, vacations). Break these costs down into monthly amounts so that you aren’t caught off guard when they come due. For example, if you anticipate a $1,200 expense in December, allocate $100 per month to that category starting in January. This way, your budgeting is proactive, not reactive, allowing for smoother financial management .
Rule Three: Roll with the Punches
Adapting to changes is an integral part of budgeting. Life is unpredictable, and unexpected expenses will arise. You should feel empowered to reallocate funds as necessary when sitting down with your budget. This reduces anxiety around budgeting and reinforces the idea that adjusting your budget is part of the process — not a failure .
Rule Four: Build a Buffer
Finally, build a buffer by gradually increasing your age of money, which refers to how long money remains in your budget before it is spent. By spending money that was earned 30-60 days prior, you create a cushion against financial emergencies. This approach enhances decision-making and reduces the stress associated with immediate financial needs .
Communicating About Finances in Relationships
Foster Open Communication
Effective budgeting should be a shared endeavor, particularly in relationships. Fostering open communication about finances is essential. Regular discussions about financial goals and budgeting can help ensure that both partners are on the same page. For couples, having these dialogues may ease some of the tension around financial matters and lead to more collaborative decision-making.
Address Challenges Together
When budgeting discussions arise, it’s important to remember that challenges will occur. Exploring the dynamics of financial disagreements and devising strategies to address them can cultivate unity rather than division over money matters. Set a regular time to review and update your budget together, making it a supportive ritual rather than a source of stress.
Budgeting with Variable Income
Adapt Strategies for Unpredictability
For those with variable income, such as freelancers or entrepreneurs, the budgeting approach may require additional adaptability. Focus on what money should achieve before your next paycheck or revenue spike. This might mean prioritizing essential expenses over discretionary spending. Ensuring that your budget is designed around your current income rather than future projections is crucial for maintaining financial stability .
Taking Action on Your Budgeting Journey
Record Your Spending
A fantastic first step to improving your budgeting skills is to record every dollar you spend. This exercise builds awareness of your financial behaviors and informs your budgeting decisions, allowing you to see where adjustments might be necessary.
Evaluate and Adjust Regularly
Review your budget at least monthly to evaluate your progress. Are your expenses aligning with your values? Have your non-negotiables changed? Make any necessary adjustments to keep your budget relevant and responsive to your life circumstances.
Conclusion: Empower Yourself Through Budgeting
Mastering the art of budgeting is a powerful tool on your journey to financial independence. By defining your non-negotiables, aligning spending with your personal values, and embracing the four key budgeting rules from YNAB, you can set yourself up for success. Remember, budgeting is a living process that evolves with your life’s circumstances, so embrace the journey and take control of your financial destiny.
If you want to start your journey towards mastering budgeting today, consider utilizing tools like YNAB and join supportive communities that emphasize financial independence.
The founder of YNAB, Jesse, joins Brad and Jonathan to share his story. YNAB or You Need A Budget, was founded in 2004 and currently has over 100 employees.
[elementor-template id="143609"]Jesse's Story
The need to budget became a reality when he got engaged to his wife Julie. Based on their incomes, they knew that they needed to be careful with money in order to survive. Jesse is a self-proclaimed recovering accountant, so, he built a spreadsheet and it worked really well for them. The spreadsheet became the base for the original piece of YNAB software.
After a year of using their spreadsheet successfully, the couple was about to have a baby. They realized that they needed to have more money coming in to make their budget work.
With that, Jesse started YNAB as a side hustle with the intention of selling his spreadsheet for extra income. The goal was to create an extra $350 each month in order to avoid taking out student loans while Jesse finished school. At first, he listed the spreadsheet for $9.95.
Julie and Jesse decided on a budget of $63 as a test fund to sell the spreadsheet. Jesse used these funds to run Ad Words. However, the spreadsheet didn't start selling until he bumped the price up to $19.95.
At this point, Jesse's business partner, Taylor, came along and asked about potentially developing software around the spreadsheet.
Related: Why A Side Hustle Is FI's Secret Weapon
Finding Your Non-Negotiable
The impetus to start selling his budgeting spreadsheet came from a strong aversion to debt. At a young age, he read one of Dave Ramsey's books. From that point on, he had a very strong aversion to borrowing money to pay for school. In fact, it was a non-negotiable point that he would make it through school without taking on any debt.
The other non-negotiable point in their life was that Julie wanted to quit her job. At the time, she was working as a social worker earning around $12 an hour. It was a goal for the couple for her to stay at home and make it through school without any student loans. Those were two things that they would absolutely not compromise on.
In order for that goal to become a reality, they had to earn an extra $350 a month for 2.5 years. In total, that amount was around $7,000. Although it may seem like a completely reasonable sum to borrow for school to some people, it was unacceptable for Jesse.
Due to these non-negotiables in his life, he had to get creative.
I feel like people sell themselves short on their creativity and their drive and their will when they can just easily step past having zero dollars into a little bit of debt just to get 'em by. It's not 'cause I hate debt, you know, on it's own, but I do feel like it does people a disservice in that way.
Jesse suggested that everyone should find out what their non-negotiables in life are. Once you figure that out, you'll force yourself to get creative because you can't take the easiest path.
Check out You Need A Budget for yourself here.
Teamwork With Julie
Throughout their journey, Julie and Jesse have been on the same page. However, that is a result of open and frank conversations along the way.
In one conversation, Julie tore Jesse away from his laptop a few months after YNAB launched. They went for a walk with their brand new baby and she reminded him of his priorities. She reminded him that he needed to find a balance between his family and his business. If he couldn't find a good balance, then she requested that he find a way to stop.
At that moment, he knew she was right.
Along the way, they have had many conversations that have steered their journey together. Some of those conversations were about their finances and finding a way to live within their means. At one point, they were living in a big, new house without any furniture.
At the same time, he had just spent $80,000 on new YNAB software that had to be completely scrapped. Julie never said anything bad about the project, she just agreed that starting over on the software had to be a tough choice. She never held the moment against him or said I told you so. Throughout the ups and downs, she has always had his back.
Money Conversations
For Jesse and Julie, talking about money was always a part of their relationship. In fact, their money conversations were very frequent.
It started out of necessity because they needed to record every dollar that they spent on their budget. When they had money to spend, they worked through their needs together. Although they never overtly said we need to be frugal, they knew what their budget needed to handle until their next payday.
All I had to say was "hey, we have $900 and $350 of it goes to rent"...We had this extra money and we'd just say "what does this money need to do before we bring in more money?" And that kind of conversation, should just happen regularly. And it's not about 'we should do this, we should do that'; but it's like "what do we want this hard earned money to do?"
They chose to spend that money together wisely in order to make it to the next inflow of cash.
Although many couples don't talk about money, it should be a regular conversation. After all, money creates the life you live so you should make sure to work through those choices together.
Related: How To Get Your Spouse On Board With FI
Introducing A Spouse To FIRE
Many people that find the FIRE movement find it difficult sharing that excitement with their spouse. In fact, when you first introduce the topic it might seem like you are crazy. However, it is important to restart the conversation.
For Jesse and Julie, their biggest budget disagreement was about their grocery budget. Each month, they would agree on a grocery budget. Each month, Julie would go a little bit over. At some point, they had a frank conversation about this.
Since Julie does all of the grocery shopping, she shared that the most important thing to her was efficiency. She wants to get in and out of the store before one of the kids melts down. Whether or not she hits the coupons or sales doesn't matter as much to her. After talking about these reasons, the grocery budget has been bumped up.
You can think about this in your own money conversation with your spouse. Find out their reasons first. Talk about your hopes, dreams, and desires as a couple. Don't bring up money for several conversations, simply talk about shared hopes and dreams. At some point, you can choose something positive and talk about how you could potentially make it happen money-wise.
Try and choose something really positive and awesome. [Asking] "How can we make it happen with the finances? How can we do this?" So just pick one goal, one thing. Make it not about spending less, make it about spending more. And have it be established because you've had great conversations about why...
It might be a slow process, but eventually, the link between money and dreams will be clear.
Do You Need A Budget?
Once both of you are on the same page with your money goals, it is important to create a budget that reflects that. If you are both creatives, it can be difficult to delineate the budgeting responsibilities.
YNAB makes it easy to think about designing a budget to fit your lifestyle. If you don't want to think about each transaction, then you can think in a bigger picture. Instead of focusing on the granular spending, simply send off your intended savings and just spend the rest.
YNAB has the goal of aligning your spending with your values. Since people are spending so much energy earning money, it is important to line up that money with what you actually care about.
If your money is lined up with what you really value, that’s the peace. You can still be in debt, you can still be paying bills you wish you didn't have to pay, but you know that your money's now doing what you really want it to do. That's the key.
Check out our full review of YNAB here.
YNAB's Four Rules
YNAB follows four simple rules that make it a powerful tool.
Rule #1: Give Every Dollar A Job
When you set up your budget, it is all about tradeoffs. If you want more of A, then you can't get as much of B.
If you are choosing one, you are ALWAYS not choosing another. So if your choosing to blow some money here, then you're choosing to not have some savings over here. And having Rule One be always in operation, where there's those trade-offs, that's where you start to have those values make themselves known.
As you go through this process, you can start to see your values. If you are paying off debt, then you might naturally cut back on eating out. Although it is not an overt rule, most people choose to cut back on eating out once they realize that the tradeoff is not worth it to them.
Rule #2: Embrace Your True Expenses
This means that you should look ahead to larger expenses such as Christmas or your property tax. If you break up your larger expenses into 12 months, then you'll have a more realistic picture of what you have available to spend today.
You can extend this rule out to larger purchases such as a new car or fridge.
Rule #3: Roll With The Punches--Change As You Go
If you are changing your budget, then you are adapting to new information. Although you cannot predict the future, you can adapt along the way. If something comes up and you need to adapt, that's okay! It means that you are still right on track.
Rule #4: Age Your Money--Build Up A Buffer
Consider the age of your money. You want to spend the money that you earned months ago, not the money that you earned yesterday. With that, you'll have more room for error when life throws something unexpected your way.
As you consider these rules, remember that life is never static and neither is your budget.
There is no such thing as a normal month, ever...You will always be able to point to an expense and say "oh yeah, that one was kind of an exception." And the month before that, "well, that was kind of an exception." It just goes on and on. If you're living then your months are not normal. And the quicker you realize that, the quicker you realize that your budget is a fluid plan that is always needing to adapt and that's just part of being alive.
Think of your budget as a fluid plan and adapt it as needed. If you plan ahead for an expense that will inevitably pop up, you will find that life is less stressful. Instead of considering a new set of tires for your car as an emergency, you will realize this expense was bound to happen. You can simply take the money out of your planned budget and continue on with your month.
You won't have to dip into debt or your emergency fund for something as routine as a new transmission or broken washing machine. In fact, Jesse hasn't touched his emergency fund for eight years!
Related: Earn More Interest On Your Emergency Fund: CIT Savings Builder Review
Does Brad Need A Budget?
Brad doesn't feel the need for a budget. At this point, he spends around 10 minutes a month on his finances. Adding a budget seems unnecessary to him. Let's see what Jesse has to say about this.
Brad's Finances
He considers all of his money saved until it is spent. When he worked, the money was deposited into his checking account. All expenses flowed in and out of that checking account. Most things were automatic such as his mortgage, utilities, and credit card auto payments. He kept between $3,000 to $5,000 of extra money in his checking account to buffer any timing mishaps.
At the end of the month, any money left in the account, except the buffer, was sent to their investment accounts.
Jesse's Opinion
Brad already had a very simple budget. Brad had jobs for his money. $3,000 to $5,000 was meant to handle messiness, the other money had the job of being saved, and the rest was purposed to cover expenses. Although managing his budget in software would be overkill, it was still a simple budget.
Jesse And Julie's Budget
Jesse and Julie have dealt with budgeting ups and downs for years. At one point, he froze his salary for three years. Finally, they have been able to enjoy the benefits of YNAB. However, they have always stayed within their means.
At this point, the couple is less focused on budgeting on a granular level. Instead, they are thinking in terms of the business budget and leveraging that potential.
Check out You Need A Budget here.
Budgeting With A Variable Income
If you live with a reliable paycheck, then budgeting is more simple. With a variable income, you need to have more foresight and creativity.
The scarcity of a variable budget should be your best friend. Don't play with money that you don't have yet. Otherwise, you are avoiding the question of what your money should do before you get paid again.
The more volatile your income is, the more into the future you need to be budgeting your current money...Do not assume you will have money in a few days and avoid the question of "I'm out of money, what are my priorities?"
You'll need to have a big emergency fund. Don't assume that you'll find more income in a few days or weeks. Find a way to stretch your budget as far as possible.
Live Within Your Means
The most important thing is to live within your means. Although the means and life can change and grow, always stay within your means. If possible, create a gap. If you can create a larger gap, then you leave room for more opportunities.
How To Connect
You can check out the budgeting software on YouNeedABudget.com. You can contact the YNAB support team for budget questions, there is also a helpful support group for YNAB users on Reddit. You can contact Jesse directly at [email protected] or check out his podcast to find out more.
The Hot Seat
Favorite Blog, Podcast, or Book: Deep Work by Cal Newport. It is a competitive advantage to be able to do Deep Work.
An Inflection Point: Jesse created the audacious goal of paying off his mortgage by age 30. At the time, he didn't even own a home yet. Never underestimate the power of an audacious goal.
Favorite Life Hack: If you work out in the morning, it makes your whole day better.
Biggest Financial Mistake: In his personal life, it might be their first home purchase in 2008 right before the crash. It had negative impacts for many years. Also, he lost around $80,000 developing software that he never used.
The advice you would give your younger self: He would use YNAB to budget for his business. If he had been using YNAB to budget for the business, he could have been able to take advantage of opportunities along the way.
Bonus! What purchase have you made in the last 12 months that has brought the most value to your life? A table saw.
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- Unstoppable Decision Making- Creating A Framework for Decision Making with David Hauser
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!